The governor of the RBA gave his views on bank dividends, super fund liquidity and how to the get economy going after the pandemic shutdown. Here’s an edited transcript of the Q&A session.

A: As you say, long term bond rates are very low. They are very low in terms of history. I think right at the moment the 10-year yield is at 0.3 per cent so the Australian government can borrow for 10 years at less than 1 per cent and it can borrow for three years at one quarter of 1 percent. So the borrowing costs are incredibly low. They’re as low as they ever been. I don’t have particular concerns that the government borrowing task will cause dislocation in these markets.
Q: What do you think should be the priority for governments to reinvigorate productivity and what is your assumptions on the participation rate for the labour market?
A: On the first question, I think there is real challenge to make Australia a great place where businesses want to expand innovate invest and hire people. And if we can do that then we’ll drive higher living standards for all Australians. How do we do that? Well I think we start off by reading the multitude of reports that have already been commissioned on this issue and perhaps I could run through you quickly at a very high level. What those reports say, is they say we should be looking again at the way we tax income generation, consumption and land in this country. They say we should be looking at how we build and price infrastructure. They say we should be looking at how we train our students and our workforce so they’ve got the skills for the modern economy. They say we should be looking here at how various regulations promote or perhaps hinder innovation and they say we should be looking at the flexibility and complexity of our industrial relations system. So those are the broad areas. I don’t want to advocate for particular policies within each of those areas but there’s plenty of advice out there from various other bodies and in these reports that are being commissioned. I’m hopeful that the spirit of of co-operative behaviour that we’re now seeing will actually translate into being able to address some of these issues.
A: You asked about the assumption on the participation rate. And here again we’re working with various scenarios because it’s very hard to know whether people who have been stood down are going to be actively looking for jobs or they’re just going to wait until their business recovers so at the moment our main focus on the labour market is on total hours worked. I think we have a better handle on how total hours worked are going to evolve and as I said they are expected to be down 20 per cent in the June quarter which is a staggering number and how that then plays out in terms of unemployment and participation and people not being in the labour force, I think it’s very hard to tell. It really depends upon the success that firms have in keeping their employees attached to them.
Q: A couple of years ago the banking regulators and yourselves came to a position moving investors away from interest-only loans and towards principal and interest. Is it now time to reconsider some of those policies given the real strain that’s being placed across the property market on investors?
Q: Both the restrictions on investors and an interest-only loans were both removed last year and …it’s hard to argue that they’re a factor in the current dynamics in the housing market. I think the property market is likely to go through a difficult period over the coming months. But it’s not because of these restrictions and there’s no capacity to remove these restrictions to to boost the market.
Q: Given recent excellent news on the health front and with the National Cabinet flagging a start to a modest gradual easing of restrictions, are you increasingly hopeful that a significant economic recovery can begin in coming months?
A: Well I listened to the Prime Minister’s press conference before coming down here this afternoon and he did say that we’re now on the road back and we’ve reached a turning point. He followed that up by saying that the current restrictions need to stay in place for some time because we don’t want to have a major setback here. There’s been an unbelievably huge effort by Australians to get us to this very good position we’re in now and I’m hopeful that if we can continue that effort then the restrictions will be able to be eased in time and that within three or four months we’ll start the recovery. But for this to recover we do need to keep the virus under control and we have to rely on the health experts. As I said in my remarks, the next few months are going to be very difficult and today’s data from the RBA is saying that there was a 6 per cent decline in the number of jobs in the country in the past three weeks just reminds us just how significant the contraction is. So I hope the effort that we’ve all put in to reduce the incidence of the virus continues and that we can start recovering in a few months time.
Q: Is it wise for governments to rule out providing low interest loans to companies or providing equity to those companies particularly those companies are in strategically important sectors or in labour intensive sectors?
A: The government has already provided huge amounts of assistance to businesses to keep them afloat in the first couple of policy packages there were large payments to small businesses cash payments to keep them afloat. The government has delayed or deferred many charges on businesses as well and the wage subsidy program is really helping many businesses keep afloat and to keep the workers connected to the business which is incredibly important as well. So the government has done an extraordinary amount so far. We can always debate whether it should take further steps. But I think it’s appropriate at the moment to pause and to examine the evidence on the success of the program so far.
Q: Why are you reluctant to use the word recession?
A: You can use the word recession if you want but I believe this is a kind of a very marked economic contraction. It’s very different to the business cycle downturns that we’ve seen over the past 50 or 60 years. It’s a once in a century event of marked economic contraction from which we will recover from and for me it’s the issue the label isn’t particularly important but but it is a once in a century economic contraction.
Q: There are some creditable economists out there who are worried about deflation more over the medium term pointing to some sort of negative spiral between wages and inflation in the hours work. Doesn’t that mean that invariably or inevitably we’re going to need pretty serious ongoing fiscal and monetary support for quite a while even beyond the initial emergency just to counteract the threat or risk of deflation?
A: Well I don’t think we’re going to have deflation over the medium term in next quarter. We’ve got some very specific and unusual events which are going to drive US inflation rate low into negative territory probably and that’s the big decline in oil prices and the introduction of free childcare immediately so there there are events that are unlikely to be repeated. So at some point oil prices will probably rise again and the government won’t keep on cutting childcare prices so I think inflation will after a period normalise but I also think that we’re going to have to have lower interest rates for a very long period of time. As I’ve said on previous occasions will not be increasing the cash rate until we’re confident that inflation is going to be between 2 and 3 per cent on a sustainable basis.
Q: You mentioned the banks being the shock absorbers of the economy but the main transmission in terms of a lot of the funding to go would be a preference for them to forego paying dividends until we see some kind of clarity as to the economic impact moving forward?
A: Well there’s certainly going to cut activity in which I think is entirely appropriate. APRA made an announcement on this issue last week or the week before last week that was appropriate that financial institutions cut back dividends. You’ve got to remember that Australia’s banks have very high levels of capital. We’ve undertaken extensive trace stress testing in all those stress tests. They maintain well capitalised so they have the ability ability to pay dividends and some Australians rely on those dividends for their income so there’s a balance to be struck and by cutting back dividends from where they were over the past couple of years I think we’re moving in the right direction to strike the right balance. But I don’t think there need to be banned.
Q: How do you see the Australian dollar’s role as the shock absorber this time, do you think it’s going to be as effective as it has been in the past given that the forecasts of global demand are pretty weak at the moment?
A: As you say this exchange rate has been a shock absorber in the past. My view looking at the economic history for the past 30 years is the exchange rate is has been the great shock absorber, it’s stabilise the economy more than any anything else perhaps even more than our own monetary policy. The exchange rate at the moment is working as it normally would. Earlier in the year it was in the high 60s. It came down more than we expected to a month ago as investors were engaged in blind selling of assets to generate cash. But as that period of panic is passed the exchange rates come up a bit but is still down very significantly on the and that’s helping stabilise the economy.A t the moment they may be not very much imports and exports taking place but once the restrictions start lifting the low currency that we have will help our exporters and domestic industries it’s working as normal.But a few weeks ago there was kind of a very large depreciation as people panic but their panic is now past.