Fireside Chat
Fireside Chat at the Commonwealth Bank’s Global Markets Conference
Christopher Kent
Assistant Governor (Financial Markets)
Commonwealth Bank’s Global Markets Conference
19 October 2026
–
Sydney
Audio
41.7MB
Watch video: Fireside Chat with Christopher Kent, Assistant Governor (Financial Markets), Commonwealth Bank’s Global Markets Conference, Sydney
Moderator
All right. Good morning, everyone. What a fascinating first session of the conference. I would like to add
my very warm welcome to everyone in the room today for what I hope will be a very engaging session with
our next guest, who I don’t think needs any introduction, but I will give you one anyway, Chris.
So Chris Kent is the Assistant Governor, Financial Markets at the RBA, which is a position you’ve
held since December 2016, so coming up to almost 10 years in the role.
So in Chris’s role, he’s responsible for the oversight of the RBA’s operations in the
domestic and global financial markets, including the management of Australia’s foreign reserve.
He’s previously been Chief Economist of the RBA and has also spent time across in Washington.
So we’re very much looking forward to the next 45 minutes of conversation. As a reminder, we do
have the QR code up on your screen to submit your questions, and we will have, later in the session,
roving mics as well if you do want to ask one in person.
So what I thought we’ll do today is to go through a bit of an overview of thoughts on the global
economy, what we’re seeing in financial markets at the moment, which has been a pretty interesting
time, Chris, particularly bond markets.
But I thought what I’d start with is clearly there’s a lot going on in markets at the moment.
What’s the first indicator you look at every morning?
Christopher Kent
I can’t tell a lie. I look at the 10-year US Treasury yield.
Moderator
Okay, good tip. 10-year government bond yield in the US. I think for me, mine’s probably the Aussie dollar. We have
a few members of our FX team in the room, so that’s probably the one I look at the most. So just
in terms of that first session of the conference was really focused on the geopolitical backdrop,
which is clearly a very interesting part of the conversation to start with.
But just in terms of the global economy at the moment, one of the things that we would pretty much say
at the moment is the global economy’s been quite resilient. The last couple of years,
there’s been a lot of different shocks thrown at the global economy. We had tariffs last year.
We’ve had the Middle East conflict. We’ve had energy shocks.
What has surprised you most about the global economy the last couple of years?
Christopher Kent
Yeah, I think, you’ve summarised it well in terms of growth has held up probably being stronger
than most had thought, certainly stronger than we had probably been predicting for some time. And
that speaks to this idea of resilience. I think you could think about some of the different sources
of that resilience. And I think when you do that, I think some of them make sense, in terms of the
conflict in the Middle East and the effect on oil prices.
One source of resilience has been the access to global oil stocks, and that’s provided a real
buffer. And China was an important part of that, reducing their imports of oil. So an important
question in all of these sources of resilience is, are those buffers being tapped out? They have
their limits. The other aspect of it, in terms of this flexibility and the use of buffers, the other
thing to think about is maybe it’s not so much that there’s resilience, but there are other
shocks happening at the same time that are working to support growth. And the most obvious one is
everything to do with AI.
So if it was not for AI, maybe global growth would not have been nearly as strong as it has been.
Moderator
I was actually quite interested in the session before when one of the first polls got put up, and the
audience was asked to name the biggest risk that you are all watching at the moment. And there are so
many risks at the moment, oil price, debt globally, credibility of central banks around the world,
not so here in Australia, but the one that came up was AI and the CapEx cycle.
Now, in terms of global bond markets at the moment and these big global developments, what is the
number one factor that the RBA is watching at the moment? Is it AI and the CapEx story, which goes
beyond just AI? What is the thing that you’re watching most closely at the moment?
Christopher Kent
I think we’re watching a lot of things. One way to think about what’s happening in global
markets is to break it into sort of two or three buckets. And one of them, AI is having an important
influence, probably on at least two of those. One of them is through the lens of neutral rates.
What’s happening to neutral rates? And I think there’s reasonable evidence, both here and
particularly offshore, that neutral rates are rising.
We sort of know that, again, coming back to the resilience, if global economies have been relatively
resilient, part of that might be global economies are managing in the face of slightly higher
interest rates to grow a bit stronger than we might have otherwise thought. That’s an indication
that neutral has been picking up. And some of that is fiscal, a lack of fiscal savings and spending
more broadly, which a lot of that is AI and investment and the prospect of future productivity
growth. So there’s neutral.
Then there’s the term premium part, and that kind of has the opposite effect. Whereas if neutral
is higher, that means policy’s less restrictive than otherwise, whereas term premium rising goes
the other way.
And term premium can be rising because of some of these adverse shocks that we’ve seen. The
world’s being hit by a lot more supply shocks, the geopolitical uncertainty, the policy
uncertainty, just as some examples.
And then there’s this sort of question about inflation expectations and what is it that central
banks have to do to keep them anchored. And so far, markets are fairly comforted in terms of long-end
inflation expectations being reasonably well anchored. But central banks are nervous around the world
that a long period of elevated short-term inflation expectations might bleed into problems at the
longer end of inflation expectations.
Moderator
So when you put it like that, there is those three major forces at play in markets, particularly bond
markets, and that’s really impacting on trying to get a really clear assessment about how tight
financial conditions are, both offshore and in Australia. We have noted in a lot of the RBA
communications, particularly the minutes and also comments from the Governor as well, is that this
idea of neutral is coming up, I would say, a lot more frequently than what we’ve seen
particularly last year. Has that been a deliberate strategy or is it really just trying to showcase
just how fundamentally the backdrop’s changing at the moment?
I think there’s been much more of a awakening as to after 30 years of this downtrend in
global rates, we’re now turned around, neutral’s moving higher, the term premium is playing
a role.
How do you make sure that you’re trying to communicate that message out there to participants in
markets?
Christopher Kent
Well, I think that’s the important point. So we’ve long always thought that a good place to
start, perhaps the best place, at least in principle, in theory if you like, about the tightness of
monetary policy, is to get an assessment of where neutral is. And we had always done that and thought
like that, but we hadn’t placed much stock in our estimates, and we’d wanted to downplay
those. We still haven’t increased surety about these model estimates. They’re still very
uncertain, but we’re no longer sort of stepping away from popping them out there in the public
arena. And so we’ve been doing quite a bit of that, and I’ve given quite a lot of speeches.
And they start with that idea that neutral is really the key starting point to think about financial
conditions and the tightness of monetary policy.
Then, of course, the problem is huge amounts of uncertainty. Such wide errors, you could come up with
a lot of answers. I think going back to your first question about global markets, I think it’s
very hard to ascribe how much of the higher long-term yields is due to these factors I’ve talked
about. But I think most estimates, the better starting point is it’s sum of both, sum of
neutral, sum of term premium, which makes it really hard to kind of see how that stance on monetary
policy might be changing.
Moderator
And I think it’s really hard just in terms of neutral. We have really good estimates of maybe
where neutral’s at now, but then when we start to think through some of these bigger CapEx
cycles that are underway at the moment. We’ve spent a lot of time already today talking through
AI, defence as well. These numbers are going to lift over coming years as well. So neutral’s
already lifted, but it also seems that if we think through the next few years, the pressure’s
going to continue on neutral. So how do you start to think through a really clear estimate of where
it is now, but also where it may go in a couple years?
Christopher Kent
Well, I would dispute that we know where it is now. And I think the future’s even harder. And I
think the challenge here is you’ve highlighted a few things that make sense in terms of where
some of the upward pressure’s coming from. But there are still longer run features, and
it’s not clear that they’ve disappeared and things like ageing of the population, for
example. Slightly less dynamic economies. We hope and we look to the future and would like
productivity growth to pick up. We’ve seen evidence of it picking up in, say, the leading
economy of the US which is often quite common, but it hasn’t really moved the dial much anywhere
else.
So we don’t know, is productivity going to sort of reverse this long downward trend that
we’ve seen around advanced economies for quite some time or not? So I still think there are
these tensions even looking forward, and we just don’t know.
One of the really important things to recognise is you really only observe neutral by observing sort
of the effect of neutral relative to other things. So that’s why it’s really important to
keep an eye on things like inflation, for example.
Moderator
I think that’s a really good point maybe to unpack a little bit more, and we might start to
unpack neutral maybe in Australia in a bit more detail soon. But I think just thinking through that
answer is there’s a whole lot of structural factors going on at the moment through the CapEx
cycle, through aging populations. But we’re still in the middle of an economic cycle as well. So
inflation is clearly an issue globally. So how much of what you see in maybe bond markets at the
moment is being driven by these concerns around where inflation is now but also then thinking through
the structure and things like Federal Reserve credibility, rise in government deficits as well. So
how do you unpack those different forces?
Christopher Kent
I think it’s very hard, but one of the things to do is, while it’s quite nice to be able to
step back and look at markets slightly afar, take a slightly longer-term perspective, sometimes when
you’re trying to answer these difficult questions that you’ve just posed, it’s quite
helpful to actually look at the high frequency movements because it gives you a hint of how markets
are, what they’re reacting to, because they’re going to move pretty quickly when news hits
the screen, so to speak. And that gives you a sense of how they’re responding also over the
longer term.
And so a lot of what we have seen in recent months has been this expansion and greater tension in the
Middle East and the move higher again in oil prices. And so you can see when that news is hitting us
about impediments in there and the conflict spreading and so on. And you can see oil prices moving,
you see yields moving. So they’re very responsive to that.
There’s also been a lot of issuance, as you said, by fiscal authorities around the globe.
It’s quite extraordinary really, if you think about that first point about global resilience and
growth and inflationary pressures, that fiscal deficits, not so much in Australia, but offshore are
as large as they are. So markets are clearly a bit nervous about that and wanting to be compensated
for some of that.
And then there’s just the geopolitical uncertainty. And what’s happening in Europe and
France in particular at the moment is having an obvious effect on their bond markets.
Moderator
Just a reminder for those in the audience, if you do want to ask any questions, please put them
through on the Slido app.
One of the themes, particularly the theme of the conference last year, was this whole idea of
de-dollarisation. And it’s hard to see if that’s actually happening in practice. But one of
the topics that we talked about a lot is maybe de-dollarisation is happening or is not happening, but
Australia clearly stands out as a very different or unique case compared to some of the countries
that we’ve spoken about, be it the US, be it France, be it Spain, be it Italy. We have a very
credible central bank who’s been raising the cash rate already to deal with inflation. We have
lower government debt levels compared to peers, and I think there’s still reasons to be very
optimistic about Australia’s long-term growth plans as well.
How do you see Australian markets over coming years in light of these global trends? Is Australia
standing out enough, do you think, in global financial markets? Are we able to take advantage of
this? Do you see maybe an Aussie dollarisation story going on? I think just the number of people in
the room probably tells you that. But how are you thinking through those sorts of factors as trying
to distinguish what’s happening in the Australian economy to Australia being this really stand
out at the moment compared to our peers?
Christopher Kent
One lens to look through is what’s happening to the Aussie dollar. And the first point of caution
I would make is, are we still very much a currency that responds to risk on and risk off? So if
there’s a major risk off sort of move in markets, the Aussie dollar usually will follow that. So
it’s not like we’re immune to those adverse shocks. And because we’re a small open
economy that’s quite reliant on trade and openness to financial flows, that makes sense, I
think.
But then there are other trends, and we mentioned actually in the minutes recently, and I don’t
want to make too much of this, but our models of the exchange rate, such as they are, still very
uncertain. Suggest maybe the Aussie dollar at the moment is marginally above the long-run equilibrium
estimates for the real trade-weighted index.
Maybe there’s something behind that along the lines that you were talking about. In the scheme of
things, our fiscal position is relatively sound. We have lots of opportunities here in Australia.
We’ve got very sound markets, well-regulated. So maybe that’s having something to do with
it.
So that’s one aspect through the lens of the exchange rate. I think the other one, and it’s
a really positive development, is just the development of financial markets, and we’ve seen a
lot of that in the kangaroo bond issuance. We are now an attractive place to issue, to raise funds,
and even if those funds are being raised by foreign entities who take that offshore, we’re still
an attractive destination. That’s a really positive thing, including because it reduces the cost
of hedging the exchange rate coming back the other way, which the Aussie banks have been on the other
side of for a long time.
Moderator
I think the resilience of the Australian dollar, and noted we do still see these risk on, risk off
moments for the Aussie. Does it make harder though for monetary policy to work here? Because I know
that’s one of the transmission mechanisms that the RBA has spoken quite a bit about recently, is
the importance of that exchange rate channel.
Christopher Kent
No, I wouldn’t say it makes it harder. It’s long been the case that we have to deal with the
volatility that’s there in the exchange rate, and that’s actually quite a useful
stabilising mechanism and an important part of the transmission of monetary policy. And I don’t
think that’s changed in any way for the worse. You get these moments in time where maybe the
exchange rate isn’t quite doing what we would like as a central bank.
And I go back to my early time as the chief economist when we had the mining investment boom, and it
was out of the GFC, the Euro debt crisis, the Aussie dollar was reasonably elevated. And that was
making our task of generating some growth in the economy that much harder. And so we talked about it
at that time. We also talked about it going the other way in 2020 when the Aussie dollar, if
anything, was again perhaps elevated in part because everyone else was doing a lot of QE and we
weren’t in like 2020 until we started that program up. So that was a concern going the other
way. But most of the time, that flexibility, that volatility is a very helpful thing that we welcome.
Moderator
Might turn our attention now to my home base, the Australian economy and monetary policy. The
Australian economy is slowing. I think that’s been noted about pretty clearly. We’re seeing
most of that happen at the moment through the household sector. We’re seeing it in our own data
here at CBA, some broad-based slowdown in household spending. Still a very large investment cycle
here in Australia. It’s not mining anymore, it’s data centres. Persistent capacity
pressures still exist, and I know that’s been talked a lot about more recently, particularly in
the minutes last week.
So thinking about it from the RBA lens is how do you think through, does the economy just need more
time to slow those long and variable lags of monetary policy? Or at the moment, does the cycle matter
less and we’re just looking through these structural forces at play around inflation, and that
is really this hard part at the moment is there are some signs the economy’s slowing, but maybe
not fast enough?
Christopher Kent
I think that the challenge is these difficult trade-offs we’re facing, and it’s not unique
to us, but we’re being hit by these adverse supply shocks. The Middle East conflict is the most
notable, and that makes the trade-off between inflation and economic activity and unemployment that
much harder to deal with. We’ve had a long period of many decades where arguably those demand
shocks were the largest thing we had to deal with, and there it’s a lot clearer what monetary
policy should be doing, because inflation and activity are moving in the same direction.
So I think that’s the challenge we’re facing. You’re right, it’s very hard because
we know monetary policy operates with long and variable lags. But we have to do the best we can. We
use models that help us deal with those lags. And we also, in my area, look very carefully at the
first stage of transmission of monetary policy. And I think as best we can tell, that’s
transmitting through the economy more or less as we would think. But the Board, each and every
meeting, will have to assess the outlook, the news that they’re getting, the balance of risks,
and then take a decision from there.
It’s interesting. So I think the potency of monetary policy has been coming up a lot more this
year, I think because the RBA did start lifting the cash rate in February. We’re now in October.
We are, as I said, seeing signs that the economy is slowing, albeit pretty concentrated at the moment
just in the household sector. But how do you judge and how much time do you look at if monetary
policy and how it’s working is changing over the course of probably the past couple decades?
Australian households are wealthier, although home prices are falling now. How do you look at if that
potency level is changing or not?
Christopher Kent
Again, probably one avenue is just to come back to the macro models that we have, and as imperfect as
they are, try and use them to say, given all the shocks that we think are hitting the economy, where
monetary policy’s at, is the economy behaving more or less as we might think? And I don’t
think there’s any reason that it’s changed dramatically one way or another.
The important mechanisms are still at work through the exchange rate, which I’ve mentioned.
That’s helpful and working as you’d think. There’s the wealth channel that’s
clearly working through the housing market and dwelling investment, but also the wealth channel
should be affecting household consumption.
There’s the intertemporal channel. That’s quite a powerful channel. That’s where higher
rates provide an incentive, not just for those who have net savings, but for everyone, including
those with debt, to save more, to pay their mortgage down a bit faster if they can. So all those are
working. And then the one that gets way too much attention, and we’ve said this before, is the
cash flow channel.
And one thing I’ve heard is people saying, well, lots of households have very significant offset
accounts, and that dampens the effect of an interest rate increase on mortgage holders’ ability
in terms of their constraining their cash flow. And that’s true, but that’s by design.
Australian households pay their mortgages down a bit faster, and it’s a way of providing a bit
of self-insurance. So if you need to for a time, you can dip into those offset and redraw savings if
you have them, and many do.
But I don’t think there’s any evidence that even the cash flow channel’s changed that
much. And of course, we can measure that because we have good measures of net household debt which
are a lot lower and more stable than just the raw debt numbers would suggest because these offset
accounts have been building up so quickly.
Moderator
So, we’re just too impatient then in waiting to see.
Christopher Kent
It’s often the case. Still early days in terms of the transmission of
monetary policy.
Moderator
We might turn our attention now just to some of the questions we are getting through. What’s the
best way to measure how tight financial conditions are right now? I know we’ve spent, as a team,
a lot of time looking at this. I know it’s a question that comes up in a lot of the meetings
that I have, and it’s obviously come up from the audience now. But how do you measure it, or
what do you think is the best way to measure it?
Christopher Kent
I think the best way is to look at a huge range of data. So there is no silver bullet. There is no
magic number that we’ve got secretly tucked away that we just don’t reveal to people.
I said we start, and I think it’s a useful starting point, but that’s all it is, with these
estimates of neutral. And there’s a wide range of models that we have, and each of the models is
estimated itself with some uncertainty. And we often talk about the range of central estimates, and
then there’s more uncertainty on top of those. But in terms of that range of central estimates,
the cash rate and the cash rate path looking forward for the next 18 months or so, sits at the
upper end of that range of estimates. So that tells you, you can have some confidence that monetary
policy is somewhat restrictive, but the question is, is it restrictive enough?
And again, those estimates are subject to lots of uncertainty and revisions. So that’s a starting
point.
I think the other thing you can and should do is look separately at the effects that you would be
expecting to see when you tighten monetary policy. And we have seen that. We’ve seen, probably
through our exchange rate models, the interest rate differential started to move higher late last
year, where our inflationary pressures were picking up, and the markets were thinking we were going
to have to respond to that. And the exchange rate’s been behaving more or less as we might
think, and if anything, at the margin, maybe a bit more appreciated than you might think.
And then you can look at the flow of funds through credit growth, for example, and housing credit
growth has been weakening, and that’s what you would expect, and it’s got an extra kick
down because of the changes affecting investors, the tax changes.
So, we see house prices, housing turnover, dwelling investment, all of those sorts of things in terms
of the forward-looking indicators softening. So that’s much as you’d expect. We do see a
weakening in household consumption growth. But then on the other side of things, looking at some
other stuff we think about, and that’s business credit. Business credit has been growing really
strongly. Some of that’s funding for data centres, but not all of it. It’s broader base
than that.
So corporate balance sheets are being used to tap into extra funding, and there’s internally
generated funds as well. And then we look at things like credit spreads, equity risk premia. And in
the main, they have suggested financial conditions aren’t so tight by themselves. So it’s a
bit of a mixed picture, but our assessment is overall financial conditions somewhat restrictive. But
the question the Board faces each and every time they meet right now is, is it restrictive enough?
Moderator
It’s certainly a tough proposition at the moment. I think one thing that surprised us a little
bit more recently, particularly over the last two weeks, is market pricing for the cash rate here. So
we have seen, in particular, post the labour force data last week with that lift in the unemployment
rate to 4.7 per cent, that market pricing is, I would say, on the lower side for November
and maybe for the cycle at the moment. How much weight do you place on market pricing, or is it
something that you watch quite closely as a way to interpret what all of us in the room are kind of
thinking around the RBA at the moment?
Christopher Kent
Yeah, because it’s tricky, and there’s a debate, very lively debate in the US at the moment
with Warsh and his views. I think on the one hand, you can use it to the markets digesting a lot of
information, and it might be telling you something about the assessment of how all that fits together
for what it means for the economic outlook in Australia. So that’s one aspect.
The other tricky part to pull apart is they’re also thinking, how are we going to react, the
Board at the RBA going to react in response to this data? So I think it is really important for us to
look at for both of those reasons, including if, does the market have a reasonable understanding of
this thing called the Monetary Policy Board’s reaction function.
And I think in the main it does. But as you say, it’s responding to the data flow, and it’s
also responding very much to what’s happening offshore. We are a small open economy, and rates
kind of easing back just a little bit in more recent weeks has been a theme not just for us, but for
others.
Moderator
Yeah. And as you say, it is hard also to understand how much of that’s getting influenced by
offshore and how much of it’s getting influenced by the data here. So we find that tricky as
well.
I might just get more into the plumbing of the financial system and then I think we’ll turn to
audience questions. Can you take us through the rationale behind the new term repo facility that was
just announced, given it’s still quite rare among other central banks?
Christopher Kent
So I think the starting point is to recognise, so before the pandemic and when we used to operate at a
tight corridor system around scarce reserves, it was very common for us to have longer-term
operations in our daily operations as they were then. From time to time, even in normal times, we
would put up a term that was fairly lengthy. That’s because it suited our needs at the time. And
then in times of stress, it was a mechanism to provide some calming noises to markets and to help the
market in terms of its liquidity management. So we had done all of those things in the past, but in
the past, all of our operations were auctions where price was something that banks competed on when
they came to our auctions. Whereas now, under our ample reserve system, we have full allotment
auctions at the seven and 28-day term. And they’re pointedly seven and 28, particularly not more
than 30 days, because we don’t want to have an influence on banks’ LCRs.
But those are full allotment auctions. And we still think that it makes sense to be able to offer a
sort of funding at longer terms, and in normal times, at really small quantities. So that’s the
plan, but not to keep those quantities down, not to … We certainly don’t want to overly
and adversely affect private markets. We want to keep those quantities fairly small. So that means
having a price-based auction. And so we’ll be having this mix, full allotment for those regular
seven, 28-day term OMOs, and then price-based auctions for those longer-term ones. And then in times
of stress, people will be familiar with those differences and it won’t be such an operational
difficulty for them to work out,
"Oh, we’ve got to come to this term auction. We want
funding at term. The bank’s offering more of it than maybe normal. How does that
work?"
So we’ll have these as a matter of course, just so people know how they work
in normal times, and they’re ready to scale up if and when needed.
Moderator
All right. Now, we’ve got two roving mics. Does anyone have a burning question in the room?
Please feel free to pop your hand and we’ll get a microphone to you.
Questioner
You mentioned the wealth effect and the transmission, and you mentioned the tax changes there has
been. Straightforward question, I guess. Hasn’t the housing tax changes, the reduction in
incentives there, done a lot of the RBA’s work already?
Christopher Kent
Well, it’s moving in the same direction as monetary policy, if that’s what you mean. I think
it is hard to split them exactly, but this is, in terms of, say, the effect on investor credit, one
of the larger moves in recent tightening phases. And that’s no doubt down to the effects of the
tax changes and what it’s doing for investor incentives. So look, I think it’s in a helpful
direction. I think that’s hard to argue with.
Questioner
You’ve got a very large focus on capacity utilisation in the NAB survey and what your liaisons
are telling you about capacity utilisation. When I look at capacity utilisation, it’s a
threshold measure for inflation. It’s not a linear relationship. So if we look back at the last
20 years, prior to COVID, you had to go over 84 to see inflation lift on NAB’s
measure, but let’s call it 82 and a half, 83. We’re sitting below that. So I know
it’s above the long-run average, but the long-run average has never been indicative of inflation
pressures when we look historically.
So why are you looking at that so much as a capacity problem? And why are we not looking more at
profits in the NAB survey, which are deteriorating quite sharply and do have a nice lead on both
employment and on inflation out of that survey?
Christopher Kent
Well, I think the NAB survey has always been valuable because it’s a very timely one. But I
wouldn’t want to overstress that it’s the only thing we look at by any means, and indeed,
that’s why we have the liaison program. So the profits can be weak exactly because supply, there
are sort of significant costs that business are facing, and not just, say, on energy and oil related,
but labour costs are running pretty strongly at the moment, and that’s an important cost. And
that’s not so much a nominal wage story because nominal wages aren’t particularly out of
line, it’s more about very weak productivity growth.
So look, I would say, like many things, it’s just one indicator. It’s one important
indicator, particularly because of its timeliness, but we look at a whole range of those. And our
liaison generally tells us that business are facing into a lot of these cost pressures, and their
inclination is to be, where they can, to be passing those on, having faced these cost pressures for
some time.
Moderator
Might just ask one of the questions I’ve gotten here through Slido, and there’s actually a
couple questions on the term premium, which shows you, I think, the interest in the audience at the
moment. Now, one of the questions, and I know it was from someone anonymous, maybe didn’t want
to put their name behind it, but what can address the rise in the term premium? Or do we need to
address it?
What can be done? Is it a case of central banks need to take action to restore credibility? Is there
something else to address the rise to, I guess, settle bond yields in the market?
Christopher Kent
I think in the main, it’s one of those things we just have to take as given that we can’t
influence. I think we can have some influence on it. So if part of the concern with the term premium
is, will central banks really get on top of their inflation mandates globally? Then that’s
something central banks can obviously do something about. It’s not immediately clear that’s
the case.
I know there have been concerns, and it was talked about in the prior session about the question about
the independence of the Fed. I think the market’s largely put that to one side now, those
concerns. So central banks can have some influence, otherwise, I think they just need to take it as
given. And what the higher term premium means is that borrowers, both governments but also corporate
sector, are facing into higher borrowing costs. So that’s a tightening of financial conditions
by itself.
I think the one thing to recognise in Australia is that at the margin that has less impact here
because so much of our borrowing, particularly in the private sector, is priced off the shorter end
of the curve. So that’s through the cash rate, BBSW, three and six months, and the like. And
yes, even corporates that issue bonds, they issue those at terms, but they’re for terms much
shorter than the typical sort of 10-year term that people are focusing on when they talk about the
term premium.
Moderator
Although I would say there are, I think, a lot of challenges or rethinking from corporates here in
Australia just around funding costs and particularly how under-hedged corporates have been recently
just with that lift in the cash rate here. So it’s certainly top of mind for a lot of Australian
businesses here. Were there any other questions from the audience right now? I see some hands up
right at the back, if we can get some microphones out there.
Questioner
Looking at the recent communication from the Fed and the ECB and even the Bank of England,
they’ve taken a more measured approach with regards to inflation. Do conditions now warrant the
same stance from the RBA given the current pressures you’re facing?
Christopher Kent
Can I ask you to clarify what do you mean by a more cautious approach to inflation?
Questioner
In so far that they haven’t been so concerned about the knock-on impacts from the recent Middle
East intentions onto current inflation indicators. They’ve been rising slowly, but they’ve
not directly and explicitly addressing those, so probably right now.
Christopher Kent
Yeah. I’m not quite sure that’s how I’d interpret the ECB at least. I think
they’re very much concerned about the potential for these so-called second-round effects from
energy. They’re hit particularly hard, not just by oil prices, but the price of other energy
products coming to them from the Middle East on which they’ve been quite reliant. So I think
they have made some moves, and they have ascribed those to the concerns about inflation.
And I think that’s very much front and centre of many members of the FOMC and the Fed. I think
what they’re trying to do is balance off those versus kind of making a judgment as to how tight
labour market conditions and demand and supply are more generally. And one thing that the US has had
in its favour is very strong productivity growth, so they haven’t had quite the challenge we
might have faced here with very weak productivity growth weighing on the growth of potential supply.
Moderator
I think there was another one at the back. I think there was another question at the back. Thank you.
Questioner
Hi, Assistant Governor. Grace Lagen from The Australian Financial Review. You mentioned there the
exchange rate channel, and that’s obviously been an important channel for the transmission of
monetary policy for some time. But I note that you’ve sort of emphasised it there, as did
Governor Bullock in her most recent monetary press conference. I’m wondering, why is this now a
focus of the communications when I suppose this channel has always been at play through this cycle,
and the Aussie was up above 72 cents earlier in the cycle?
Christopher Kent
I think it’s always been there. Doesn’t necessarily always get talked about or questions
asked of it. What we always face and what the Governor faces into, particularly in her media
briefings, is questions about the cash flow channel. Because they’re the very tangible one that
people, everyone in Australia understands. Even if they don’t have a mortgage, they’ve had
a mortgage in the past, or they would like a mortgage in the future, if they’re yet to get into
the housing market.
And so they understand that channel. It’s very tangible. So I think it’s important for us to
acknowledge that, including because for mortgage holders that are struggling and haven’t had a
chance to build up those buffers they can rely on, that really is a painful experience for them. But
then it’s important, I think, particularly on questions about is monetary policy working,
you’re only doing this to mortgage holders, it’s important to talk through all these other
channels.
And an exchange rate one is one that quickly gets forgotten by many, including those who say, for
example, you may have heard the argument as much as I have, "Why is the Reserve Bank responding to
high oil prices? We can do nothing to affect higher oil prices." Well, actually, we can because
higher interest rates and a higher Australian dollar than otherwise reduces the cost of oil prices.
Australians don’t pay US dollars at the pump for their oil prices. They pay Aussie dollars. So a
higher exchange rate even has some effect there.
So I think it’s partly in response to these questions about the effectiveness of monetary policy,
and it’s important to emphasise to people there are many channels, and the cash flow is probably
the least important in terms of the macroeconomics.
Moderator
I’m going to ask a question that’s come up a couple of times, both from me and also on the
chat here. It’s just in response to the labour market data last week. So the unemployment rate
came in at 4.7 per cent, which is certainly a little bit above, I think, where we, the RBA,
and consensus had seen it for this part in the cycle. Certainly thought the unemployment was going to
lift higher. Is there a risk that the labour market’s loosening a little bit quicker than what
was expected? Or should we be cautious around that data print, just given the survey changes that
have occurred by the ABS?
Christopher Kent
I’d always be a bit cautious about the monthly numbers. They’ve always been volatile, even
putting aside these sort of questions about changes in the survey which have had effects of late. But
even having said that, there are indicators where the labour market has become less tight a bit
faster than we might have forecast. And I think a really important question here, is that because
demand is weakening maybe a bit more than you might have thought for labour? Or is it because are
there still these pressures in terms of costs of labour still rising too greatly?
And we’ll get a partial reading on that and an ability to update some of the estimates of things
like the NAIRU when we get the inflation data for the important stuff next week. So you talked about
markets having moved and responded, and that made sense, I think, in many regards, at least in terms
of the direction when the labour market came out, was a bit softer than people had thought.
Let’s see how they view also the inflation data, and it’s important to put those two pieces
of the puzzle together. That’s what we’ll be doing when we update our forecasts.
Moderator
I think we’re all keenly awaiting that third quarter inflation data out next week. It’s hard
to believe that is only next week, and then the RBA meeting is in just over two weeks’ time.
I’m conscious we have less than two minutes left, but I have a question at the front of the
room, so this might be our lucky last. Thank you.
Questioner
The rise in business credit demand and the- reflecting the strength of business investment in
Australia, which you said is widespread, which I think is a very encouraging sign. Do you think
that’s going to offset some of this productivity weakness that we’ve been seeing in the
Australian economy, and that’s been holding us back? So, you have to be upbeat because in my old
graphs I used to draw, there was a pretty strong link between business investment and productivity.
Christopher Kent
Look, one can hope. That’s part of the puzzle and the picture in terms of stronger productivity
growth in the future is business investment. It’s not the only part, the sort of tangible
investment in capital, building infrastructure, and so on, private and public. But it’s an
important part. So let’s hope. And it is something I point to when people sort of ask these
questions about things all heading in one direction. Let’s say they focus on the household
sector. The business sector has got a degree of resilience, including their investment plans, and so
far they’re holding up and pretty strong, as is business credit. But thank you.
Moderator
Like most conversations these days, it always does come back to productivity growth. We are at time,
so would everyone please join me in thanking Christopher Kent for his time today.