ウィスパリング同時通訳研究会コミュのOpening address at Banking 2022 Conference, Lowe

Good morning, everyone and thank you very much for that introduction. I'd like to echo your comments, at how good it is for everyone to be back together again. This conference had been postponed a couple of times earlier because of COVID, so it's really good to be able to be back in a room with people and let's hope the health situation allows that to continue.

The ABA has set a challenging theme for this conference; that's planning for the future. The events of the past couple of years, and particularly the events of the past couple of weeks, served as a very good reminder of how hard it is to know what the future brings. But we can be sure that tomorrow will arrive, and we can be sure we need to plan for it. So I think it's an appropriate but challenging theme the ABA has set for this conference.

This morning, I'd like to talk about three issues on which I think we all need to plan. The first is higher interest rates. The second is a change in the nature of money. And the third is climate change and a restructuring of our energy system. All incredibly important issues and all ones that we need to plan for.

Before I talk about those three issues, though, I want to remind you about the resilience of the Australian economy. It's important because having a resilient economy gives us a really strong base on which to plan for the future. We saw this resilience in the December quarter national accounts. There was a very strong bounce back in GDP following the Delta contractions mid-year. The level of GDP in Australia is now 3.5 per cent above its pre-COVID level. No other major advanced economy is in that position. I'm expecting the economy to grow by more than 4 per cent this year, and return to something quite close to trends next year. So, of the advanced major economies, we're in a better position than any other. It's important that we remember that and it should give us confidence about the future.

The resilience is also evident in the labour market. This time last year we thought the unemployment rate in Australia right now would be 6 per cent. It's been 4.2 per cent for the past couple of months. There's an extraordinary number of job vacancies at the moment, and job ads are very high, so we're expecting the unemployment rate to fall further over the course of this year. And later this year, we expect at the moment that the unemployment rate will fall below 4 per cent and will stay below 4 per cent next year.

If that's what happens, it will be the first time since the early 1970s that Australia has had an unemployment rate below 4 per cent. It will be a very significant achievement and it speaks to the effectiveness of a combination of monetary and fiscal support. Together monetary and fiscal policy have worked and they've worked very effectively. It's really remarkable that two years into a global pandemic, Australia's on the cusp of the lowest unemployment rate in generations. Who would've thought that would've happened? In the middle of 2020 people were saying the unemployment rate in Australia could be 15, 20 per cent, and that there'd be deep and protracted scarring of our labour market as people lost jobs and opportunity, they wouldn't recover. Yet here we are on the cusp of the lowest unemployment rate in generations.

The resilience is also evident in household balance sheets. Households have built up a lot of extra savings during the pandemic. Most of us couldn't spend as we used to spend, and the government gave people money to compensate for their loss of income. So people had their income maintained and they couldn't spend, savings went up. So there's almost $250 billion of additional savings over the past couple of years. That's a huge amount of money. The median borrower now is two years ahead of their mortgage payments. Four or five years ago, the median borrower was one year ahead of their mortgage payments. So that's a big shift from one year to two years in just a short period of time. We're also seeing at the moment that loan arrears rates are coming down; they're fairly low and they're becoming lower. And many households have been able to pay down their credit card debt.

The banks supported their borrowers and their customers during the dark days of the pandemic and most borrowers are now back on track. Obviously not everyone has a big buffer and some people are still in difficulty, but most borrowers are in a better position than they were two years ago.

So you put together the resilience of the economy, the resilience of the labour market, the stronger balance sheets of households and the strong balance sheets of Australian banks, and I think we can have some confidence that we're planning for the future with a strong base, and we can look forward to reasonably strong growth over the course of this year.

So that's the backdrop. I'd now like to talk to the first of the three issues we need to plan for and that's higher interest rates. The last time the RBA increased the cash rate was in November, 2010. That's more than 11 years ago. So there are a lot of borrowers, and I'd say frontline lenders as well, who have not had any experience at all of a rising interest rates cycle. For many borrowers, that's going to come as quite an unwelcome development. Although I know from the letters that I get every day when I turn up at work, that many depositors have a different view and there will be part of the community that will welcome higher interest rates. So we've got to remember that as well.

The Reserve Bank Board have said they will not increase the cash rate until inflation is sustainably in the 2 to 3 per cent range. We're not yet at that point. Headline inflation is 3.5 per cent so that's higher than it has been for some time, but underlying inflation is just 2.6 per cent. That's just above the midpoint of the 2 to 3 per cent target range. That's the first time in seven years we've been above the midpoint of the target range. So we still have modest inflation here and we're only at 2.6 per cent on the back of really unprecedented disruptions in global supply chains, which have pushed up the prices of many goods. It's also relevant that aggregate wages growth is still running around a 2¼ to 2½ per cent mark. That's where it was before the pandemic, and before the pandemic, that type of wage growth was delivering inflation consistently below 2 per cent.

So wage growth is still modest and some of the increase in prices that we've seen is from supply chain disruptions that we would expect to reverse over time. So we're not yet at the point where we can conclude that inflation is sustainably in the 2 to 3 per cent range, but recent developments have moved us closer to that point. Inflation's been higher than we're expecting, the global supply chains are proving more contracted and taking longer to resolve than was widely thought likely. And in the last couple of weeks, the Russian invasion of Ukraine is pushing up commodity prices right across the board – high prices for energy, for all the base metals and for many agricultural products as well.

So given these developments, it is plausible that interest rates will increase this year. It's not guaranteed, but it's plausible. Two issues that we're watching very carefully here are the persistence of the supply side problems and the higher pressures coming from developments in Ukraine. So that's one issue. And the other issue is developments in domestic labour markets. On the supply side before Ukraine, there were signs that the supply side problems were starting to be resolved. Wait times for deliveries were starting to come down. The price of computer chips in global markets was coming down. So, there were still problems, but there were gradually being resolved and the resolution of those problems was giving our central bank and other central banks some confidence that inflation would come down. But now we've added another major supply shock. We had a big supply shock because of COVID and now we've got another one because of Ukraine. Inevitably, that's going to keep CPI inflation in Australia higher than it otherwise it would be, and it's going to be higher right around the world.

One issue that we're paying close attention to here is the inflation psychology. For many years, firms were reluctant to put up their prices and because they didn't want to put up their prices, they didn't want to put up wages. It's quite possible that a period of protracted headline inflation will see this psychology shift and firms will decide that they have to put up their prices, and if their prices are rising, then they can afford to pay higher wages. So we're watching very carefully for any shift in the inflation psychology. If that shift were to occur, inflation would be higher and it would be more persistent and we would need to respond to that in time.

The second issue is domestic labour costs. We expect wages growth to pick up, but to do so only gradually. And the gradual nature of the pick-up reflects some institutional features of our labour market: the fact that we have multi-year enterprise agreements that often don't get negotiated for three years; we have an annual review of award wages; and there are public sector wage policies that cover a lot of labour force and they change only slowly.

So a pickup is clearly taking place, but I think it'll be quite some time before wage growth picks up substantially.

There are a couple of uncertainties here, though. We haven't had any experience where I said for 50 years for unemployment below 4 per cent, so we can't be sure how wages respond to very low unemployment. And we can't be sure about the inflation psychology. If that shifts then understandably workers would want bigger compensation for higher inflation and firms might be prepared to pay a higher wage. So they're the issues that we're watching on inflation. The message here is it would be prudent to plan for an increase.

The second issue I wanted to talk about where we need to plan for the future is a change in the nature of money. If you look back through the long sweep of history, then what societies use as money is influenced by the technology they have. Some societies used clamshells a long time ago. For a while societies were using silver and gold coins. Right here in New South Wales, not many streets away from here in the colony of New South Wales people used rum. That was the best technology they had at the time.

Then we moved onto paper banknotes, and here in Australia you have these wonderful polymer banknotes with sophisticated holograms in them. The most common form of money today is electronic bank deposits that we can move over the internet in seconds thanks to the bank's' investment in the NPP. So what constitutes money in society changes over time. I think it would be foolish to think that this innovation and the nature of money is finished. There will surely be more innovation. We can't be sure what the next innovation will be, but I think there's a fair chance that it'll be some form of digital token sitting in a digital wallet or a digital device.

There are really big issues to think through here from both the technology perspective and from a public policy perspective. On the technology side, relevant questions are what form will these tokens take? Will they reside on a distributed ledger or some other form of technology we use? How do we ensure that the system is resilient and that it's not subject to some form of counterfeiting? Just as we spend a lot of resources making sure that banknotes can't be counterfeited, we need to make sure these tokens were secure. Would these tokens be anonymous and private like banknotes so they can move around without leaving a fingerprint or would they be traceable? And under what circumstances would they be traceable?

So there are a lot of technology issues here that need to be resolved and from a public policy perspective, there are equally challenging questions. These include, should the tokens be backed by the central bank? Just as we back and issue banknotes today, we could back and issue these tokens. If instead a private entity was to issue the tokens, how do we ensure that they're interoperable between various issuers and what are the collateral arrangements that would back those tokens? Another issue the central banks are considering is should these tokens pay interest? If we did, that could change the very nature of the financial system. People might prefer a central bank token that pays interest to a deposit at a commercial bank and if they did, that could reshape how financial intermediation works. So it's a big question.

Another big question is what is the potential for these tokens to destabilise the financial system, particularly in periods of stress? You could imagine in a difficult period that people decide they want tokens back by the central bank rather than deposits in a commercial bank that was under stress, and it could be quite easy to run from bank deposits to these tokens and it could destabilise the bank system. It would make bank runs easier. So if you're worried about that, how would we mitigate that risk?

So they're the public policy issues that the Reserve Bank is working through together with our international colleagues. They're important issues, but we need to prepare for them because, as I said, the nature of money changes with technology and technology is changing quickly.

Given this, the Reserve Bank very much welcomes the government's response to a thorough review of the payment system. The first important step here is the development of a national payments plan. And I would encourage you all to be as actively engaged in that process as you possibly can. We need that plan and it needs to be good and it needs wide buy-in.

There are also important pieces of legislation that will need to be passed to make sure that Australia is well placed for the innovations of the future. This legislation includes the modernisation of the Payments System Regulation Act, which governs with the payments system board of the Reserve Bank can do. That legislation was really leading edge when it was developed more than 20 years ago, but it's outdated now.

We need legislation to give effect to a new regulatory regime for stored value instruments, including stable coins and what the collateral backing for those coins should be. We need legislation to set up a tiered licensing regime for payment service providers. We need legislation for the regulation of crypto-assets, including the custody arrangements for those crypto-assets. So there's a lot of work to be done here by both parliament and by people in this room. They're important questions – we need to get them right. It's clear the digital economy is integral to our future and we need a payment system and a banking system that can serve that digital economy efficiently, effectively, and safely.

The third issue that I want to talk about that we need to plan for is climate change. It's obviously a first order issue for the financial system. We were reminded of it as we walked into this hotel this morning. It's also an issue that comes up in every single conversation I have with foreign investors. They want to know how Australia is going to make the transition to a less carbon intensive economy. They want to know what Australia's plans are. They want to know what the opportunities are that Australia has, and they want to talk about the risks that we have as well. So we need a plan here. We need good answers to these questions, and we need to plan for this transition.

The financial sector has a really important role to play here. Australia has great opportunities and it served as a reminder, my Deputy resigned yesterday to participate in those opportunities. Those opportunities take financing and people in this room play a critical role in helping provide that financing. And there are risks here as well, and people in this room will help us manage those risks.

But you can only provide the financing and manage the risks, if people are able to price, measure and manage risk. To price, manage and measure risk, you need information. So from a regulatory perspective, the members of the Council of Financial Regulators are working on a framework to help establish that information. So one of the things we're working on is the Climate Vulnerability Assessment that APRA is leading. We want to help financial institutions identify and understand the risks they face. Whether they're credit risks from stranded assets or change business models, or they're insurance risks that are building or risks coming from the repricing of assets in capital markets.

So that's one important thing we are doing. Another is helping improve disclosure requirements. In this area we need disclosure that's clear, that's comparable across countries and that's comparable across companies. Without having really good disclosure in this space, investors, banks, and capital markets, won't be able to do what they're really set up to do, and that is allocate capital. So people need the information and that information needs to be quality and comparable.

Unfortunately, we're not yet at a point where there's a widely used and accepted international framework for these disclosures, although members of the Council of Financial Regulators are working on this with their international counterparts to try and make progress here. I think the main message here is that in planning for the future, we need to provide the people who want to make capital decisions with information, and it needs to be quality information. And if we can do that, then I think institutions in this room can help Australia seize the fantastic opportunities we have in this area. So that's a huge challenge for the future.

So the issues that I've talked about today – higher interest rates, the changing nature of money and climate change – are only three of the many issues that you need to plan around and then some of these other issues are on the table today. I could have added to this list of three, three more. The need to plan how best to take advantage of the new technologies that are out there. Not just the changing nature of money, but the way banks are run and the way they organise themselves. A second would be the need to plan for strong cyber resilience. As anyone who's involved in cyber resilience knows, this is a challenging area and the bar keeps raising and we need to keep moving with it. And the third challenge we all have is the need to plan for a tight labour market and to invest in the skills of our people.

One of the things the Reserve Bank has been trying to do, is get the unemployment rate down and we've been successful in that. But it creates new challenges for us all and I think we need to work on how to attract, retain, and invest in our people in a tight labour market. That's another challenge. So Ticky, you have plenty to talk about today and I'd be happy to answer some of your questions. Thank you.