I had actually discussed with some of my senior colleagues, you know: "Do we need to do a big move," and I had actually written a press release – I often did this – where – considering a couple of courses of action, one of the tests is can I write a convincing statement. I've plenty of times written two and mulled over – of course, hoping that when we press the button to go, we actually send the right one. So I had the 100-point one in the top drawer, but we had gone with the 50 recommendation, and that morning – on the Tuesday – I just forget the exact events, but things had really taken a turn for the worse over the several days since we had sent the papers out, and I think it was actually Guy who said: "You know, it's probably worth reconsidering the bigger move."

So we went to the board meeting, and I put on the table at the beginning: "When it comes time to talk about what to do, I'm going to propose the bigger move," which we did, and I think that was a good call, and I think that was the occasion where the board assembled in the dealing room after lunch to watch the effects on the screens, and the markets, you know, reacted to the shock. But at the end of the day the sharemarket was up. Didn't stay up subsequently because other stuff happened, but – that was pretty eventful, that period, and so certainly by then – and that was early October – by then, all the feedback we were getting through our market contacts, we're in the market every day.

We have a balance sheet. That's the thing a central bank has that's an advantage. We're not a government department, and – it's not a criticism, but they're not running a balance sheet in the market every day. We are – and have a lot of market contacts – and so we were picking up – and you could see it globally – a lot of tension, and it was pretty clear that this was going to be a very big event and we were going to need to ease a lot.

AFR: Was there any conversation or particular thing that really kind of crystallised it for you over those days?

SOURCE: RBA, CENTRAL BANKS Nov 7 Stevens raises rates three weeks before the Federal election. Oct 12 Federal government guarantees bank deposits as CBA takes over Bank West. Aug John Howard announces in parliament “Interest rates will always be lower under a coalition government”. Ben Bernanke Mar 2008 Stevens raises rates to their peak of 7.25 percent. Nov At G20 in Washington China announces huge stimulus. Sep 15 Lehmann Brothers files for bankruptcy. Apr As western Sydney suffers, Daily Telegraph splashes Stevens on its front page. Headline: “Is this the most useless man in Australia?”. + Nov 2 RBA moves to cut rates A turbulent decade Apr 9, 2009 Interest rates bottom at 3 percent. Aug Iron ore prices start a huge rebound. Sep RBA becomes first major central bank to lift rates post GFC. Click buttons for main event details May The Age newspaper reveals a foreign bribery scandal at RBA subsidiary Securency. Stevens says: “It is quite easily the most unpleasant and difficult set of issues I have had to deal with.” Oct 2011 Greek debt crisis triggers global panic. Australian cash rate (%) Sep 2006 Phase One: The commodity boom Nov 2015 US raises interest rates from zero, taking pressure off the AUD. Stevens: “We should just chill out.” Glenn Stevens was appointed RBA Governor replacing Ian Macfarlane following his retirement. Feb 2012 Australian dollar peaks at $US1.09. Cash rate Second Greek bail-out triggers euro-zone crisis Policy rates - G3 Capital inflow Apr 2013 Stevens re-appointed for abridged three-year term. Oct 2010 Julia Gillard forms minority government Feb 2007 “I don't think any central bank could accept the notion that somehow a rate change is off limits for one year out of three. That would be crazy.” - Glenn Stevens May Taper tantrum hits emerging markets as the Fed considers ending Quantitative Easing. Sep Tony Abbott wins government. Oct 7 RBA starts unprecedented rate cuts. Very low global rates have pushed up the Aussie * Since April 2013, the Bank of Japan’s main operating target has been the money base Policy interest rates–G3 (%) SOURCE: RBA, ABS, BLOOMBERG Australia has cut reliance on foreign debt to finance investment Australian net capital inflow (% of nominal GDP) * Includes March quarter only Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

Mr Stevens: I think it was a period where every day you would come to work and there had been something happen overnight, and you could get the sense that the world was teetering a bit, so to speak.There were a couple of weekends that I spent the whole weekend on the phone, and a lot of this stuff remains really, you know, not on the public record, and it shouldn't be, but let's say that at times like that, the central bank's job is to make sure everybody who needs funding is going to get it from somewhere, that if we need to provide more funding to the market, we're ready to do that, that if there are weak players, there's a potential partner if needed, and that's your job in those moments. So we were doing that.

AFR: We were teetering, you say.

Mr Stevens: The world was ...


AFR: The world was teetering. When you're making that decision, how much was the fear that by going 100 – you know, double what your papers had been recommending – that you would actually add to the panic that was probably already ...

SOURCE: RBA, ABS Australia has just gone 25 years without recession GDP growth Inflation GDP growth (%) Budget balance The big three inidcators The new problem: Inflation is too weak Consumer price inflation* (%) * Excluding interest charges prior to the September quarter 1998 and adjusted for the tax changes of 1999–2000 SOURCE: RBA, AUSTRALIAN TREASURY The elusive surplus Australian government budget balance* (% of nominal GDP) Underlying cash balance; 2016-17 Budget Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

Mr Stevens: Well, there's always that possibility, and that's why, you know – I've said before my heart was in the mouth a bit as we watched that unfold, but any time there's a possibility that your actions and your words will be misunderstood, that's always true, but in the end, you can't let the possibility that you will be misunderstood prevent you doing what has to be done. Otherwise, you would always be behind.

AFR: I think the big second thing that happened in that time period, aside from what was decided on fiscal policy, was the bank guarantee. Do you have any reflections on how that evolved? Because there was a fair bit of preparation that had gone on prior to that ...

perhaps as a sort of – maybe no one really believed you would ever have to use it because it implied a calamity on a global scale.

Mr Stevens: The real backdropis that we had been working on the Financial Claim Scheme for a long time, but that actually hadn't been on fast enough a track, in hindsight. So we didn't have a very well-articulated and appropriately, you know, specified guarantee. Most countries have a guarantee that's explicit of some kind. What we had was a vague assumption on the part of the public that somebody would make sure they never lost money in a bank, and there were surveys going way back that said people thought the government or the Australian Bankers Association or the Reserve Bank was actually – so it was very vague.

RBA Index of Commodity Prices (SDR, 2014-15 average = 100, log scale) Iron ore price SOURCE: RBA In China’s orbit Commodity prices Oil price Brent oil price ($US/barrel) SOURCE: BLOOMBERG Iron ore price ($US/oz) Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

I mean, there was once a time when it was thought constructive ambiguity was good, and it still is in some ways. But I think we found ourselves with this sort of vague notion that there was some kind of backstop, and we had been trying to work on a scheme that would actually make it a bit more explicit but appropriately limited, and the crisis hit before all that was properly worked out, so we had to accelerate that. That's my memory.


AFR: What was driving that process? Was it sort of warnings from groups like the International Monetary Fund that we had a wholesale funding issue, that that was the sort of

weak point.

Mr Stevens: It was – I mean, we were talking about the deposit guarantee. It may have even been as far back as Wallis [the Financial System Inquiry of 1997, headed by Stan Wallis]. I just forget the details now, but when I started in this role there was a process of trying to develop the scheme, and you know, we were negotiating, discussing with the banks and so on, and it had to be accelerated.

Business investment* (share of nominal GDP, %) Business confidence SOURCE: ABS The mining boom and bust Investment Business conditions * Adjusted for second-hand asset transfers between the private and other sectors * Net balance; deviation from average since 1989 NAB business conditions index (ppt) SOURCE: RBA, NAB NAB business confidence index (ppt) Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

AFR: In the wake of the financial crisis here, you had collapses of major investment banks, ALLCO and Babcock & Brown, and the big four were hugely exposed. How worried were you about the strength of the local banking system?

Mr Stevens: I was never really especially worried about asset quality in the large banks, and I said at the time that I thought our banks were light years from the problems of others. I got chipped for saying that by somebody, but – so I was never that worried about that. Funding liquidity is an issue, but that's inevitable in a panic. In a panic, funding liquidity tightens up for everybody, whether you're solvent or not.

AFR: There was also a bit of a concern about Bankwest, too, wasn't there?

Mr Stevens: I don't want to go into details. There were several entities that we were watching more closely than others, and they were one. But in moments like that I think the central bank's job is to make sure the system has adequate liquidity, make sure that the players that are under more stress have a plan, whether that plan involves tapping our standard facilities, which – that's what they're there for, but you've got to have the appropriate collateral if you want to do that.


So have they? Have they got it structured in the right way? And in the crisis, of course, one of the innovations was to parcel up the mortgages into securities of acceptable quality that we would take as collateral, and many entities took that preparatory step of getting things ready. And in extremis, if there's a player that's weak enough, is there another entity that can absorb it if needed? I mean, that's all the preparations you make in these times, and that has always been so.

AFR: In your recollection, do you think everyone in the political system is quite aware of how dangerous some of this was becoming out in the public? From thinking here, again, about the guarantee?

Mr Stevens: Everyone in the political system, I don't know, but the treasurer and the prime minister, and the senior cabinet members, I think they were appraised of it, yeah. I think the Treasury and the other regulators were doing a good job of keeping them appraised.

AFR: Leading up to that weekend of October 12, how much feedback were you getting on the early signs of, perhaps, a bank run?

A flexible labour market SOURCE: ABS Wage Index Employment rate Wage price index growth (year-ended, %) Unemployment rate Pay has fallen with inflation Employment to working-age population (%) More discouraged workers post GFC Unemployment rate (%) Sub-trend growth keeps jobless rate high Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

Mr Stevens: At moments like that, what happens is the large banks start to get deposit inflow from smaller ones. That's normal. You were getting troubling things like people ringing up radio shows to ask: "Is my money safe in bank x?", where x might be a pretty large bank. That's troubling. There was an increase in demand for banknotes, which we obviously see very directly. So they were certainly signs of stress. And people are observing major global financial institutions going to the wall or being guaranteed by their governments or getting other assistance. So it's not surprising that people would be pretty tense.

AFR: So on that weekend you've had, I think, Ireland has moved to put a guarantee on the ... you've got a financial claim scheme, which hasn't really been fully bedded down. I think there were suggestions that we should have a bank deposit of $100,000, the leader of the opposition then said maybe $250,000 and then suddenly it got up to a million. How did that process go over that weekend of deciding what sort of level you should guarantee for bank deposits and why did you need to act so swiftly?

Mr Stevens: To be honest, again, my detailed recollection is not that good. It was a Sunday, I think, it was announced. I remember sitting in church, but sitting at the back because I was expecting the phone to ring, and I think there was an additional complication that New Zealand was having an election and there was the possibility of them announcing things. One of the lessons in the guarantees is you've got to err on the side of overkill at those moments. The initial financial claim schemes that we were discussing had guarantees for $20,000 or maybe $50,000.


AFR: So it's rent money, really.

Mr Stevens: But if there's actually an incipient panic, you've got to overkill, and I think that's the lesson from the UK experience.

You know, did we need to go unlimited? I don't know. But that was the decision taken and it worked,

which was 99 per cent of what matters.

AFR: Did you ever consider taking equity at all? Did it ever get to that point? The bank?

** Monthly hedonic price index; series breaks occurred in April 2016 and May 2016 due to changes in methods used to calculate the index Housing prices (year-ended growth, seasonally adjusted, %) SOURCE: ABS, APM, CORELOGIC, RBA, RESIDEX Housing prices Building approvals * ABS and Australian Property Monitors (APM) are quarterly stratified median price indices; Residex is a quarterly repeat sales price index Loan approvals Australia’s achilles heel House prices have fallen twice on Stevens watch Housing supply is finally catching up with demand SOURCE: RBA, ABS Private residential building approvals (monthly) * Excludes refinancing ** Includes refinancing An APRA crackdown on investor loans has helped owner occupiers Housing loan approvals ($b) Australian Financial Review Interactive infographic Interactive infographic by Les Hewitt

Mr Stevens: The Reserve Bank?

AFR: Presumably the Commonwealth, obviously, but taking equity in a bank


in distress.

Mr Stevens: We didn't need to get to that position, because the wholesale and retail funding guarantees and one or two mergers was enough, and the panic subsided. We expanded our balance sheet quite a lot, but by the middle of 2009 it was back to normal, if I remember rightly. So the period of huge tension here was not that long, which is obviously very good. And towards the end of that year the banks were in the market, raising equity.

And they raised, what, 30-odd billion. The fact they could go to the market and do that, OK, it costs but that's actually a very good thing that that should be done.

AFR: One of the things that I find really interesting, you're all effectively locked in rooms at a period of extreme crisis and tension, you're limited as to who you can talk to because decisions like this can't be leaked out. It comes down to you individually, just a small handful of you ... Do you take anything from the sort of person you need to be or the skills you want to have or the history you need to cope with that?

Mr Stevens: Well, you are who you are and the event comes and ...

AFR: You wouldn't have ever imagined having to face such a thing would you?

Mr Stevens: No. But – and, hopefully, it's just once in a lifetime. But, at those moments, you're drawing on all the skills and experience you can find around you and making the best call you can, and that's what they were doing in Canberra. And, as it happened, we had people leading the Treasury who had been through other big economic episodes and who had some pretty well-developed views about the appropriate fiscal response and so on. That was to the country's advantage.

AFR: What do you need to do to take the mental leap to say: "Well, we always do things in this amount," to then say: "This is a completely different world and I've got to back myself to say I've got to do something, which we wouldn't otherwise not consider at all?"


Mr Stevens: I don't know that there's any science to how you go from increment mode to actually large discrete move mode. I don't really know how to describe the process of how – but you had to make that leap once you come to the view that the world fundamentally has changed a lot then, and we're going to have to reconfigure quite considerably. Because we've started with rates high and we needed to do that to confront the inflation challenge, which, although some at the time said it wasn't real, it was real, but once that has been done, once the outlook has changed, we were going to need to move quite a bit – and 25 points at the time wasn't going to cut that, not in time.

AFR: In going to that raising of interest rates in 2007, that was a searing experience for you. Did you anticipate the political backlash and also the terrible – you know, that terrible article in The Daily Telegraph?

Mr Stevens: The 2007 episode – I mean, basically, at that time there was no other credible course of action for us to take. We took the decision, and I assumed that when we did it, it would be very unpopular, of course. I actually think what's remarkable is there was basically no public criticism of the bank by the Howard government at that time, and that's very much to their credit. I want to say that: that I'm sure it was extremely inconvenient, but they were scrupulous in not letting their – any private criticism they may have had – I don't remember it getting into the public domain. That's very much to their credit.

The infamous headline – front page, I think, in 2008, after we had done some more tightening, and as much as anything, I think that was about the banks were not quite in lockstep. Actually, the period where they had moved in lockstep, if you look at it, was the historically unusual period, but there had been this view built up that they were only allowed to do what the Reserve Bank did, and I made the mistake of trying to explain that: "Well, you know, that's not necessarily so. There's other stuff happening." And I got caned for trying to say that, and that's actually the backdrop to that piece. I think that was more about us failing to control the banks, more than actually raising the cash rate. Anyway, there it is.

AFR: Are there any lessons to learn from that?

Mr Stevens: Well, one lesson seems to be – more for politicians than us – if you seem like you're defending banks, you're probably going to get kicked. I think that's a very regrettable state of affairs in the media, but that seems to be the way it is.

But you know, our job is to call it as we see it. That's what we do.

AFR: When you say in the 2007 election campaign there was no credible alternative but to raise interest rates,


are you saying that the evidence all pointed to you needed to tighten, and if you didn't tighten, then it would be seen that you were not tightening for political reasons because it would be politically inconvenient?

Mr Stevens: I think if you go back, there was a demonstrated model. Inflation is higher than expected or lower than expected; we respond to that because we have an inflation target. We had done that in August. Everybody should have known – everybody did know – that were the inflation figures released at the end of October on the high side, the bank would have to respond to that. How could you not? Bear in mind we weren't doing monthly statements then, so the option of not moving but explaining why – that really wasn't available because we didn't have a practice of ...

AFR: What could you explain if you took that course: that it was politically inconvenient?

Mr Stevens: And we will do it next month. You know, the option would be: "We're not doing it because of the election, but we're going to do it next month," which actually wouldn't have helped the government, I don't think – would have left us just lacking credibility. So the way I thought of the decision at the time. The evidence is there, people would reasonably expect us to do our job and be consistent with all past behaviour, and I couldn't think of a way of explaining why we wouldn't do that.

AFR: So would it be, like, an unofficial rule that the central bank should ignore things like an election campaign with movements either way, that – and everyone should know this – that that's what it will do?

Mr Stevens: There were people saying at the time that there was some sort of unwritten rule that you don't move rates not only during a campaign but in an election year. So one year in three, you can't move in either direction. Does that make sense? There never was any such unwritten rule. I never heard anybody – any of my predecessors ever say: "Well, you know, the deal is that while the election is on, we don't act." Ian [Macfarlane] once said: "Well, we're not actually that keen on moving during a campaign, but if we had to, we would." That's what he said, but people often quoted the first bit of that and not the second. So – and I was asked in public several times that year: "If the evidence suggests you need to tighten near the election, will you," and I always said: "Well, of course we would, because we do our job." So I think I was fairly clear.

AFR: And you said that you gave credit to the Howard government for not complaining about it publicly during that time, but are you aware that there does seem to have been some political grudge held against the bank over the years?

Mr Stevens: I'm not sure that I would say I could detect that, actually. You know, only the people who might have held such a grudge could say. I've not seen any behaviour directed towards me or the institution from any of those people that would be – that suggests that.


AFR: And no prime minister or treasurer complained to you personally about it?

Mr Stevens: No. I've never had, either at that time or any other time, a PM or a treasurer on the phone saying: "Don't do this," or: "Do this," or: "I want –" that has never happened in the 10 years I've been in the role.

AFR: With The Daily Telegraph headline – "This is the most useless man in Australia", or words to that effect ... Did that have – that must be a bracing thing: to wake up in the morning and walk into work and have that in the papers.

Mr Stevens: It was hard on my family because my 16-year-old daughter worked in a newsagent, and we didn't know it was coming. So the first person in my family who saw it was her, and it was also the day we were doing the 21st birthday for my older daughter. So it was a bit of a downer for the family, but you know, sometimes these things happen, and there's nothing you can do about it. If the media comes after you, you can't win.

AFR: Well, it's probably fair to say the Reserve Bank did, in the wake of that, or during part of that process, up its media operations.

Mr Stevens: We did. That was one event that caused us to invest more in employing serious professionals, who've done a great job, which is not to try to cast aspersions on those who went before.

AFR: It's probably also symptomatic too of just how central banking has changed. You know, when you started it's fair to say that the governors were fairly invisible.

Mr Stevens: Ian found the visibility rose during his time. I've certainly found it has risen a lot in my time. There's plenty of people around with selfies with me in Martin Place. I think that's partly central banking. You know, central bank governors have become more public figures. It's partly the tendency to personalise any institution in the face of its leader, because people – I think the way the press and the population – the way they kind of get their arms around what is that institution – well, it's that guy or that woman – that prime minister or whoever.


It can be uncomfortable, but that's the way the modern world seems to work, and that has affected us. And probably in addition to that, globally, central bankers have had to do some pretty unorthodox things, feeling obligated to try to fulfil their mandate in very difficult circumstances and perhaps where other arms of policy couldn't help. So you know, that has kind of added to this slight tendency to celebritisation, I suppose.

AFR: Just going to the Securency scandal with the sort of alleged corruption, did that reflect a failure of governance by the Reserve Bank?

Mr Stevens: I think we've said publicly already that we've regretted the governance that was there wasn't strong enough to detect what's alleged to have occurred. We've said that. Yes.

AFR: What lessons are there from that?

Mr Stevens: Well, some questions arise in my mind as to should we be in these sort of businesses, and we are no longer an owner of Securency, and Note Printing Australia we still own, but its mandate is much more tightly defined, and you know, at the moment, they're basically more or less 100 per cent geared to the next generation of banknotes project. So there's certainly those questions, and for me, you know, we should have been applying much more scepticism – I've said this in public already as well – more scepticism to the success that they were enjoying. In hindsight, we should have been more sceptical. That having been said, all of these things are still in front of the courts and may well be for some time. So the final answers are not yet known, and obviously I'm pretty limited in what one can say.

AFR: I wonder if we could just jump a little bit chronologically to sort of the world we're in now, reflecting, though, on how it is that we came out of the crisis. I guess we did very well, and that's sort of widely seen as true. We've got some newer challenges. In terms of trying to answer the question of where we go from here, I wonder if you can reflect on whether it's really possible now to use monetary policy when you've got the rest of the world, among your peers, in a very unorthodox place with negative rates, quantitative easing, whatever else might be in the pipeline.

Mr Stevens: Yes. In a world of capital mobility, which is the world we've been in for some decades, what the major countries do with their policies is always a constraint at some point. If they have really high rates, like they did in, you know, say, the early '80s, when Paul Volcker was dealing with US inflation, how open is it to us to say: "We're actually going to run really, really low rates."?

I mean, you know, that gets reflected in currencies but probably more broadly as well, and it's not that you slavishly have to do everything they do, but when the central banks are on a very strong course, you're going to be affected, and you can try to chart your own course to a certain extent, but there's a limit to how much you can do that, I think, realistically, in a world where capital is mobile. So that's what we see. That doesn't mean we're completely impotent to do things for our own good, but it's just you're not an entirely independent agent either in that world.


AFR: So in this world of QE and unorthodox policies, how does that work for us if we find ourselves pulled in there? How would QE work here?

Mr Stevens: Well, I'm very much hoping we never need to find out. We've certainly observed what has been done elsewhere, and there's any number of assessments around on its effectiveness.

AFR: How would you rate its effectiveness?

Mr Stevens: That's a difficult question. And I preface any answer by saying I'm very thankful not to have been in the position that they were in of feeling that we've got to do more. We haven't been in that position, and hopefully we won't be. My answer to the question, I think, is that in countries where long rates matter a lot – and in Australia this is not such an such an issue. Because a lot of our lending keys off shorter rates. But in the US or Europe where long rates drive mortgages very directly: OK, you've brought the overnight rate down.

The next thing you could do would be to actually directly bring the longer rates down, and that probably was stimulatory initially, I think. Once you get into later rounds where you're looking for effects where the central bank takes the lowest-risk assets out of the system and the investor who used to hold them is now holding something that's slightly – not quite so low risk, but probably still pretty low. And the intention is that out along a chain of transmission, other stuff happens.

My test is: "Who went to Bunnings in the end as a result of that? Did someone go and take borrowed money and spend it on real goods and services that wasn't going to otherwise? Because that's actually in some sense the ultimate test. Did we create some additional demand?" It's impossible to know really, but I suppose I'm left with some doubt that all that many people went to Bunnings that weren't otherwise going to. Maybe and probably the US would have the best case that that happened. But I think for me to take a bond off you and give you another asset, namely cash, which is more or less a perfect substitute, and expect that you've then had a major behaviour change – you know.

AFR: How would you judge the transmission mechanism works here now, when you're cutting cash to such low levels?

Mr Stevens: I think on the work that I'm aware of, the evidence that I'm aware of, I would say that cash-flow channels still probably work. I'm personally of the view that maybe not as strongly as they used to, because I think the evidence is that the borrower households – that's where the action comes from, and the way this is supposed to work is the borrowers have more debt than the savers have deposits. That's a fact. And when you change rates the borrowers are the ones who are, you know, spending all their income, and if I give them a bit more income. They're likely to spend that. And the savers – the cut to their direct income is actually not as big, and they're less likely to respond.


That's still true. But I think more of the borrowers are actually using the low rates to accelerate the repayment rather than going to Bunnings. Now, what that does is it's accelerating the decline of the debt for those individuals, those households, so the day when they are freer of the debt or have a lower debt and they're then more confident to spend – that day is getting closer. But it probably hasn't been as much of an immediate effect maybe as it might once have been. And I'm hypothesising here. You can't prove this.

AFR: Is that day getting closer, or are people just re-mortgaging, buying bigger houses?

Mr Stevens: No. Well, credit growth slowed down in the past year, really. So I think a lot more people are intent on trying to get to the point where they're carrying a lower debt load. It's the new people borrowing to come into the market that, you know, keep credit growing at all. So I think what's driving that is just people have changed their opinion about how much confidence they have in future asset values rising and how much leverage they're prepared to hold. I think a lot of people thought: "I'm going to be more careful."

AFR: So a demographic factor, as well.

Mr Stevens: I don't know. Maybe. I think it's probably largely that people have looked around the world, and there has just been a mind shift change.

Ten years ago, you know, we were very confident. Asset prices were rising. Leverage was rising. Saving was falling. Saving rate was falling. And there has been a complete – a very substantial change in people's psychology. That was bound to happen, actually. It began in about 2007. Looking back. It took some time to come through all the figures. But it's probably a good thing, in most respects.

AFR: In the last rate cut you didn't get full pass-through on the mortgage side, and you've said that you didn't expect that would be the case, and you wanted an increase in deposits. Why didn't you expect it all to be passed on? And what's the stimulus you get in this situation?

Mr Stevens: Our assessment of the way the banks were reading their own funding situation led us to feel they probably won't go the whole 25. We don't have enough precision to say they will do X. We just felt probably if we cut 25, they won't – that won't all come through. There's still some ... impetus there, and you know, we don't know what the effect on the exchange rate is, of course, because it's impossible to model that. I would imagine it was lower than it was otherwise going to be, but I can't tell you by how much.


AFR: So when the deposit rates go up is that encouraging people to save more, or is it giving them more income that they then can spend?

Mr Stevens: Well, a pretty small portion of deposits actually went up. I think we're going to find that most deposit costs have come down for the banks.

AFR: Is it a more complicated story now that banks are in a war for deposits and they need to raise more funds and that's – so you're getting – that's part of the story why you don't get the full pass-through, which perhaps ...

Mr Stevens: Probably. There's regulatory change that's in place or coming that's changing what sort of deposit helps you on your NSFR and that sort of thing, and that's prospective, but all these things get pulled forward into current behaviour, because people start to adjust when they know a regulation is going to come in. So all that's happening. There's stuff happening in international markets as well that affects – so it is a complicated mix, which does complicate the story, the messaging, and it complicates at the margin our assessment of, you know, how much oomph we get from what we do. Sure. That's true. That's the world we're in.

AFR: Do you really think that we need to stimulate housing borrowing more, or are you hoping that most of this comes through the exchange rate?

Mr Stevens: Well, I think most of the domestic effects of cheap money comes through the household sector. Higher house prices than otherwise, more borrowing than otherwise, wealth effects, lower saving rate, etc, etc. That's where I suspect the bulk of the domestic demand impetus comes from. It doesn't come from businesses saying: "Quarter point less on funding costs relative to my hurdle rate. I'm now going to do the project." You know, there's no evidence that that occurs or ever did. So it comes from the households. And as you know, the thing that I've tried to grapple with is – that's where we get the effects, but do we actually want households to engage in a major levering-up from here. It's not that what they did before was disastrous. That clearly hasn't been. But from here how much more do you want?

So I've felt we had to grapple with that. As the facts at the moment are, the credit growth of households is running at about 6 per cent. Fractionally less if you take account of a build-up in mortgage offsets and so on. I don't think you can say this is a terrible risk. If it was 10 per cent or 15 – that would be a different story. It's not too low, but you know – so trying to find the balance between doing what we can to give the economy growth to help the transition but not building up a – I know The Australian Financial Review has taken a slightly different position, but these are the things we have to grapple with.

AFR: So how much do you think goes through the exchange rate then?


Mr Stevens: It's very hard to be precise, because there are so many other things affecting the exchange rate, so identifying the interest rate effect is, you know, really a mug's game, I think. But I guess I have to believe that having lowered the cash rate for five years, and also made the odd comment, exchange rate is lower than it was going to be otherwise. The terms of trade are taking it down as well. How much of that's the interest rate? Impossible to be precise.

AFR: So in this sort of potential world that we're coming into how does that mechanism operate if we are doing QE. If we're buying ...

Mr Stevens: We're not doing QE.

AFR: Well, we're not doing QE, but if we're buying bonds to bring yields down, is that – that's not going to go through the domestic channel, is it, because we're not America ...

Mr Stevens: I think you're arguing that what other countries are doing is, in fact, really aimed at getting an exchange rate effect. Well, that may well be.

AFR: Will that work for us?

Mr Stevens: You're talking about other countries, not us. Let's be clear. No QE is being done there.

AFR: In extremis, though, could you imagine?


Mr Stevens: With 10 days to go – we're not going to do it in that time. That's a question for the next governor one day.

AFR: It's pretty clear that the QE programs particularly and the negative interests rates in Japan and Europe are aimed at driving ... in a ...

Mr Stevens: I think you can be forgiven for thinking that's what they – that's at least part of the channel they're looking for. It's not the done thing in polite company to say that, and everybody has to motivate what they're doing by their domestic objective, and that's ... but I don't think it could be denied that people have an eye on exchange rates when they're making these decisions. To deny that would be to deny the obvious, I think.

AFR: Just one last question on that. Can we ask again whether the currency is appropriate? It's our favourite question.

Mr Stevens: I don't really want to bite on that. I think it's doing its job. You know, when I started this role it was about where it is now. It has moved a lot in the interim. I think it was too high, it wasn't responding enough to the fundamentals in the economy. When we thought that, we said that. It's possible it will give us trouble, but my position in recent times has been it has been adjusting as it should.

AFR: With the regime, inflation is below target, below the 2 to 3 per cent. It's forecast to do so for quite some time. How long can you go – I know the Reserve Bank talks about the soft edges. How long can you go below target before it starts to lose credibility? And what would that then mean?

Mr Stevens: I think – we've got enough flexibility to cope with being below and if not this regime, then which one is better, I haven't seen it yet, and the best bet will be to stick with inflation targeting. It will be for the new governor, of course. I assume they will sign an agreement and, you know, it will be for him and the treasurer to do that with whatever wording changes they might think is appropriate and I'm not involved in it.

I don't think the target is losing credibility, as yet, certainly, and we've had periods below or above before. The best thing to do, I think, in these circumstances, is to keep articulating the goal and have a credible story for the medium term. I think we have that at the moment and, beyond that, it will be for Philip [Lowe] to keep that the case.


AFR: And on this debate that sort of emerged about having some sort of nominal GDP target

That's in a way, going back to an old debate you had 25 years ago, isn't it?

Mr Stevens: Yes.

AFR: What's your take on that?

Mr Stevens: Well, it's an idea that has been around – and it's not a completely crazy idea, intellectually. It's an idea that has been around and been proposed for other countries. I suppose what I would say is for a country that has very large terms of trade swings, imagine a big terms of trade shock that's then moving nominal GDP a lot. Do you actually want to be then trying to offset that with a swinging the other way in real GDP? Not in any short time, I wouldn't think.

So there's a question of whether – for a country with terms of trade swings as big as we have, a model that might be fine for the United States or someone would it work as well here? I think that's a legitimate question. And, secondly, I would observe no country has ever actually adopted this model, to my knowledge. More countries have adopted inflation targeting in the past 20 years than most other regimes I can think of, actually. So that set of empirical decisions is something that may tell you something and give you pause for thought.

AFR: Outside the terms of trade problem, which is obviously significant, is it a way of, perhaps, getting wages going, if that becomes your target? Because that seems to be the problem in North America, Europe?

Mr Stevens: Well, if you just announced a higher target, suddenly everybody thinks: "That's credible, I believe it, and I'm going to have higher wages," well, you could announce a higher inflation target if you really thought that was the way you wanted to go, but I don't think the evidence is very convincing that expectations respond just like that. When we were trying to get inflation down, in theory, you were supposed to be able to credibly announce it's going to be lower and everyone would believe you and it would just go down ... I don't know of any country where that occurred. So can you get expectations to go up without creating the demand and to make actual inflation go up? That would be a pretty important question.


AFR: And if you want to set a GDP target or something like that, presumably, that's a recipe for easier policy now to try to drive up nominal income, and especially with – even with the low inflation target you've got now, how concerned are you with what's happening with housing prices, especially in the eastern suburbs of Sydney it does really seem to be a frenzy.

Mr Stevens: I've expressed, you know, some unease over time with housing. Anecdotally, I think it depends who you ask. I actually think it's pretty mixed around the various cities and even within cities right now. So that's one set of questions: what's actually happening? And I think – it's true that auction clearance rates are high, but the number of auctions is actually down, the credit growth rate has slowed down, prices – well, there has been some data problems there but prices move around month-to-month. But over the year, nationwide, it's positive but it's not unusually strong and it's actually negative in some cities.

So there's a two-speed economy story there. It's probably not that surprising that parts of Sydney are leading the charge because this economy is leading the country at the present time, which, actually, we needed if we're to manage the transition after the mining boom. So, you know, there's a bunch of stories in there.

AFR: On the data, is it appropriate or is it good enough that we rely on what is really a fairly strange set of providers, not necessarily real-time pricing for an asset class that is bigger than any other?

Mr Stevens: Some of it does claim to be real time. But there was a methodological change; it was a change that needed to be made but it resulted in a sort of catch-up in level that then, I think, could have been disclosed a little bit more clearly maybe to all the users. And once you understand that you can kind of make appropriate ...

AFR: So you were pretty confident of getting an accurate read with the datasets that

you have?

Mr Stevens: No data is perfect but I can probably think of some other data that – if I had a certain amount of ... resources to devote to getting more data on something, I don't think house prices would be where I would put it. I would put it into some other stuff.


AFR: Such as?

Mr Stevens: Capital spending. Capital expenditure survey covers half of the capital spending that the national accounts pick up. So in the forward-looking – and I'm not criticising the bureau, let me be clear, but everybody is trying to use the Capex survey to project, fine, that's good, but if you compare the level of investment picked up in that survey with what's in the national accounts, there's a huge gap.

AFR: Yes ... missing the services element.

Mr Stevens: In trying to predict national accounts version of investment, we're guessing a large chunk of it. But that's a kind of historical legacy thing, so that will be one area, not the only area, where if you had scarce resources to do more data you would do it, I think.

AFR: Governor, one of the motifs of your term has been the idea of the glass half full ...

Mr Stevens: Yes.

AFR: If you sit here at this point though and you think about the next shock that comes along, compared to the big one that you've had to deal with, next time there's far less monetary policy ammunition ...

Mr Stevens: Yes, yes.


AFR: There's no fiscal buffer, there's higher household debt, there's very unlikely to be a stimulus from China, how exposed are we right now if we do get another significant shock from abroad?

Mr Stevens: Well, actually, the amount of household debt relative to income probably isn't that different to the last time there was a big shock. So let me be clear there. Government debt is higher, that's true, not unmanageable but it is higher. I still think we could do fiscal stimulus in an extreme setting if we needed to, but it will be a more complicated decision for whoever is the government at that time because we start with a higher stock. So that will, at the least, be a more difficult decision process to go through.

I think, probably, the banking system's liquidity management and capital position is probably better than it was in 2007-08, so that's a point on the strong side. The exchange rate can still adjust and I'm sure it would, so that shock absorber will work. It's true, as you say, there's less interest rate left. That's right. That is less true for us than others, but still in absolute terms it's true, it can't be denied. So we probably don't have quite the embarrassment of riches on the economic levers as we did, perhaps that was an unusual circumstance back then. We're in better shape on some other things, like the financial sector. So it would depend on the nature of the shock, I guess.

AFR: And how concerned should we be that we've got the ratings agencies warning that we could lose the AAA rating unless we take more vigorous action on federal budget deficit?

Mr Stevens: I don't think we should make the AAA rating itself alone the single metric by which we judge the fiscal position, but it is an indicator and what that warning, from the agencies, is telling us is that there's work to do, certainly, on the recurrent side of budgets. There's work to do to be on a better path than we're on. And I've been on record as saying we should do that work. You know, there's this question about infrastructure and so on, and I think that should be debated on a parallel but separate track. But we ought to be covering with taxes what we spend on welfare and running the government and so on.

AFR: What's your judgment as to why the political system is struggling to deal with this?

Mr Stevens: I would observe that this seems to be not just a problem here. It seems to be difficult elsewhere, as well. So if we are looking for causes of the difficulty the political process has in getting traction, we probably shouldn't confine our search only to domestic measures. There may well be domestic factors, but maybe not only. But, beyond that, it's not my competence to really try and explain.

AFR: You mentioned we should be covering with taxes what we're spending, I think is what you said, how realistic ...


Mr Stevens: Well, that's pretty uncontroversial, I would have thought.

AFR: Not in some circles. How realistic is it, do you think, to expect that we can solve the current budget deficit by having our spending go back to, say, a level when it was lower than it is now and not touch taxes? Will we get the budget done in that – relying on that mechanism alone?

Mr Stevens: I don't know. You would have to ...

AFR: It would take a long time to get the debt down.

Mr Stevens: You really would need to talk to people who are closer to the budget than me. I can't help feeling, though, that, as a populous, we've actually voted for higher taxes, we just don't realise that yet.

AFR: And it's very hard to go back the other way, isn't it, potentially, until we realise or have a vote.

Mr Stevens: Yeah. There might be a bit of a tendency to think: "Well, we solve the tax issue before by taxing other people more," but I suspect if we're going to close the shortfall with taxes, it's going to mean we're all paying more.

AFR: There's a footnote in your Anika speech about that, even though we came through the crisis – well, that might have delivered some complacency about how we go from around about now.


Mr Stevens: There is, I guess, some possibility that the celebrated 25 years of growth leaves us, collectively, as a – and I wouldn't just single out political leadership here, leaves the community, perhaps, without realising it, operating on the assumption that this is all a bit of a game. It's a bit like a sporting event, the waxing and waning, interesting to watch, but in the end it's just a game. Actually, it isn't.

It's more important than that and it will actually matter if we can't have an appropriate amount of fiscal discipline but also be prepared to face up to the other things that are happening. The demographic changes are going to mean big issues for all countries and we won't be any exception. How we think about health costs, retirement ages, all those things. There are implications and it isn't a game. It's real. So we need thoughtful leadership and careful discussion and we need to try to avoid retreating into slogans and little soundbites. As hard as that is, which is where, of course, your good selves have a role.

AFR: We're getting towards the end. I just thought a good question might be also to get you to reflect on how the bank has evolved ...

Mr Stevens: This bank?

AFR: ... institutionally under your time: the changes and how those changes might look in a few years' time.

Mr Stevens: Well, how they look in a few years' time, I don't know. I think the institution is – I mentioned earlier I want us to be seen as competent, independent and trustworthy. I think we are. It's very important to keep that, and all the things that we've done in our internal governance processes, in our efforts to convey information publicly and the way we've conducted some pretty major projects we've got going on – that's all designed to fulfil our charter mandate obligations, to do so as efficiently as we can and to give people confidence.

So, you know, we've got a major investment in upgrading the security of the banknotes because counterfeiting, while still low, is increasing, and you have to – it's actually quite a long lead time to be ahead. That project has just delivered a major milestone, with more to come. We're renovating the government's banking arrangements. We're the government's banker; that's a very big project. We have to compete to keep that business. You don't do that by standing still. You have to evolve, so we're trying to do that.

AFR: What does that look like?


Mr Stevens: It's basically a complete redesign of the architecture, the IT systems – very long project. It's delivering the various components over a run of years. We've made some pretty substantial changes to balance sheet management: got more diversification in the reserves, a bigger balance sheet, more provision of liquidity to handle stuff happening at night and all that sort of thing. So there has been a lot of evolution there.

AFR: So ...

Mr Stevens: Very big project – under the committed liquidity facility, where banks could bring us mortgages, what's actually in that package? So we've had a very large project to gather the appropriate data at a loan level so that we know what's in that and we know how to haircut it appropriately. That will pay dividends appropriately, respecting privacy, the higher-level data will be market available. That will help market development.

We're building our part of the New Payments Platform because all that's going to settle in real time across us. So that's a big project. There's a lot of investment there. The bank has had to invest in more project-management skills and so on, and a lot of it's very IT-heavy. So these are things you don't sort of see from outside, but they're big investments that I am confident will deliver gains in the future. The institution has changed a lot like that. It's more publicly visible. We publish more stuff: you know, forests worth of paper.

AFR: When might we see a female governor?

Mr Stevens: I don't know. Well, not for seven years, but after that, who knows?

AFR: I suppose that goes to the point are you a Male Champion of Change and do you think that the bank has done enough to promote ...

Mr Stevens: I'm not part of that – formally part of that initiative. I'm aware of it, but we've thought a lot about gender equality of opportunity in the institution. I would like us to be doing better than we are, but we do have some internal targets. Got – 31 per cent, I think, of management staff are female. So we have a way to go yet.


AFR: What's your target, then?

Mr Stevens: Thirty-five by 2020, and 40 eventually. Forty per cent is the share of females on the staff generally and in the workforce. That seems like a reasonable proximate goal, anyway. I think we can get that. One of the issues is if you take the economic graduate pool, it has tended to be two males for every female. I think in our recent recruiting we've done a fair bit better than that ratio, is my understanding, and Philip has some ideas about supporting the study of economics in schools for girls, and so on, that are aimed at trying to do something, however small, to affect that pipeline from which we can draw. If you look at the IT world, you know, it's very male. So if you take a lot of IT people on, like we have, you know, it's hard to find enough women.

AFR: You've obviously dealt very closely with all the major Australian banks and the smaller ones over the past 10 years. Is there a culture problem of governance in Australian banking?

Mr Stevens: I think culture is very important. I'm not sure I want to say there exists or has existed, you know, a cultural failing. There have been, I think, any number of examples globally, and maybe some here, of behaviour that, when exposed to the light of day, everybody feels embarrassed by. I don't want to make any comments about the current cases under way. They're before the courts and I'm not across all the evidence. But suffice to say I suppose that the finance industry generally in the world has, not met people's expectations on the trust side, and that has to be addressed, and I think they get that. It's incumbent on all of us to try to – including in the official sector – to do what we can to rebuild that trust, because it's all about trust, really.

AFR: But is there a problem in the Australian banks? Some sort of cultural problem?

Mr Stevens: I don't know that I want to opine on that. In a current febrile environment where you've got some people saying we need royal commissions and other people saying that other things will suffice, I think it might be inappropriate for me to weigh in with an opinion to your question. I think, though, it is incumbent on us to make sure that we all remember it's other people's money, that we take great care with incentives – be they financial incentives or any other kind, that they don't give too much temptation to do the wrong thing – and where stuff has gone wrong, you know, it has to be rectified. It's incumbent on everybody to step up there, and – just a plug – there is this Banking and Finance Oath – an ethical initiative led by the St James Ethics Centre – and many more of our senior bankers are signing up to that. I think that's a good thing and it will be good if that continues.

AFR: But the Reserve Bank wasn't a big proponent of even the Financial System Inquiry. I find it hard to believe that the central bank would think there's such an urgency that you need a royal commission into ethics and governance in banking.

Mr Stevens: Well, it's a political question. I really don't want to buy in, but we have had a major financial inquiry that was very broad, and I think it would be worthwhile making sure we've responded appropriately to that.


AFR: We should wrap up. I'm sure our readers would be interested in – what are your plans for the future?

Mr Stevens: Holiday. Drop from sight completely. Vacation. Chill out through the summer, to coin a phrase, and after that I don't know.

AFR: You're south of 60, so you've still got a fair amount of professional life in you. Would you expect to have an ongoing professional life after you take a break?

Mr Stevens: I don't think I'm going to be doing a full-time executive role again, but beyond that – to be truthful, I've come to this building every day for 36 years. I don't really know much else. So it's going to take me a while to work out what else to do. I hope to do something – or things that are useful for a while.

AFR: About last night, where you spoke (at the Sydney Community Dinner), you said that the qualities of a governor or people in your position which were required and which needed to be driven by – were, in your case, by responsibility, obligation and duty. Perhaps you could expand on what you mean by that.

Mr Stevens: Well, some people out there seem to think that people in public positions do it for the power and the glory and – lifestyle, someone said. That didn't really ring to me. I've always felt that this institution, in particular, but not just this one – in the public sphere, we have very considerable responsibilities and obligations to the community, and what we're here for every day is to fulfil those as best we can, and that has always motivated me and all my colleagues here. The bank is actually a fantastic institution in that sense, and probably people outside – most people who interact with us in any detail, can see that. The general public can be confident that that's the motivating factor here, and that will continue, and that's a very good thing.

AFR: What advice would you give your successor?

Mr Stevens: I've been asked that before, and the only thing I've said is grow a thick skin. Beyond that, I don't think he needs my advice. He will know what to do.


AFR: And do you ever regret – I mean, I remember years ago various people tried to lure you into the private sector. Do you ever have any regrets that you didn't ...

Mr Stevens: Well, I would probably be a bit wealthier, but – it was actually Ian Macfarlane who usually had the arguments to stay here, and there was a point at which I realised this is actually where I belong. So no, how can I have any regrets? I was given the opportunity to lead a fantastic institution for 10 years, and people seem to think we've done a reasonable job. How could you regret that?

AFR: So, Governor, thanks very much. Thanks very much, and thanks again for everything that we've had to do with each other over the past 10 years.

AFR: It has been much appreciated.

Mr Stevens: Thank you.

AFR: Can I just ask one that we can insert in that – from the flow where you've spoken about infrastructure spending – that we need to look at that as a possible alternative way to find stimulus. Would a critic of that say that that's a recipe for more waste of money because the political system tends to waste it, and what would be the conditions ...

Mr Stevens: A critic could say that, so what I – and I've said this before. Infrastructure: it's all about the governance. It's not about the funding. The funding is the easy bit. There's any amount of money out there very cheaply that you could find if the public sector funded it, or even the private sector. The critical thing is how do you choose what projects to do? Is that appropriately arm's-length from day-to-day politics? And then you've got to price the usage once the thing is built, whatever it is, so that there's a flow of income, which in some financial sense is the test of whether it was the right bit of infrastructure, of course, but it's that flow of income that makes it attractive to a pension fund or an asset manager to own.

Then you have the choice of: "Well, I could sell that as a way of financing the next piece of infrastructure," or you could choose to retain it, but appropriate governance and appropriate pricing and the right sort of risk-sharing balance between public and private – they're actually the difficult challenges here.


If you could get those challenges sorted, then you would be able to allay that criticism. The potential criticism of even having a distinction between capital and recurrent is that people will think of all sorts of things they can call capital and waste a bunch of money. Yes. OK. So you've got to have proper governance, and so – you know, and Infrastructure Australia or somebody like that that says: "These are the projects that will be done." Proper pricing and so on.

AFR: Can I just ask one final question? You're seeing a lot of criticism – I mean, global central banks are coming under fire a lot more than they have been in the past. Do you think this is inevitable – is this sort of partly of their own making because of their policies, and do you think this could happen here?

Mr Stevens: I think it was pretty likely if you think that faced with an unprecedented situation, limited capacity or willingness or both of other policies to support growth, the central banks, looking at their mandate, would say: "Well, we've got to do whatever we can, and we will have to be inventive and try new things," not knowing – because you couldn't know – how effective that will be. And they've – let's say they've had some effect but they're not miracle cures, right, but you've done all this unorthodox stuff. How likely would it be that there would be just nobody saying, you know: "This doesn't work," or: "You shouldn't have done it," or: "In doing this, you've let others off the hook"?

You're bound to have some of that said. I think we shouldn't be that surprised that such things are said, and I very much doubt that my counterparts elsewhere are all that surprised. None of that means they were wrong to do what they could. It's just that, like I said before, what they could do was never likely to be enough in itself. That's the truth. Could there be more criticism here? You know, I suppose the times when you get criticised are when you're doing what you should do and it's unpopular to some group, like it is with retirees right now, you get some criticism, but the really big criticism comes if there's bad economic circumstances, even if we didn't cause it. Everybody – there will be plenty of criticism to go round in that day, so I'm glad that day is not happening in the next 10 days.

Interviewers: Michael Stutchbury, Jacob Greber, Karen Maley, September 7, 2016

VIDEO INTERVIEW

AFR: Governor, you had to manage, of course, the biggest financial crisis the Reserve Bank has had to face since the 1930s with the famous October 8, 2008, cash rate cut by 100 points and then the weekend of October 11 and 12, where you brought in with the government the bank guarantee. When and how did you realise that this was a very serious financial crisis that would require extraordinary measures?

Mr Stevens: Well, I think post the Lehman failure you could see things tightening up pretty quickly and it's a matter of public record that – for that October board meeting we had initially thought of a 50 point reduction, which, itself is starting to make some significant change. But over the weekend – and I can't, to be honest, recall exactly the sequence of events over that weekend. But it became clear between when we sent the papers out and the actual meeting that things were really deteriorating pretty quickly.


And I had a 100 point statement sort of in the top drawer, which I had thought about but decided, initially, not to go with. And at our morning meeting my colleagues said, you know: "Perhaps you should get that out of the drawer." So we went like that. So it was in that, I think, progressively building up over that couple of weeks after Lehman that it became clear that we had a big event and a potentially quite disastrous situation globally which, inevitably, would affect us.

AFR: Did you have, at that time, any fears that there might be significant stress on the Australian banking system, including runs on the banks?

Mr Stevens: I didn't really have fears about asset quality, per se, especially not in the major institutions, but funding liquidity clearly tightens in these situations and I think we had a pretty good handle through our people that are in the market everyday on how that was evolving and, of course, it's the central bank's job in a situation like that to try to ensure adequate system, funding liquidity, including, if needed, by our own operations against collateral. So we were prepared to do that.

And I think probably my main fear was just that at moments like that you can have a collapse of confidence, which is even unrelated to what fundamentally is happening, because the economy, fundamentally, was in a reasonable shape and most of the financial system was in reasonable shape. But confidence can be a fragile thing and you have to do what you can to try to sustain it and respond to any deterioration very quickly.

AFR: You and the Reserve Bank acted decisively during the crisis. Previous to that, during the election campaign in 2007, you controversially increased interest rates and you've taken some flak for that over the years. Do you have any regrets about that increase of interest rates during an election campaign?

Mr Stevens: Well, I don't – I don't think one can regret doing your job and doing the thing that had to be done, and there wasn't really another feasible or credible course of action for us at the time. I think most people actually can see that. And, as I have reflected over the years, given where we were at that time, I don't think we could have taken another decision. So, in that sense, no, no regrets. And I would have to say that – the government of the day, without question, could be forgiven for feeling aggrieved, there hasn't actually been very much at all in the way of political fallout for me or the institution – and that's to their credit.

AFR: If you hadn't have increased rates, then could you have conceivably lost credibility?

Mr Stevens: Well, yes, because there was a demonstrated track record and pattern of behaviour when inflation moves more than expected in either direction. We've got an inflation target. We have to respond to that, everybody would have expected that. I think it would have been impossible, really, to give a credible explanation of why we were not responding to it at the time. And as we know now – we couldn't have known for sure at the time, but we know now inflation went to 5 per cent very shortly after. It came down subsequently, partly because we were responding appropriately and partly because the world changed as the financial crisis unfolded. But it was on its way to 5 per cent, you have to respond to that.


AFR: Conversely now, since then, we've got the opposite issue where inflation is under target and you've cut interest rates, the cash rate to a record low 1.5 per cent. We do seem to be seeing, in response to that, quite a lot of action in the housing market and in parts of, say, the eastern suburbs of Sydney, it does seem to be some frenzied in auctions and house selling.

Mr Stevens: In some auctions, but actually, as I understand it, the volume of properties being put to auction is actually lower than a year ago. Credit growth has slowed down, prices are probably rising smartly in some areas, but in other areas they're not and in some cities in the country they're falling. So I think it's a mixed picture It's not without risk, and it certainly gives me some discomfort, but then we're balancing that against the other obligations we have to pursue.

In the economy, if we ended up with more real growth than we currently forecast, that probably wouldn't be a problem in the near team, not for a while, and inflation is, if anything, a little bit too low. Not disastrously, but it's a bit on the low side. So you've got to balance all these things and make a decision that neither completely ignores the financial stability and housing concerns, nor let them completely dictate the decision. That's the balance that we've tried to strike.

AFR: But previously you've said that home borrowers should not expect the rate of housing price appreciation they've seen in the past, in terms of making this one of their main investment decisions. Is there a worry that people are now thinking: "Well, this is the main route to wealth in Australia – to buy very highly priced housing and hope it still goes up further"?

Mr Stevens: Well, I think there's some risk of that, though I don't think that will be the risk in Perth or some other cities where prices have gone down in the past year, and we've certainly been fairly vocal on the need for care and, as I say, in an asset price boom and bust, the critical question you have to ask is how much leverage is there. And, on the evidence available at the moment, credit growth is . It's a moderate rate, it's not too low but I don't think you could say it's too high for the household.

So putting all that together, I think, we've struck the appropriate balance of risks. And the other thing to point out is there has been a tightening of lending standards, appropriately led by APRA's work and some work by ASIC and that, I think, is giving me a little bit of comfort that the credit growth we are seeing is better based than it might have been.

AFR: One of the motifs of your two terms as governor has been a glass-half-full message. Are you concerned at all that there's a certain complacency in Australian life that you referred to in a footnote of a recent speech? Are we getting too complacent about the 25 years of economic growth that we've been through?

Mr Stevens: Well, we like to celebrate the 25 years of expansion, and we should. That's a remarkable run. And you know, we've had a little bit of luck on occasion there, but we've had some other things that have helped us as well. So the conversation we ought to be having is how did we achieve that, how did that actually occur – when we did have brief downturns, why were they brief and shallow and how was it that we got going again quickly and how do we make sure that we can do that again if needed. I think there is some risk that the long period of growth may be leading all of us as a community to somehow think that's just the natural state of affairs, that we don't need to do anything to achieve it.


That's not really so. It's not a game. It's not a sporting event that we like to spectate on, but then in the end it's just a game. It's real. And we do need to make sure that we are having the serious conversations about things that will help the supply side of the economy; things that will make sure that our fiscal position, which is – it's OK, but it's probably not quite on the right path, as I've said before. We need to make sure we're having the right conversations there about being on the right track, so that in future episodes we do have the flexibility that we had in previous ones.

AFR: Is there a sense that politics now is seeming to be a bit like a game and a bit of political theatre, rather than dealing with issues that need to be dealt with?

Mr Stevens: I don't know – well, I don't want to, you know, weigh into the political scenes. It's not my place to do so. And I'm not competent to do so. I just say that I think it's important in general public discussion – and we all play a part. You play a part. Many others in this. That we avoid retreating into slogans and sound bites and, you know, very narrow definitions of what's fair and these sorts of things. Try to have the more difficult, the more nuanced but the more important conversations about where we go.

AFR: Your reference to narrow definitions of "fair", which you spoke about recently – is that the idea that you can't do any change if any one person is disadvantaged? Is that your reference to narrow definitions of "fair"?

Mr Stevens: Yes. I think there's a tendency for a proposal to be put forward, and if there's a single person in the country worse off they will be on TV that night, and you know, it is up to the political process to craft a way forward on all this stuff; that they can show people everybody is paying their share. We're all going to have to take part in that. But that actually means that all of us, in some sense, have to accept we don't get stuff for nothing.

AFR: Can I ask, in the 10 years you've been in the job and looking forward to the next governor and people sitting in your position, what are the attributes or things that should drive you personally to achieve what you've been able to do?

Mr Stevens: Well, I've never thought that this role was about power and status and stuff like that. It's obligation, responsibility and duty. That's the way I've approached it, and I know that Philip feels exactly the same. So nothing will be different there. The RBA is vested by the Parliament with considerable powers, a good deal of independence and some pretty big charter obligations.

I feel we've done as well as you can in achieving those in my 10 years, which have been, you know, rather interesting. And I'm sure the bank will go on to continued success under Phil's leadership. But it's about those senses of obligations and duties, and the values we have of respect and intelligent inquiry and putting the public interest first, all these things that are in our values statement: they're how we go about meeting those obligations.

AFR: Thank you very much, Governor.

Mr Stevens: Thank you.

Interviewer: Michael Stutchbury, September 7, 2016