Transcript of Question & Answer Session The Year Ahead

Thanks, so much Governor. They are indeed challenging times, and the question of policy credibility becomes central in that. I suppose I'd like to open by asking you about a couple of things here. One of them is the Reserve Bank's decision to set the three-year bond rate, or have it on hold at 0.1 per cent. Subsequently, when the markets moved against you, the Bank seemed to be very slow to actually back that position. And also, of course, you famously suggested that rates wouldn't move till 2024. Now, one has to be flexible, but obviously you've had to walk away from that. What does the Bank do now to set out really clear goals to the markets and really clear signals to the markets about where monetary policy is heading in such uncertain times?

Thank you. I think what we can do is set out our forecasts, as I've done today, so that you can evaluate them, and we can also set out as clearly as we can our reaction function, so how we're going to respond to those forecasts.

What we've seen over the past year or so is the economy has done much, much better than we thought. The downturn from the first part of the pandemic wasn't as severe, and the bounce back has been much stronger. That has come as a surprise to us and we've responded to it. That's the responsible thing to do and I'll continue to try and set out our forecasts and our reaction function, and you can all make your judgement about whether that's reasonable and how we should respond.

It's quite significant that we have made faster progress towards full employment and the inflation target than we had expected. And, not surprisingly, all else equal, that's going to bring forward the timing of the expected increase in interest rates. I think that's pretty clear.

I'm going to do a slight follow up, which is against the rules, but there you go, I'm the President. I suppose the problem, though, is last year we were talking about forecast of not moving rates till 2024, and in yesterday's statement of monetary policy, you were basically saying, well, we don't know what's going to happen to wages and prices, so we can't really sort of say where we're going next. Is it just a question that we've got a couple of signals coming up on wages, in particular, in the next couple of months, that things are just too uncertain. Or is this something that also helps you get over the hump of the federal election?

The federal election isn't a relevant consideration in our decision making. What we're driven by is achieving full employment, inflation consistent with the target, and there's a lot of discussion of inflation at the moment, rightly so.

We've got to remember that underlying inflation has only just got to the midpoint of the target band for the first time in seven years. So I don't think that requires an immediate response. We've been below that … in previous addresses, we had people criticising us was because inflation was too low. And we're also on the cusp of this historic milestone of getting unemployment down, and I think we can test how far we can get the unemployment rate down without having an inflation problem in the country, and that's worth doing.

I didn't expect us to be in this situation. We don't have a crystal ball, there's a lot of uncertainty. But what we have done is respond to the changed circumstances we find ourselves in, and I understand that in some people's eyes that damages our credibility. We don't have a crystal ball. Things happen that we don't expect. But what I hope you expect of us is that we respond to that and try and explain why. The result of that might be damaged credibility for the central bank, but I hope people can see the fact that the economy evolves in an unexpected way, and we respond to it.

And, actually, this is good news. And I'm hoping we get further good news over the course of this year and as we make further progress towards full employment and we can sustain inflation at roughly 2.5 per cent, we will be able to normalise monetary policy. I hope and expect that to happen, but as we know unexpected things can happen, and when they do, we'll respond.

Jessica Irvine has a question.

Jessica Irvine, Sydney Morning Herald and The Age.

I share your excitement to be here in real life. My question is about wages growth. What is the minimum standard of evidence that you would accept to convince you that wages are growing at a rate that is consistent with keeping inflation sustainably in the midpoint of the band? And I would refer you to last year, you were talking about wages growth needing to be three point something to be consistent with that. Do you still want to see a three in front, and, if so, the graphs you've shown us show we don't get Wage Price Index back to 3 per cent until the end of next year. So, do you actually want to eyeball a Wage Price Index report, a quarterly report, with a 3 per cent annual rate, or would you be able to go off a quarterly rate of 0.8 and go, ‘Well, if it was a 0.8 one quarter, 0.9 the next quarter, annualise that, we're at 3 per cent.’What's the standard of evidence that we should wait for before we get excited about the cash rate?

We don't have a specific kind of rule or benchmark here, but let me just take a step back and explain our thinking. If we're going to deliver an average rate of inflation of 2.5 per cent, which I certainly hope we can, and the country gets labour productivity growth of 1 per cent–I certainly hope we can do that, let's hope we can do better – and the labour share of national income was to remain steady, that would mean that labour costs should grow on average at 3.5 per cent. If they're growing at two point something and the country's generating 1 per cent productivity growth, then inflation, I think, is going to be below the midpoint of the target band. So, this is where the focus on wages comes from. It's this medium-term relationship between prices, wages, and productivity. That's the analytical basis on which we're focusing on wages.

The relevant concept isn't really the Wage Price Index. That gives us a measure of how fast base wages are rising, but I think we all know, in a tight labour market, wage increases come through other ways. People getting promotions but they're really doing the same work and they get paid more. And we know when people switch jobs, even if they're doing pretty much the same job, they get a higher rate of pay. And there's also greater evidence of bonuses. So we're going to be paying close attention to the broader measures of labour costs. It's been difficult in the past couple of years to look at the measures in the national accounts, because they're affected by too many compositional things, but going forward, we're paying close attention to those. And to answer your question directly, we don't have a specific benchmark, but what we want to see in the Wage Price Index, these broader measures of labour costs in our liaison with business, which is very important, evidence that wages are trending higher.

So they'd get to three first?

Well, it's possible we can have … I think this is the other point we're conscious of, it's possible that we could have sustainably high inflation with low wages growth. That means a decline in real wages. We've seen that in the United Kingdom a number of years ago. So, I don't want to give you the impression that we're kind of hanging on every single wage number and got a specific benchmark there, because that's not how we're thinking about it. There's this medium-term relationship, and we're also conscious of the fact that prices can move around for other reasons other than labour costs.

Ron Mizen.

G'day, Governor. Ron Mizen from the Australian Financial Review. Thank you very much for your speech.

In the speech that you gave the National Press Club last year of the same title, you very specifically said that you did not expect the interest rate to be creeping up until 2024, and even potentially beyond that. Absent from this year's speech is any reference to specifically when you think that will happen. But I'm wondering if you could share with us what the Bank's central case scenario is for when you believe interest rates will now begin to lift, and what your best-case scenario is? And when we last spoke, when I asked you a question, you said that market expectations of multiple rate hikes in 2022 was a complete overreaction to inflation data. Do you still hold that view or is it looking more rational?

I think what I can say is that the faster progress towards full employment and inflation consistent with the target does bring forward the timing of a likely increasing interest rates. We should welcome that. Whether it happens this year or not remains to be determined. It will depend upon how these supply issues are resolved, and the strength of the pickup in labour costs. If things go well and the economy performs strongly, then I could … there are clearly scenarios where we'd be increasing rates later this year if some of these uncertainties get resolved in the way that I hope they would. But time will tell.

It's certainly a plausible scenario that rates go up later this year, but there are a lot of other scenarios as well. The point I was trying to emphasise in my prepared remarks is there are a lot of uncertainties, both on the supply side and the labour market dynamics, and because inflation's not that high at the moment, we can wait to see how those uncertainties resolve. If they resolve in one way, then we'll be raising rates. If they resolve in another way, then it's still quite plausible that the first increase in interest rates is a year or longer away.

There was a second part of the question …?

Is the market pricing now looking a little more rational?

The thing that I find most surprising of the market pricing at the moment is that in the United States, four increases in interest rates, roughly, are predicted this year. In Australia, the market pricing is for four as well. So the market is pricing in the same increase in interest rates in Australia and United States by the end of this calendar year. Yet our inflation rate is half that in the US, and labour cost growth is half that in the US. So, that's a thing that I'm kind of still surprised about. We keep looking at the markets and trying to understand what they're telling us, but I still struggle with how the same interest rate reaction is priced in for Australia and the US.

Ticky Fullerton.

Thank you, Governor. Ticky Fullerton from The Australian.

You remain very focused on wages growth when it comes to any decision making. You've also just admitted that the Bank's economists have vastly underestimated growth in inflation and employment, and 2022 may not be any different. How do you and the Board see the risk of inflation getting out of hand and damaging the economy?

I see the risk of that to be very low, because partly the increase in inflation is driven by these supply side problems. I think they'll be resolved.

One category of the CPI that I've been looking at is the price of electronic goods. Most years they fall. The price of electronic goods fall. The computers and the stuff we buy. In the past year, that component of CPI has risen. It's risen because we've all sat at home and done shopping and wanted to get our stuff. And then there's been an interruption to the global supply of chips. So the price of chips went right through the roof. Cast forward six months, what's likely to happen? I suspect we won't be buying as many electronics, we'll be going to cafes and travelling and the supply side problems in the chip market are now being resolved and the price of chips are coming down. I suspect on that category we'll go back to more normal rates of increase. The same with cars. There's been problems in producing cars because of chips and the prices I think have gone up 7 or 8 per cent this year. We don't expect car prices to keep going up like that. So I think there'll be some normalisation as these problems resolve.

And in the labour market there's a lot of inertia in the system because of our institutional arrangements. And that inertia means that I think it's quite unlikely that wage growth picks up to problematic rates.

We can't discount stuff happening that we don't expect, that's obvious. But the focus on the ability of the market to solve supplier problems and inertia in Australia's wage system means that the pickup in inflation here is still going to be in broad terms, fairly modest, and if it's faster than that, we can respond. And the household sector has a lot of debt so I think they'd be quite responsive to an increase in interest rates.

So I'm not worried about inflation getting out of control and this is one reason why the Board is prepared to be patient here. We want to get the unemployment rate down, first time in 50 years below 4 per cent. Fantastic – let's hope we can do that. And because we're not too worried about a massive inflation outbreak, we're prepared to sit for a while.

Sarah Conte.

Hello, Governor. Sarah Conte, SBS World News.

The RBA has several duties, but one is, fundamentally, to contribute to the welfare of the Australian people. Given property has become so unaffordable, especially to people without access to intergenerational wealth, should the RBA be required to consider the impact of its decisions on house prices and be at least partially responsible for helping make them affordable?

I don't think giving the Reserve Bank responsibility for kind of controlling the overall level of housing prices in the country makes sense. There are just too many other things that are driving housing prices other than interest rates, aren't there? At the moment in the past couple of years, people have wanted more space in the house. They've wanted to work from home and people haven't wanted flatmates or whatever and so we've wanted more space. The supply of housing is fixed. Demand goes up. What happens to the price? It goes up. And there's nothing we can do with monetary policy to offset that.

And probably, maybe last year or the year before, I was asked a similar question, I think we have higher housing prices in this country because of structural factors. The choices that we make as a society give us high housing prices. We all choose to live in, most of us, in these fabulous cities on the coast. We want large blocks of land. We have restrictive zoning. We've underinvested in transport over the years. And we've got a tax system that's conducive to investment in property. That's why we have structurally high housing prices in the country. They've risen the past year because of lower interest rates and this increased demand for space, but monetary policy can only do so much and we can't counteract all those other things.

If the society doesn't like the current level of housing costs, I think there are structural solutions. The solution isn't to put up interest rates.

Peter Ryan.

Hi Governor, Peter Ryan from the ABC. Thanks for the speech today.

Look, I know we've had a lot of fun talking about timelines and dates. 2024, 2023. You've said that 2022 is plausible, but what sort of consideration do you have to make about possibly running too late with pushing rates higher and then being forced into doing aggressive rate hikes when things get out of control and you're having to play catch up?

Again, that's a possibility, but I think it's unlikely, really for the two reasons I mentioned before. If the supply side problems were resolved in a way that takes the pressure out of goods prices, and there's quite a lot of inertia in aggregate wages. If we're wrong there and inflation does pick up and doesn't come down, then we will have to increase interest rates more quickly than I currently think is possible. And I think, this remains to be tested, that when interest rates go up this time, the household sector will be quite responsive to it. So it's the same answer really in response to Ticky's question, this inertia in the system and if we're wrong about that, then interest rates will have to go up more quickly, but at the moment it doesn't seem a particularly high probability event.

Ed Boyd.

Edward Boyd, Sky News.

Governor, do you believe the RBA being so descriptive about no rate changes until 2024 has seduced a lot of Aussie homeowners and businesses into borrowing money with these record low interest rates? And if rates now do rise earlier, do you bear any responsibility? Was this the right guidance to have given families and businesses over the last two years?

Well, at no point have we said rates will not go up till 2024. I know that's how often it gets characterised, but what I've always tried to do is to set out our forecasts, our reaction function, and then over the past couple of years, drew an inference about if those forecasts come to pass, what that meant for interest rates. That has not constituted a promise. It's a probabilistic statement and sometimes that subtlety doesn't come across as well as I would like it to, but we have not made a promise that interest rates wouldn't go up. We've said, based on these forecasts, we don't think they will, but the forecast change and then the outlook for interest rates changes.

The fact that people expect interest rates to stay low for a few years I think has been important in helping the economic recovery. The fact that people have been prepared to invest in housing, that spending is helping. We've got extremely strong residential construction at the moment and that's helping. And the end result of that, we shouldn't forget this, is more people have jobs in Australia than ever before. As I said in my prepared remarks, the share of the working age population with a job has never been higher than it is today and it's going to go higher. And that's a real benefit to people and to communities. The housing price issues can be solved through other ways, but this sustained reduction of unemployment is a great benefit to the country and we shouldn't lose sight of that.

Daniel Sutton.

G'day, Governor. Daniel Sutton from the Ten Network.

Over a million Australian mortgage holders have never experienced a hike in the cash rate now, and so obviously those people are now looking very carefully at your words, trying to read the tea leaves and work out what they do with their mortgages. You can't obviously go to the RBA Governor looking for individual financial advice, but if it was your mortgage, would you be scrambling for a fixed rate or would you be sticking with variable? [Laughter]

I don't know the answer to that. I haven't thought about it, but the advice that I would be …

Do you have mortgage, still?

No, I've lived my house for more than 25 years and over those 25 years, I'm in the fortunate position of having paid it off. But the advice that I would give to people is make sure you have buffers. Interest rates will go up, and the stronger the economy, the better progress we make on unemployment, the faster and the sooner the increase in interest rates will be. So interest rates will go up. We need to be prepared for that and people need to have buffers.

The positive news is that when we look at the data, most households are paying off more than is required by the current level of interest rates. They're keeping money in their offset accounts and their redraw facility. So there's a lot of capacity for many borrowers to keep their current level of spending, even with higher interest rates, because they've built up these buffers.

So make sure you have your buffer, because, as I've talked about multiple times, unexpected things can happen, but one of the things that I think will happen is interest rates will go up. I can't tell you when, but they will go up.

Swati Pandey.

Hello, Governor. Swati Pandey from Bloomberg News.

My question is on interest rates again. Your forecasts are projecting the economy, inflation, unemployment, all moving in the right direction and already we have seen that happening. So why not start raising rates like from what we have right now, it's pandemic era setting 0.1 per cent. Why not start with 15 basis points already, given that inflation is within the band and unemployment is at a 13 year low? Why wait?

Why wait? I think the main part of the answer there is there are uncertainties. Remember, I think I've said this three or four times already, we've just got to the midpoint of the target band for underlying inflation for the first time in seven years. That in and of itself isn't a need to raise interest for rates. And we've got to that point because of these unprecedented problems in global supply chains, and wages growth is still at a rate we know from before the pandemic, wasn't consistent with achieving the target.

So given those preconditions and the uncertainties that exist, I think it's the appropriate thing to do to wait and to try and do what we can to get the unemployment rate down and move later, once those uncertainties are resolved and we do have that success in getting unemployment down. I think it was Ticky's question about the likelihood of a severe pickup in inflation, I think that's quite unlikely, so we have time to wait.

What I'm trying to understand is do we really need the pandemic era monetary policy setting right now?

Sorry, I missed that.

Do we really need the pandemic era monetary policy setting right now?

Do we need them? They are helpful in getting unemployment rate down and getting the nominal part of the economy growing at the rate. I think we have a unique opportunity here to get people into jobs and get their incomes growing more quickly and we can do that without running an unacceptable risk of inflation. The Board has made the judgement that's an appropriate trade off – managing the risk of inflation being too high, we've got to be conscious of that – but there's great benefit in getting unemployment down and we can do that I think safely. If it turns out to be wrong then we'll have to raise rates more quickly and this is why the buffers will be so important.

Peter Hartcher.

Governor, thanks for your speech today. Peter Hartcher, Sydney Morning Herald and The Age.

With the enormous expansion of government fiscal policy in recent years plus the strength of the bounce back that you've described today, is this the time that governments, federal and state, should be starting to retrench fiscal policy and tighten spending.

Should be starting to entrench …?

Retrench fiscal policy and tighten …

I'm not going to give governments advice on fiscal policy. I think the general point that I make here is that over the past couple of years, governments have borrowed a huge amount of money and they borrowed that against the country's future income. It was exactly the right thing to do. Private incomes were weak because we couldn't work in the pandemic. The government's borrowed and supplemented private sector incomes with money they've borrowed from the future. Perfectly sensible and I've been strongly supportive of that.

The result of that is that there's a higher level of public debt than we've been used to. So, at a very high level, there are two ways you can respond to that. The first is to run tighter fiscal policy than you otherwise would have. That means less government spending or higher taxes. The second way of responding to this is making sure our future income grows very, very quickly.

So, I think the best way to deal with the debt problems isn't to run really restrictive fiscal policy. It's to do whatever we can to make sure that future income is strong. We've borrowed against it. let's make it strong. And this is why the productivity agenda of the government is so important, because the best way to deal with the fiscal problems is make sure future income growth is strong and then the debt to income ratio will take care of itself.

So, I'm not going to provide advice on whether the government should have a tighter or a looser fiscal policy, but I do think it's important that both governments and business really focus on lifting national productivity so our future income is strong and we can pay down those debts.

I want to pick up on the productivity point there and if Laura will indulge me just for a second … You've emphasised the centrality of productivity growth. You've said in years past that governments recognised intellectually the need for productivity reform, which obviously in Australia in recent years has been a failure with the dwindling and then stagnation of productivity growth. Do you think governments in Australia have yet constructed the agenda for productivity growth that you've long called for?

I'm not going to pass judgement on that, but I know the current government is focused on infrastructure, on skills, on research and development, and lowering taxes and tax reforms. So, they've got initiatives in each of these key areas and I'll leave it to you and others to a judge whether that's going to be enough to make sure that future income is what we need and that we can generate the big increases in real wages.

In previous years I'd spoken a lot about infrastructure and I think we've made progress there. The emphasis in the next period I think really has to be on human capital accumulation. It's skills and technology. I understand governments are working on that and trying to improve the delivery of public services, but I think we've got to do more there. But I'll let you be the judge rather than me sitting in judgement.

Quentin Dempster.

Thanks for your address, Governor. Quentin Dempster from the New Daily.

We heard the Prime Minister say at the Press Club yesterday, and you've given us the substantiation of that in your wonderful graphs today, that there's every prospect unemployment in Australia could drop to an historic low of 3 per cent, or at least in the threes. You've indicated the conditions in the job market currently should result in systemic wages growth.

Do you accept that these conditions are partly the result of the suspension of Australia's usually high migration rate because of COVID border closures two years ago? And rather than get Australia back to immigration to resume the trend to a total population of 40 million by 2055, shouldn't we be seriously thinking about further curtailing migration at least for a time, while we enjoy fuller employment, higher wages, and catch up with this country's infrastructure backlog, particularly housing.

I don't think the main thing going on here is the cutting immigration. That's not the main … The main thing going on is the large fiscal stimulus and the monetary policy support. That's a very powerful combination. One that we haven't seen for a long time. Very large fiscal stimulus, unprecedented monetary policy measures and they've worked. That's what's driven the unemployment rate down and in time, wages up.

I say that partly because I'm looking at the evidence overseas as well. Like in Europe, the unemployment rate came out last night. It's multi-decade lows. That's not because they closed the borders. There's been a lot of fiscal stimulus and monetary easing. And in the US, the unemployment rate has come down as well. Most countries in the world, the unemployment rate has come down because we've had this macroeconomic experiment in a way where we've had very large fiscal stimulus around the world and very large monetary stimulus. And surprise, surprise, you put those two things together, it works. That's the lesson I draw from it.

The closure of the borders has affected some segments of the labour market, and we all know the problems in hospitality and agriculture, and some professional services, but the closure of the borders isn't what's driven the unemployment rate down and wages up. It's the combined monetary and fiscal stimulus, and actually the resilience of Australians and their preparedness to get out and adjust, and do things.

I know it's not your remit, but do you want to see the migration rate resume back to trend?

I'm not going to offer commentary on that. But I think allowing people to come into the country and making it easier for people to come into the country with skills is incredibly important. Many businesses tell us through our liaison that they're either delaying investment, or not expanding, because they can't get the skills at the moment. And opening up the borders and having those people come in will allow businesses to expand, invest, increase the country's capital stock and add to our collective human capital. So, having people come in with skills is incredibly important. And I'll leave it to others to judge how fast that should be.

Governor Lowe, we're just on time. Are you happy to keep taking some questions?

I'm in your hands. Yes.

Oh, okay. Well, in that case, Peter Hannam.

Yeah, Peter Hannam from The Guardian.

Look, you mentioned a list of challenges. I note there was no mention of climate change and you talk about supply disruptions and so on. We only have to look at the Nullarbor Plain at the moment to see what extreme weather can do to Australia's supply lines. So, I'm just wondering whether we should take a view that maybe climate change is not a serious priority from the omission in your speech today.

Also, I think The Guardian readers, some of them being the market fundamentalists that they are, want to know that after you've unwound, or started to unwind, that massive bond buying, 42 per cent of government debt, for example, which is obviously distorted some elements of the market, is it not inevitable that there will be some sizeable losses that will have to be covered from the budget and perhaps in the billions of dollars?

Laura, I don't know how … Those are two big questions. I could talk on each of those for a long time, so I'm not quite sure I'm able to do that.

On the fact that I didn't talk about climate change today is certainly not a reflection of the priority we put on it. I wanted to do my best just to keep at the time limit I was given. There are important issues to address and I chose to address those rather than climate change.

Our institution is spending a huge amount of time on climate change from various perspectives, both the effects on investment, particularly in the energy sector, the implications of that. It has an effect on pricing through the Council of Financial Regulators looking at insurance, and the risk profile of the banking system, and I would say the desirability of Australia as an investment destination. I could give you a 50-minute talk on that, but I'll choose not to. But the fact that I didn't talk about it today isn't a reflection of the weight we are giving to that issue.

On the issue of the bank's profits, central bank accounting is complicated, but the way I think about it is that we have bought all these bonds at yields between 10 basis points, which is the lowest we bought at, and 2 per cent. So, we've got these assets that we expect to hold to maturity and we'll earn somewhere between 10 basis points and 2 per cent on each of those assets until they're mature. The offsetting liability we have is the exchange settlement balances. At the moment, we are paying zero on exchange settlement balances.

So, we're earning a positive running yield, which is accumulating on the bond that we earn 2 per cent. We're earning 2 per cent net running yield on that. Over time, as the rate on exchange settlement balances increases, the running yield will decline and for some bonds it will go negative. So, the rate at which interest rates go up will determine the profile of our profits. So, we've done a lot of simulation work to look at how the profits would evolve under various runoff profiles for our balance sheet and profiles for interest rates.

That's how I'm thinking about it. The other way of looking at it, which is the way the financial accounts deal with it, is use market value accounting. And when you use market values, it telescopes all the future gains or losses into today. So, you're going to see quite large swings, possibly some large losses in capital losses in the Reserve Bank's balance sheet, because the market pricing telescopes all the future things into today. The Reserve Bank is a very well capitalised institution. We retained some additional capital this year to deal with the potential losses. As those losses come through, I expect there'll be smaller dividends to the government for a number of years, but we're a well-capitalised institution. It's not a concern I have.

Sophia Rodrigues.

Sophia Rodrigues from Central Bank Intel.

While drawing your forecast, you're assuming market pricing for cash rate hikes. Now this time market is pricing nearly 200 basis points of rate hikes over your forecast period. Could you explain how this has affected your forecast? And if you're still forecasting 2.5 per cent underlying inflation at the end of the forecast period, does it mean you're endorsing market pricing?

If I understand the question, it's what are we assuming about the path of interest rates in preparing our forecast. We're using the market path, which has, as I said before, three or four interest rate increases in it this year. So, we're using something broadly similar to that in the preparation of our forecasts. The main impact that has is happens in late ‘23 and ‘24, because there's a lag as you know between interest rate changes and the effect on activity in unemployment and inflation. So, we are assuming the market path, but that is one of the factors that will bring inflation down.

So, that means you will need that rate hikes to still have inflation at 2.5 at the end of your forecast period. So, when you're assuming that and you're still arriving at that forecast, does it mean you need those number of rate hikes?

So, the alternative assumption to use that we do occasionally is just keep interest rates unchanged through the forecast horizon. If we'd done that, then inflation would be higher at the end of the forecast period than we've got.

Jonathan Shapiro.

Governor Lowe, Jonathan Shapiro from The Financial Review. Thanks for extending the time to take my question.

I am noting your scepticism or cynicism of market pricing. I wanted to get your view on the Australian 10-year bond rate, which the RBA would own a lot of those securities. The rate is around just under 2 per cent, which is below the Reserve Bank's lower band of its inflation target. What do you make of that seeming disconnect between a short end, which is pricing in a 1 per cent cash rate before the end of the year, and looking out to 10 years, a market that either sees slower growth or no threat of inflation? Just interested in yours and the Bank's perspective on the message being sent by the longer end of the bond market.

Yeah, it's a very good question and something we discuss, not just in Australia, but internationally, because the US 10-year bond yield is pretty much the same as ours. In a way I find it remarkable that the markets expect the US to go from 7 per cent inflation to 2 or 2½, without real interest rates at longer ends becoming positive. So maybe that's going to happen. It's going to be remarkable, isn't it, that we go from 7 per cent to 2 per cent inflation without positive real interest rates? So I still am struggling to understand that, and we're looking at the market pricing and talking to market people about why that is the case. But it's an open question. Can other countries get their inflation rates down without having real interest rates turn positive?

I'm very hopeful that over time, these real interest rates will turn positive, and they'll do that if we can generate the productivity growth, because there's a link between long term real interest rates and the underlying rate of productivity growth a country can generate. So let's hope we get to positive long term real interest rates, because that will mean stronger growth and stronger productivity. But it's a good question and something that we puzzle over a lot.

Anna Henderson.

Thank you, Governor. Anna Henderson from SBS World News and NITV.

Look, you have touched on this a little bit already, but as people do fill up their petrol tanks, buy a loaf of bread, or buy a RAT test, potentially, what's wrong with our system that unemployment can be tracking so low, and at the same time, we're not seeing significant wages growth, and what needs to be done to fix it?

I mean, wages growth is picking up. The Reserve Bank, really for a long time, its strategy has been to get the unemployment rate down, put pressure on the labour market, wages growth to pick up, inflation to rise to target, and normalisation of interest rates. So that's been our underlying strategy, and I see that actually working now.

Can the inflation eat into earnings here?

Inflation is eating into some people's wages and it's very difficult when you're filling your car up at $2 a litre, it really eats into households’ budgets. I know that's very difficult at the moment for many people. The counterbalance to that is people have jobs, and they're going to get bigger pay rises over the next couple of years because of the macroeconomic strategies that are followed. It's swings and roundabouts, isn't it? You're paying more for some of the things you buy, but you've got a job, and hopefully if the unemployment rate's low and the labour market's tight, you'll get a bigger pay rise and you'll be better off. That's the strategy.

Will you be spending that on your mortgage?

Sorry?

Will you just be spending it on your mortgage?

Well, some people will and some people won't. And hopefully some people can draw on the buffers they've built up, because of course, interest rates can go up a bit and people don't need to change their repayments if they've got a big buffer that's built up or they're paying more than the regular amount, and many people – not everyone can do that, not everyone's in the position to do that – but some people can. So, I think we've got to keep in mind that getting people into jobs and giving bigger pay rises, has huge benefits both for people's budgets and for the society. Really that's what we're trying to do.

If I could just intervene while Julie comes to the microphone. Just on that point, though, you talked in your earlier remarks about inertia and about supply and demand problems. I mean, isn't it the case that the fact that wages aren't going up high, does suggest there are structural problems in the wages market and in institutional settings. And isn't that something that we've got to address with a classic case in point being at the moment the aged care workforce?

There's inertia in the system. Is that a problem or is it a positive?

It's a problem if you don't know …

I mean, there are wage relativity issues in our labour market that are significant and they're worth looking at. I agree 100 percent with that, but the Reserve Bank can't do anything about wage relativities. What we can do is get the unemployment rate down so everyone gets bigger pay rises. We only have so many instruments and if we get unemployment down, people get bigger wage rises. They have to get them right across the board, and in a way, inertia in the system's positive because it allows us to take more time on monetary policy, doesn't it? In the US, wage growth has spiked very quickly and probably they'll have to respond to that, but we have time.

Julie Hare

Thank you, Governor. Julie Hare for The Australian Financial Review, and I'm also on the board of the National Press Club.

The jury is out in Australia as to whether we are undergoing the great resignation as in the United States. I'm just wondering if you have any thoughts or insights on whether it's happening here or whether it's going to happen and what that means for wages growth. Thank you.

Well, we're looking at the data on this. In the US, a lot of older people have left the labour force. So a lot of the resignation is older people – they may not want to deal with the health situation or they might have had caring responsibilities or whatever – but older people in the US have left the labour force in droves. That's not the case in Australia. Some younger people in the US have left, but that's not the main story. In Australia, what we're seeing now, for the first time in many years, is quite a rate of job hopping and job switching. In previous talks, I've talked about the low rate of job switching in Australia and that was one of the things that was depressing aggregate wage outcomes. Unemployment comes down, plenty of opportunities, people switch jobs and they get bigger pay rises. And labour force participation is at a record high here and I think it's going go higher.

So if Australians want to work, there are opportunities there and they're going to get rewarded for it. So I'm not worried about people leaving the labour force here in large numbers, but it's something we're watching.

Final question is from Andrew Tillett.

Andrew Tillett from The Financial Review and also Vice President of the Press Club here.

I'd like to ask about the C word – China – and what impact China might have on your forecast for the year ahead. We're obviously seeing stagnant economic growth figures in the back half of the year. They've done a bit of monetary stimulus recently, obviously the questions over the Chinese property sector, and the obsession with COVID zero over there too. What's your assessment of the risks that they might pose to the global economy?

The first point to make here is growth in China is trending lower. I mean, we've been through a truly extraordinary period where they had very high rates of growth. That's trending lower. So we have to get used to a world in which growth in China is lower. It's still strong, but it's lower.

Right at the moment, as you were alluding to, they're dealing with two really difficult issues. The first is the deleveraging of their property sector. We know property's been incredibly important to China's progress and leverage was built up a lot, and the authorities now want to unwind that leverage. And we know in any financial system, unwinding leverage is difficult, and the Chinese are dealing with that at the moment. It is having a big effect on their property market and that has ripple effects for the rest of the economy. The authorities have responded to that a bit, but not particularly strongly. So that's one challenge, and how you balance off the need to deleverage, but keep the property sector going, it's hard to get that right.

And the other big issue they're trying to balance as you know, is COVID. They've still got very low numbers of COVID and they're trying to make sure that remains the case. We know from our own experience here, it's very hard to do that with Omicron and whatever comes next. So how do they balance the need to keep COVID low and they're having restrictions in some parts of the country at the moment and that's affecting the supply chain again. So put those two things together, big challenges. They've got things to balance and we're watching it carefully.

Now, I've been wrong before, because we do have one more question from Tim Shaw.

We all do that, so don't worry.

Tim Shaw, Director of the National Press Club.

Governor, are we seeing the greatest intergenerational exchange of wealth between the bank of mum and dad and younger Australians, because those self-funded retirees are not getting any return from their cash deposits and are not sophisticated share traders. Do you see an increase in that intergenerational wealth transfer over the next couple of years, whomever is in government in Canberra?

Well, it's possible, but we've got to remember, the self-funded retirees that many of them have benefited from decades of house price appreciation, from rise in the equity prices and stronger wages growth over much of their working life. There are swings and roundabouts here, and it really depends upon your perspective, but there is a growing trend, as you're alluding to, of parents and grandparents, helping their children into the property market. And the high level of housing prices means that that's going to be an ongoing feature of our economy, I think.

You can look at that in a couple of ways. One, say that's good because it's helping children. Another perspective is it just reinforces the existing distribution of wealth within society. It's fine if your parents can help you, or your grandparents can help you, but if your parents aren't in that situation, then you're going to find it harder to get into the property market and my own perspective is that that has negative repercussions over time. So it's a complicated issue. It's not one the Reserve Bank can do anything about, but it's the world we're in.