Speech Fireside Chat at the Australia’s Economic Outlook

Andrew Hauser, many thanks for your time. The Prime Minister earlier said that he wouldn’t tell the Reserve Bank how to conduct monetary policy. Do you care to tell the Prime Minister and the government how they should conduct fiscal policy?

I had a meeting with Ross before this interview and he said he wasn’t one for a ‘gotcha’ question.

No, I wasn’t, no.

And that’s not a ‘gotcha’ question.

No, it’s not a ‘gotcha’ question at all.

Well, I’ll tell you something, actually, about commentary on fiscal policy. I was brought up in a culture where it really wasn’t for central banks to provide a running commentary on the decisions that democratically elected government’s take. Those are difficult decisions; they’re ones that they’re accountable to their electorate for. And outside of financial crisis – and unfortunately we had to deal with one in the UK quite recently – I think it’s for democratically elected governments to make fiscal decisions, and it’s for central banks to do the job that they were given to do by the public, which is to bring inflation down to the target level and to keep it there.

So you might have noticed overnight that the European Central Bank cut interest rates by a quarter of one per cent?

Did they?

Apparently they did. That’s what I heard. And you might have also heard that the Bank of Canada cut rates by quarter of one per cent the previous night. Now, given the fact that the Reserve Bank is not ruling anything in or out, and the next rate move may be up or down, is Australia out of sequence, as an economy, as its own monetary policy, with other economies around the world?

I don’t think so. Let’s take those cases in turn because they’re interesting. In Canada, the case is fairly straightforward. Their interest rates were higher than ours, their inflation rate is lower than ours, and their unemployment rate has picked up quite a bit more substantially than ours. I think if you took those data out of Canada and you plug them into the Australian context, you might well see a different policy stance. Canada is in a different place in terms of the economic development, and they made the decisions that are right for them.

In Europe, which obviously I’ve been a bit closer to in recent years, there has been a very persistent lack of growth. Now, you might say Australia has lacked growth in the most recent period but, actually, if you compare the aggregate growth rate in Australia to the aggregate growth rate in continental Europe, Australia actually, as we’ve been hearing this afternoon, I guess, has had a pretty positive story to tell relative to continental Europe. You would much rather, I think, be living in Australia than you would in some parts of continental Europe at the moment. It’s interesting, though, actually, if you look at the European decision and if you looked at the detail – and I know you will have done – they actually revised up their inflation forecast for the medium term while they cut interest rates. That’s probably a bit of a communication challenge for them. And when I talk, as I do, to some of the people on the ECB Board, they’re not all sure where rates are going next. So they’ve been keen, I think, to start the rate cutting cycle to show that they’re independent of the US. But whether that goes a lot further and where it goes from here, I’m not so sure. And maybe to pre-empt your next question – but I shouldn’t do that, but I will, Ross – we all have the same fundamental challenge, which is that inflation has been sticky on the way down. In particular, services prices inflation – and I’m sure we’ll talk about this in the context of Australia – Canada and Europe, and many other countries, the UK, obviously where I’ve just come from, have the same challenge. Your colleague earlier said it was a tough time for central bankers. I don’t think people should feel too sorry for central bankers. We’re well paid, we have an interesting and important job to do. The people that are challenged and struggling are the people who are finding it difficult to make ends meet.

Who are affected by your decisions.

And who are affected by our decisions, but who are most importantly, Ross, affected by high inflation.

Okay. So can I go back one step? The Bank of Canada, and also Christine Lagarde last night, made the observation that while in response to inflation, interest rates were raised very rapidly, you could not make the same presumption for rates coming down in the face of the now declining inflation. Do you think that is a reasonable prognosis?

Sorry, for Europe or for?

For Europe, for Canada, or for nations around the western world with what you describe as this sticky inflation?

Well, I think you’re trying to do … your colleague was really going for it at the Prime Minister earlier – this is a mild version of that.

But no, the reason I’m asking you this is, you know that interest rates are like buses coming past. You wait for a while and then not one, but two or three come past at the same time. That’s generally the way it is with interest rates. So you generally, when rates start to move either up or down, it’s a part of a cycle. Now, the question is once they begin to come down, it’s barely likely to be just one. A central bank has got to be convinced that there’s a reason to continue to move those rates down.

Well, look, and this is where the uncertainty thing, I think, comes in, because if you think about where the market thought the Federal Reserve was going to be at the beginning of this year – seven rate cuts during the course of this year. What is it, one or two at most? And some people are even talking about a rate rise. So I’d be careful actually putting too much weight on these very knowledgeable forecasts at any moment in time. What we have to do is set interest rates to bring inflation down to the target. I’m sorry, we were having a conversation earlier with some of your colleagues from Amazon and Uber, and the big job there, of course, is to get the big new announcement out of the place. Success for a central banker is to be boring but predictable in these conversations, and I’m going to be boring and predictable about that fact – that our target is not a particular level of interest rates, it’s a particular level of inflation.

Is it dangerous for a central banker to make predictions about interest rates and where they’ll be in the future?

Yes.

Is that because communication today is expected to be better by central bank Governors and by their staff?

I really do believe, and I know this is a difficult thing to sell, that the most important communication we can give to, let’s be honest, the Australian people, who are the people who we all care about here, is that we can and will get inflation back to a stable and low level so that – and the Governor talked about this, I think, in her first press conference – inflation no longer needs to be part of their problem set.

There are a lot of challenges in running a business. I was just up in Townsville in North Queensland only yesterday hearing about some of the challenges up there, and I was in Perth two weeks ago to try and learn about this enormous and very different economy to the one I’m used to. And, you know, you need to recruit people, you need to invest, you need to be innovating, you need to be thinking about expansions or contractions. You don’t really want to be worrying about inflation. Inflation is the thing that our job is to take off the table. The same is true if you’re a household. You’ve got lots of challenges in educating your children, bringing your family up, providing for them. Having something called inflation that you can’t control and gets into every decision is incredibly toxic.

I actually think central banks, when inflation picked up a couple of years ago, forgot this for a little period of time. They forgot just how crucial inflation has played as a role in history. I mean, without wishing to be hyperbolic, it’s caused wars, it’s caused genuine breakdown in society, because it is the most unfair form of economic development that I think you can really think of as developing. If you’re on low incomes, if you’re on fixed incomes, if you’re struggling to make ends meet, inflation is a toxic thing you can’t do anything about. So it’s that, that I think we need to give people reassurance about, not that their interest rate will be at X, Y or Z.

Okay. So bring it back to Australia. Here the monetary policy, the interest rate increases, were not as aggressive as other parts of the world as you’ve already observed. And now we’ve had the message that Australia will bear a higher rate of inflation over a longer period in order to try and maintain employment, because of the dual mandate now of the Reserve Bank to look after inflation and jobs. Now, those two things can run contrary to each other from time to time and maybe are now. So the question is: the glide path down for inflation, is that something that’s really been tried by many central banks before?

Well, it’s interesting because when you think about where, for example, the Bank of England, which I know more about, thought inflation would get to when inflation first picked up, of course they thought it would rise very sharply and then fall very sharply. So ex-ante, as it were, ahead of the time, the central bank was pretty clear that that would be a blip. I think it was called transitory, project transitory, or some such …

There were similar messages here as well.

… online called about that. Clearly, that proved to be wrong, and not just in the UK but, as you say, here and elsewhere. And we’ve all had to live with the fact that inflation has been much stickier, not just in the last few months, but in the last few years. As your colleagues said at the beginning, we are living with inflation above target for years, not for months. The thing that central banks and all of us have to be particularly worried about in that context is clearly that people start to think: ‘Well, hang on, maybe these guys don’t mean it when they say they are going to target 2, 3, 2½ per cent, in our case, inflation; maybe they’re secretly targeting 3 or 4 or 5’ or ‘they’re not very competent and they’re not going to do it’. And at that point when expectations start to rise, if they do long term, they get built into wages, they get built into prices, and that becomes a very, very difficult situation.

Then to get rid of it from there, what does the central bank have to do?

Just to be clear, we’re not in that situation in Australia at the moment. We monitor inflation expectations and measures very closely, so do you, and so far they have been well anchored. So in terms of the strategy you describe, we have so far managed to get to the point where inflation expectations are well anchored despite the fact, as you say, we have very consciously been seeking to bring inflation back at a gradual rate to protect those employment gains. And without wishing to sound like a politician, and I have a little list of things that Australia does better than the UK, because I’m expecting this question, it’s not that little, actually, anymore. It has economic things on it, it has political stability as well. Three Prime Ministers in the last five years? Well, how about five.

And none of them here yet have been likened to a lettuce. Let’s be honest about that, shall we?

But on your question, we are trying something slightly different here, to some other countries …

Okay. I just want to get to this point: so you believe what is being tried here in Australia right now is something different to what is conventional monetary policy theory by central banks in other parts of the world?

Every country has its own objectives – to use the technical term, objective function or objective. So in the United Kingdom, our primary goal is – was/our/we/their, I’ll say ‘their’ – their primary goal is to bring inflation back to target and, subject to that, to support the government’s other goals for growth and for employment. So it’s a first priority, second priority issue. In Australia, it is a more balanced objective. That is obviously quite similar to the objective in the United States. So I don’t want to say I think that Australia is on its own. I think every central bank is seeking to bring inflation down in a way that minimises the losses to employment and to output. We have a particular weight on that strategy and, to be honest, so far that strategy has worked. It is a narrow path, but it has worked.

Because I want to go to this narrow path, because traditional monetary policy from central banks would be go hard with interest rate rises, you can crunch your economy potentially into recession, unemployment rises, and eventually then the inflation comes out, you can cut interest rates.

Well, I disagree with that, Ross. I don’t think that is … well, you may say ‘traditional’. Maybe that was true in the Volcker era, for example, in the US, but I think we’ve learnt since then. And most, if not all, central bank mandates include the idea that if you do the kind of thing you describe and really go macho on growth, you are going to bring inflation down, for sure, but you are going to keep bringing inflation down to zero, to negative. And we know that, actually, we talked about inflation being costly – there’s one thing more costly than inflation, and that’s sharp deflation. So your kind of strategy, if I may, the hypothetical strategy you describe, is not a sensible strategy for any central bank to do because you will bring inflation to target and then you’ll keep going. And I think that scenario, and there are other scenarios, and I see Warren Hogan is here and he has a particular view about rates, which I’m sure we could debate – he offered to come up here instead of me, actually.

Yes, that’s right. He did.

You didn’t take that offer. You can have different views about how aggressively you want to close the so-called output gap.

So is what Australia is doing right now, the central bank, is it so different?

No.

You mentioned it was different, though. You mentioned it was on a different path?

Well, I think, look, let me put it this way. The employment gains in Australia have been impressive; 2.7 million jobs created in the last decade. That compares to 2.5 in the UK, an economy three times as large. It is probably fair to say that there is some secret sauce here that it is worth being particularly protective of. So I would say to that extent, from growth as well, the periods of negative growth in Australia have been one, two, three, in the UK I think 12 in the past 20 years, quarters of negative growth. Those are things worth celebrating, they are things worth protecting. But no, this is not some sort of radical strategy, off the mainstream, off the grid. This is core central banking, but respected well. So I will end on this point: the objective that the Australian people have given us, the Australian Parliament, the Government, the Treasurer, that is crucial because central banks are unelected officials. Hopefully we do our job reasonably well at least some of the time, at least technically we know what we’re doing, we’re good economists, but we only act under the egis of the public. If the public choose to give us that task, we must take it seriously. If they take it away, we must take it seriously as well. So I do think it is terrifically important. Setting your own goals and saying ‘we’re going to do this, we’re going to crush the economy’, to use your example or whatever, there’s no legitimacy there. And ultimately, central banks will not continue in their role if they set their own goals. Those goals are for politicians to set on behalf of the country. Here we have a clear goal which is inflation and to protect those employment gains.

Would the job of the Reserve Bank in Australia be easier right now if productivity was going forwards and not backwards?

Well, there you go. There’s another one, isn’t it? That’s a hidden ‘gotcha’ question.

No, there’s no hidden ‘gotcha’ questions. It’s just a ‘gotcha’ question.

Yeah, it is. Relatively weak productivity growth is true across the western world.

Yes.

Even in the United States, which is an interesting counter example at the moment. Actually, productivity growth has only been strong for a quarter or two. If you look at the average growth rate over the most recent few years, it’s materially below what was –

But wasn’t all this technology supposed to improve our productivity, make us wonderfully more … our output to be significant per person? What happened there?

You mean AI or?

All of that. It’s all coming. Everything that we’ve had so far.

It’s interesting. There’s a fascinating paper that looks at when did the productivity growth really kick in when we switched from horsepower to internal combustion engines. I’m going back a little bit.

A little bit.

A little bit. And the truth is that what happened, first of all, was that people took engines and they just replaced the horses and factories. So when the horse used to go around and pull a bar, they put an engine in pulling around a bar. Turns out it’s not the best way to use an engine, and it actually took a generation to learn how to use that new technology effectively and get it into the productivity data. My personal view is that that was the same for these modern technologies as well, the diffusion takes longer than you think when you really have to integrate it into businesses. And so I think, look, that is a big challenge, and maybe the US has started to see that pick up, or maybe they just got lucky.

I think also we’ve had some really interesting interactions with immigration, which is obviously not just true in Australia, it’s true in the US, in the UK, in continental Europe. And we had some interesting questions about the hangover from COVID, and working from home, and we could go on for hours about those various trends, couldn’t we? It’s true, isn’t it, that for economies to be on a long-term sustainable trend, we need productivity to improve. And it’s true, too, that if that’s part of the mix, it might help at the margin for wage growth to be higher without posing inflationary challenges. But those aren’t things, I think, that the central bank can directly influence. They’re things we need to understand. They are things we need to model, they’re things we need to work with government on to analyse. But productivity growth is for the economy and for governments to drive rather than the central bank.

Of course. My final question really to you is – and this would have been almost the first question normally, take the mickey out of the Englishman who comes to Australia, and how wonderful is it, and how about the sport and all that type of thing .. No, that wasn’t it. I was just simply going to ask you –

Didn’t you just do that?

No, I didn’t. I was going to ask you about just one thing. Being here now in Australia, seeing the economy as it is versus the UK, just the settings there, where is it better to live right now, in terms of a citizen, in terms of a business? You’ve been in both, you’ve spoken to a lot of people in both places. And just why?

Unfortunately, I think Sky runs in the UK, doesn’t it, so I’m probably in trouble here. I’m in the right place. The UK economy is in a very challenging position at the moment. I know that there has been a debate here about the debt stark, and the sustainability of the fiscal position. Go and look at the UK. Go and look at the US, for that matter, as well. There has been little or no growth in the UK since COVID. When you do the charts of the level of growth and the recovery post-COVID, and the big V, the UK is just tickling along at the top level it got to before COVID. Australia has surged forward on that. In terms of employment growth, as I say, jobs created here have been significantly larger. I’ve made the right trade. I’m only here for five years but I’m hugely glad to be here. And I think some of the positive stories about the medium term – I like your arrows going up. I’m not quite sure, where are they going? Which part of the world are they going?

It just keeps going. That’s it.

It’s like China, isn’t it?

It’s like Elon Musk. Don’t worry, it just keeps going up.

You might want to get the graphic designers to look at that. The opportunity here was one of the many things that attracted me to the job and as I say, we haven’t talked much about what I learned when I was out and about in the last few weeks, but it’s been really eye-opening. Some of those stories about the growth future of Australia, I don’t know if they will come about, but they’re exciting and interesting, and I’m glad to be here to learn about them.

Well, a part of the new mandate for the Reserve Bank is that it communicate better with the public and with business. And in Andrew Hauser, I think you’ve just experienced that new era of communication at our central bank. Andrew Hauser, many thanks for your time.