Transcript of Question & Answer Session Strangers in Paradise

You have been here five months and I know you have done a trip out west and you’ve spoken a lot of business leaders here. From perception to reality, what has been the most surprising factor for you since you have been here?

You’re right – I have been to Melbourne, I have been to Perth and Townsville as well, which was a real eye opener up in what I’ve been told to call FNQ. Although I’m not sure if FNQ is an okay phrase or not, so if I have just been very rude, I might be on the next boat out! What is the biggest surprise? Gosh. Not sure quite how to answer that. I would say this. Bank of England’s principle used to be ‘human and humble’ and I think it is quite important to come across and be humble about how much there is to learn coming to a new society. As you probably know, well, you might not know, one of the risks for a Brit coming to Australia is you think it’s much like home, everything seems much the same. If you were going to Tokyo, if you were going to Singapore, if you were going to New Delhi you would never have that view because the language would be changed, everything would be changed. And it’s incredibly important to guard against, I think, because a) it’s a pretty classic British attitude – that I already know how this place works – and b) it also closes your horizons to learning about what is new.

One of the reasons I went to Queensland and Perth first is that obviously both of those places in different ways are the engines of growth in Australia and in ways that are very, very different to the UK. So I mean meeting with the mining companies in Perth, meeting with some of those who are working on enormous pipelines, staggering pipelines of public and private projects up in the north east. We went to a company which I think RBA rules prevent me describing so you could detect it but it was a metal refinery that ran largely off solar power. Pretty eye opening, actually, to a green 54-year-old Brit coming from a largely service-based economy and hearing how those places are going. So that’s probably a rather dry and boring answer to your question. I’m sure there’s some more fun things I could say about my life in Sydney and so forth but it’s enormously motivating actually to come, I don’t want to say late in my career, but later in my career and get your hands around a new and challenging set of issues. There is work to do at the RBA as well, obviously, in terms of modernising and bringing RBA up-to-speed, but I’ve been absolutely hugely bowled away by the ability and quality of the people there – so no down side. Final point, sometimes when I end … I’m trying to play for time so you don’t ask me about inflation.

It may not be me.

Let me tell you a story. Let me take you right back. No, I will tell you. So I go to a lot of meetings with very senior people and I have very high discussions about strategy and they’re very informative. At the end they often lean over to me and say, ‘I have to ask you, mate, why did you come here’. I always reply to them, ‘Why would you not?’ Actually, what is there not to like about the challenge of coming here? And some of it is very difficult. There’s some difficult challenges at the moment. Perhaps I’m sounding a bit like I’ve swallowed the happy gas, but there is not much to not like here.

That’s very true. Sometimes we under sell ourselves in this country.

That’s right. I was surprised. I thought Australians are instinctively optimistic but I’m told it’s the reverse.

Deputy Governor, thank you very much for the speech tonight on your overview on Australia. I also wanted to thank you for the opportunity to ask a question but I am going to ask a question on the more recent information we have on the economy. Given the RBA has categorised the economy has being steered down the narrow path but that path is potentially getting a little narrower, I wanted to ask your thoughts around obviously services inflation has been something that has been important in assessing whether or not the economy is still on a narrow path. Could I ask your thoughts given we got an update yesterday on more persistent services inflation, how that may play into your thoughts on the outlook?

You are absolutely right in what you say. I think the challenge of persistent services inflation is not unique – and you know this – to Australia. Actually what is interesting, if you draw the chart of inflation and you break it down into services and goods – and obviously goods have to a large extent come off and a number of countries are actually in deflation, not in Australia – the pictures look incredibly similar. I think there is probably something there all of us need, central banks to probably learn and understand about a little bit more. Look, the number yesterday obviously picked up a bit, and there was quite a substantial market reaction. You didn’t say where you worked but I’m guessing it’s in the financial sector somewhere. Where?

I work in balance sheet …

Obviously picked up a little bit. If you look at our statement from last month, we said three things: inflation remains above target and is proving persistent, the outlook remains highly uncertain; and returning inflation to target is the priority. And all three of those things were true a month ago and they’re true now. I think on your question about how well do we understand services inflation, and again I would generalise from the RBA alone to elsewhere, obviously market services inflation did fall a little bit in the most recent data. It was actually welcome and if anything, there was an interesting ‘mini puzzle’ in the data as to why it was services that were somewhat weaker and maybe goods, and particularly durable goods, were a little bit stronger. But look there are a number of different hypotheses about what is going on here and they have different implications for policy.

One possibility is just that it’s taking a little bit longer for policy to feed through to service inflation than goods. The right policy response to that clearly would be to hold your nerve and coming down in a slightly bumpy way but we are coming down. And if you look backwards that is in fact exactly what has been happening. Whether it continues to be the case we can debate. It could be telling you something important about the labour market because service prices are obviously often more heavily a function of the cost of labour in general. And obviously what has been extraordinary, I think, about the experience of the labour market, not just in Australia but globally as well, is just how strongly it has performed. The number of jobs that are being created is just enormous. Sometimes you talk about not celebrating success enough; this is an incredible achievement. When you think about adjustments of this scale in the past, they have always involved very, very sharp adjustment in the labour market. So far we haven’t done that and that’s obviously been part of our strategy but it could be part of why services inflation is taking a bit longer to come down. The other point is services prices sometimes consist of administrative prices, which monetary policy frankly is quite hard to get at. There is an interesting question there do you strip them out and control the things you can’t control or do you have to push the rest of the inflation basket down a little bit further in order to bring inflation back to target. That’s a challenge and a question for central banks. You’ve put your finger on a very important question, one we all need to understand better and it’s an important part of our job to do that.

Do you think monetary policy is really the ideal tool to be dealing with this inflation crisis – or inflation issue I should say, it’s not a crisis? Because the issues of the global economy to me look like they’re coming from deficient aggregate supply given the breakdown of supply chains, deglobalisation and localisation as such. I would argue that monetary policy is not necessarily the tool to be dealing with that because I do note that we don’t know a lot about this inflation cycle. It’s very different to what we have seen before. Bank of Canada cuts rates, everything is looking good and then suddenly inflation spikes up. Europe’s economy recovers and now the PMI is dropping sharply below 50 so it seems a very uneven cycle. And as such, do we need more simple analysis rather than using econometric models from the last cycle to be looking at services inflation, unemployment, wages growth etc. and just come to more simple conclusions? It’s a whole bunch of questions.

I know. How many questions are you going to ask me?

You only have to answer one.

That’s a trick I haven’t yet learned. I will try to take as many as I can. I grew up working with Mervin King, who was obviously one of the governors of the Bank of England. He was a full adherent to the concept that inflation is always and everywhere a monetary phenomenon. And you don’t get inflation in non-monetary economies. If you start from the point that, actually, there is nobody other than the central bank, ultimately, that can anchor inflation in the long run.

So, to your point, should we give up on monetary policy and try something else? No, because that will end in failure. However, to your point about are we being moved around by movements in the supply side that are different, challenging and potentially much bigger than in the past? I think you have put your finger on something terrifically important. We have obviously been through a very major set of supply shocks as part of COVID and the UK in terms of Brexit and you could go on. It’s probably fair to say the central banks need … the mark on their exam paper for that period is, you know, needs some improvement, in terms of understanding some of those shocks albeit they happened very rapidly. If you look forward you think about geopolitics and its implications for the changing nature of global trading channels, you might think about the energy transition as well, these are all going to have potentially major effects on the supply side.

However, and this is where I come back to my ‘don’t give up on monetary policy thing yet’. The challenge … the goal of monetary policy is to bring nominal demand into line with where the supply capacity of the economy is at any particular moment. If that target is moving around more than you thought it was in the past, if it’s being moved by different shocks, you really do need to understand the shocks better than you did in the past. If you were to look at the headcount in the central banks and say how many of you very loosely are allocated to understanding the demand side of the economy and how many are allocated to the supply side, it’s 90-10 or 95-5 or whatever it might be. That may need to change in the future, but that’s a point about the analysis of central banks, it’s not about their toolkit. Their toolkit will, I would argue, always remains control of the supply and price of money and that would be true in a bitcoin economy as a much as it would be in a fiat economy. What we need to do is understand the supply side better. All of your points about better models and all the rest of it are right, but that’s a joint challenge.

Just a quick question. You mentioned all of the influences. How much of the financial markets play into that decision-making process, with the volatility in the financial markets, tightening of financial conditions; how do you see that?

It’s a great question and not one again that central banks have historically always done very well at. I spent many years at the Bank of England running the markets function and during periods in which it was impossible to ignore, right. The global financial crisis obviously had fundamental implications for the economic outlook, the LDI crisis that we went through in 2022, ditto. Had we not had built up sufficient understanding of how the financial system worked and how that transmission mechanism fed into the economic system, I think we would have been in a difficult place. It’s not quite ‘men are from Mars and woman are from Venus’ but obviously the people work on the economics side and the financial side are often different people with different mindsets and different ways of thinking. And that’s a good thing because that leads to the sorts of challenge internally that can be quite hard to generate in some public organisations.

So, I think thinking about how do you measure the stance of monetary policy – for example, we always historically used to use the short interest rate and then we learnt that you needed to use the yield curve as well. Now we know we need to think about a whole range of financial market prices, the price of the yield curve, and they’re becoming increasingly important. I was sitting next to someone let’s just say in the private finance sector and certainly in the UK, not in Australia yet, understanding how those flows are varying, which is a very big challenge in terms of data and in terms of how those things work., is really, really important. Could it mean we make as big a policy mistake if we mis-model the supply side? I don’t know. But these are all part of a much bigger agenda, I think, for central banks thinking about where next.

You’re going to ask another question?

So if the share price falls 10 per cent, if Australian equities fall 10 per cent with the potential increase in interest rates, does that play into your thinking?

Definitely a sting in the tail. It might do. Everything counts, everything counts.

Thank you for taking the question, Andrew. My question is RBA is known as a reluctant rate hiker in the economist analyst circles and in the press as well. From what I understand from your answer to the inflation question, it’s also that the right policy response is to hold your nerve. Is that a correct categorisation …?

Swati didn’t get to where she is today by accurately quoting public officials. You know that’s not what I said. I said there are a wide variety of different ways about thinking of services prices, all of which would have different implications for the policy stance. There is a lot for us to reflect on ahead of the meeting in August. What is important, I think, is we don’t … and I’m interested that the market reacts to one number. That’s fine. But there is a whole series of data coming out between now and when we meet in August. There are two measures of retail sales which have been on the floor, as I would like to remind you. There is an important release on employment. There is the Q2 inflation number, bearing in mind the numbers we spent time talking about earlier are only partial and that’s something I’m not used to from the UK, that the monthly indicators don’t contain a full sample of prices. There’s business surveys and you name it. It would be a bad mistake to set the basis of policy on the basis of one number and we don’t intend do that.

Just wondering if you can reflect on your experience coming from a central bank with a specialised monetary policy board. Obviously we don’t have that in Australia yet, but might do soon. From your experience dealing with, say, non-specialists, would you say that there is a greater attention paid maybe to the hardship of the wider audience than a more specialised monetary policy group might have? And does that likely suggest perhaps that holding the nerve longer than would be the case in a specialised board like the UK?

That sounds like a very interesting academic topic for analysis. I wouldn’t know necessarily how to begin answering it. I will make a couple of points. I have been very impressed by the debate on the Board so far. You’d probably expect me to say that, but it’s true. You have people on that Board with a very wide range of backgrounds who do bring a diversity of perspectives, as you say, not just of people who are struggling but also business conditions and from right around the country as well. Those things are valuable and important.

We also have a liaison function, as you know, at the RBA. When I was in Townsville and Perth and Melbourne, I was visiting firms with them. So we have a wide variety of ways of getting non-technical ‘spreadsheety’ DSG-modelled kind of information in to complement the pointy-headed stuff, if that is your point. I don’t really see any reason why people’s backgrounds should give them a bias one way or the other. But obviously the point of ensuring you don’t get the biases is to have collective decision making and to have groups challenging each other. And although I didn’t used to believe this, that decisions are better made by committees than by individuals, it turns out to be overwhelmingly true. As an academic matter, that if you do a bunch of controlled experiments on monetary policy and you either have people deciding on their own or people in a group deciding, you get better outcomes in general from the group. You do always have people at the extremes and the groups beginning bring the decision back to the central case. I mean, how do I know? I would be very surprised if the different structures give a bias. What I would say is the quality of debate on the Board is different from the nature of the debate in the UK, but no less bad for that and in some ways probably more insightful. You wouldn’t believe, some of your economists in the room, how petty professional economists can get sometimes when you desperately want them to make decisions about interest rates – I say this as someone who until recently was on the other side of the table – we’re blessedly relieved from that.