Transcript of Question & Answer Session Economic Conditions and the RBA’s Transformation

Good evening. Thank you very much, Governor, for those words. I think you’ve really drawn out for everybody the complexity of issues that the RBA is grappling with, but also the importance of transformation within the organisation to be future fit not only for the decisions you need to make, but as you say, for the infrastructure and importance to the economy that the RBA has. I’m looking forward to moderating the Q&A session. If you do have any questions or would like to vote on any questions you can use the app which I think the details - there they are, they’re on the screen at the moment - we’ll also be taking some questions live in the audience as well and I think there are people wandering around with microphones if you have a question and I’ll come to that. But I might kick off with a few questions, if that’s okay. I might start globally, Governor, and work down to more local issues. If I start globally, you ended your remarks with a reference to the shifting geopolitical dynamics, so why don’t we start there and some of the questions coming through are about this as well. Let’s talk about the US, the policies in the US potentially are they inflationary for Australia, what do the threatened tariff wars mean for us, particularly in light of the last 48 hours where there’s been discussion of tariffs on Mexico, China and Canada.

Yes, this is, apart from when are interest rates coming down, this is the second most question I think I get asked. I think I’d first say that, look, at this stage it’s hard to tell because it’s actually hard to tell what the new administration actually will do as opposed to what they say they’re going to do. There is a lot of discussion about tariffs and in particular the most recent salvos in terms of Mexico and Canada. I think that does remain to be seen whether or not that’s some sort of reality or it’s a negotiating tactic, I don’t know, but we have to set policy based on what we know, not based on shadows, and so I think the first point I would make is that although we are thinking about the potential implications we are still mainly focused on what we’re observing going on in Australia at the moment, because if there are going to be implications for inflation and growth, they’re not happening next month or even in six months. It’s going to be out a little bit. So our focus needs to be remain staying the course on inflation.

Having said that, what happens if, say, there are tariffs imposed in the United States, and I think most people agree that the implications are potentially for inflation in the United States to rise, potentially inflation in some other countries - so what often happens with trade, though, is that trade moves, so if there are large tariffs, for example, on China, Chinese trade will probably try to find other ways to find an outlet, and Australia might even be a beneficiary of that. So we might in fact find some deflationary impacts for Australia if it rolls out that way. It depends often - it will also depend very heavily on what others do. So we don’t know how Europe might respond to tariffs on it, we don’t know how China will respond, so I think we need to just be alert to what might be happening in those other countries as well, and as I say nothing is happening in the next - it’s not going to affect inflation in Australia in the next six months. To the extent that this sort of activity impacts China, that also is very important for us because China is our largest trading partner and what happens in China, when China slows down that has impacts on our economy as well and the growth of our economy. So I don’t know the answer exactly what will happen. Yes, I think tariffs would be inflation in the United States. What happens here may well depend on what happens with trade. And what happens to China is going to be really critical.

I might stick with China then for a moment. Regardless of the tariff position the economy remains sluggish, which obviously, as you said, has a big implication for us. Are you seeing impacts yet from the Chinese government on their stimulus policies?

I think we’re not seeing impacts just yet. Our judgment - and we wrote about this in our November Statement on Monetary Policy. Our judgment is that the efforts by the Peoples Bank of China to lower borrowing costs, to encourage lending into particular sectors, that sort of easing I think is positive and some of the moves of the government to support consumption in the real estate sector, I think, are positive as well, and we revised up our forecasts a little bit for Chinese growth on the basis of that. The issues for China around the real estate sector, though, are still quite front of mind. It’s a very challenging situation. Property prices in China have not risen, they’ve gone down a lot and they’ve stayed very low, and people in China don’t have a lot of confidence in the - well, some of them have paid for homes that they just haven’t got, so there’s not a lot of confidence in that whole development industry, the housing industry there, I think. So that’s impacting the confidence of the Chinese consumer. There’s still issues there, but the Chinese authorities at least have shown some inclination to try and address the concerns, particularly about consumption. China has deflation. Prices are falling, unlike the rest of us are experiencing. There are, I think, challenges in China that the government is - it does seem they are trying to address them.

And what do you think Australia should be doing to prepare for that or seek to deal with the consequences there?

Well, our exports, obviously, are driven very much by commodities and so commodity prices are likely to be impacted if China doesn’t come out of this, and I think that means, obviously, two things. One that our national income isn’t as strong as it was. And it impacts on government revenues as well. So it has impacts for us as well. So I think these are the sorts of things that - when we’re thinking about where the appropriate monetary policy settings are, we’ll need to be thinking of the impact of slower China on our growth and what that might mean for the inflationary pressures in our economy. At least at a first order level you would expect it would be slightly disinflationary for us.

I opened by asking you the second most question you’ve been asked. Do you mean if I go to the first most? Thanks. Specifically you said a moment ago, and you also said in the November Statement on Monetary Policy, that sustainable return to inflation target, your expectation is that will occur in 2026, the market generally expecting a rate cut February, March, May 2025. Are we waiting for a rate cut in 2026 or what are you looking for - -

Why does everyone always want forward guidance.

No. This has a big legal disclaimer on it. It’s fine. It’s fine. Don’t rely on any of this too much. Should we be thinking about 2026 or what are you looking for in 2025 to give you confidence that we’ll be where we want to be in 2026?

Our forecast, even though it’s got those very wide error bands around it, our central forecast at the moment is that by the end of 2025 we will be back down below 3%. But we don’t think it’s good enough just to be just below 3%. The reason you aim at 2.5 is because it gives you a little bit of leeway on either side. So we think we’ll be back there by - that’s according to the central forecast - by the end of 2025, and provided we - so far our forecasts - it’s gradual, it’s slow, but so far we seem to be trending in the direction we think. So provided we continue along that trajectory then we will be in a position at some point to consider whether it’s appropriate to cut rates. But as I said earlier, and as I showed in that graph, overseas countries had much more restrictive - we judge much more restrictive policy than we did. We judge we’ve got restrictive policy, but it wasn’t as restrictive as some, and if you look at some of the countries that are lowering interest rates quite a bit, Canada and New Zealand in particular, who we often compare ourselves with, both of those countries now have unemployment rates - I think Canada’s unemployment rate has a 6 in front of it, the New Zealand unemployment rate is rising quite quickly as well. So they are lowering interest rates in response to what they’re seeing happening in their employment markets which will flow on, and they’re seeing it flow on to their inflation rate as well.

So we’ve got these central forecasts, there are error bands around them, and as I said earlier, it could be that inflation falls more quickly if consumption in particular doesn’t pick up like we’re forecasting it will - it could fall more quickly - and if it does then the Board will be taking that into account and responding.

I don’t want to put words in your mouth, but I’m trying to keep the audience happy, but that may - there may be a scenario where you’re considering a rate cut in ‘25 in expectation inflation will be where you want it to be in ‘26

Let me be clear. If you look at overseas countries, they are cutting interest rates even though they haven’t reached their target yet because they’re expecting to do so, and I think I’ve said this before when people have asked me do you need to be back at the target before you cut interest rates? No, we don’t, but we need to be pretty convinced that - we need to have a fair degree of confidence that that is where we are heading. You don’t have to be there, but you have to have a pretty good degree of confidence that you are heading there.

Thanks. You talked about, also in your remarks you mentioned the narrow path and I think you said that you still think we are on track for the narrow path. What flags will you be looking at in the coming months that might alert you to the fact that we’re moving off the narrow path?

So I think there’s a few things. The first is obviously we’re going to be looking at inflation. We’re going to be looking at the labour market. Those things, though, are backward looking in the sense that they’re behind us, so we’re also looking at a lot of forward-looking surveys. We look at some of the commercial surveys like the NAB survey, Westpac, these sorts of things. We also have our own liaison program and the bank’s liaison program, I think we probably talk to around about a thousand businesses/business groups a year so we have a very broad - it’s 20-odd years old this particular liaison program and it’s been set up in a way that we can look over time at responses to questions, and it’s pretty good intelligence, I think. So the things we’ll be looking for there are what they’re telling us about what’s going on with consumers, what’s going on with the labour market, what are they seeing about their selling prices.

Now, at the moment the readings we’re getting from these sort of forward-looking indicators are that the labour market is easing, but it’s still marginally difficult to find staff in some areas. Selling price pressures are easing, but they’re still seeing costs rising, so not as much as they were, but they’re still a little bit elevated. These are the sorts of things that we’ll be looking to continue to see ease in order to be convinced that we’re heading on the narrow - continuing to head on the narrow path

While we’re talking about growth and unemployment, my daughter who started year 11 economics has a question if you don’t mind me asking, but GDP growth remains slow but unemployment is low, shouldn’t we be expecting, if we have a strong labour market should we not be expecting to see increased confidence, household spending and hence growth.

What’s your daughter’s name?

Chloe

Alright, Chloe. This is a sort of a bit of a conundrum that people focus on. The economy isn’t really growing very much and I think I showed that in that graph, but employment is still strong as you point out. The point I try to make here is that a difference between levels and growth rates. So if you look at the level of demand it’s still quite elevated relative to history. Even though it’s not growing it’s still quite elevated. So we’ve got this situation where demand overall is holding up level, it’s not growing, and that’s generating a demand for labour to meet that demand, if you like, because all the indications are that we’re trying to supply goods and services that are being demanded and we’re still not quite meeting them. The way I would explain this, it seems a little bit sort of esoteric, I suppose, to think about aggregate demand and aggregate supply, but I’m sure everyone knows examples of - the construction industry is a great example. It’s not growing. Construction isn’t growing very much, but the level of demand in the construction industry is still such that we can’t supply it, we can’t get the people in particular, they can’t get the skills. That’s an example of where the level of demand is above the ability to supply it. There’s various examples like that, I think, around. The other one I often use is it’s not so much now, but I’m sure people remember back in 2023 when we were sort of just coming out of COVID, the hospitality industry and you’d go to a restaurant and they couldn’t get staff. Again an example of demand for a service that we were finding it very difficult to supply.

That’s a long way around to answer Chloe’s question which is that the demand level is still quite high even though it’s not growing and that’s what’s generating the demand for jobs.

That’s basically what I said to her as well. Thank you. There’s a lot of focus on demand side inflation. I wonder if we could talk a little bit about the supply side factors as well

This is actually - the supply side is very important because when inflation took off in 2021 all around the world there was a confluence of things that happened. The first was that because of COVID we had supply chain issues and the ability to get goods - people were demanding lots of goods and the supply chains weren’t able to supply them because of problems with getting staff, people were sick, there were situations where we had containers in one part of the world and they were needed over that part of the world. You know, it was all over the place. At the same time governments were spending fiscally, putting money in peoples pockets, people couldn’t go out so what did they do? They decided they wanted to spend on goods. Big demand for goods, difficulty supplying them, the price of goods goes up. I tried to buy an office chair at one point during that period and I couldn’t get one for love nor money and then I had to pay through the nose for it. So there was that to begin with. Then what happened was the Russian invasion of Ukraine and that was a massive supply shock and it was particularly in Europe who depended heavily on Russian gas and that had a big supply impact because it impacted energy prices, electricity prices. That’s an input to practically everything. All of a sudden you had supply chain issues, you had a massive energy shock and you had demand rising, and the confluence of those things resulted in massive inflation. Now, at the time there was a bit of a debate about it’s transitory, don’t worry, it will go away by itself, and then the realisation came, and it was us, but I think it was also the rest of the world as well, everyone - well, actually, no, demand is part of the story here as well, and interest rates were at emergency low levels. So we actually had to - what we had to do was we had to remove the stimulus before we could even start to put restrictiveness in place.

That’s where the supply side things comes in, and I think broadly we think that the supply side inflationary impulses have largely gone away now and what we’re dealing with is demand. Having said that, I would like to highlight a point that we often talk about internally and other central banks and that is that I think in the world we’re facing into we’re probably going to see more supply shocks because we’ve got these geopolitical things going on, we’ve got potential sanctions, we’ve got Middle East problems. All these things suggest that supply shocks - we’ve got the energy transition things happening. So there’s all these potential shocks to the supply side of the economy which are going to potentially result in rising prices, and I think central banks are entering a challenging period in how do we handle those because the traditional idea would be, well, it’s temporary, you look through it. But if you get lots of these shocks and the inflation rate stays elevated for some time then people will just start to assume that inflation is higher, and once inflationary expectations adjust then it’s very difficult to get inflation back down. So I think we’ve got some challenging times ahead.

How do we prepare for supply shocks, future supply shocks that you’ve talked about?

Well, it’s challenging because by definition you sometimes don’t know where they’re coming from and they come as a bit of a surprise. I think we’ve just got to be alert to - and it’s very difficult. The other point I would make here is that it’s often difficult, as we saw in 2021/22, it’s often difficult to determine at the time whether it’s a supply shock or a demand shock. So I think we’ve got to be a lot more agile in thinking about what the source of the inflation issue is. I think we’re going to need to think about what - the government might need to think about how it’s responding to some of these things as well, whether monetary policy is the right way to respond to some of this stuff. But all I can say is I think we’re going to have to be agile and we’re going to have to be very alert to the fact that it might be supply side driving things.

May I ask one more direct question on interest rates. In the November Board minutes the Board stated that they were not ruling anything in or out on interest rate cuts, implying that there may be circumstances where their next move might be up. What might be the circumstances where that would be the case?

I talked earlier about our forecast and our forecast of inflation coming back down to just under 3 in end of 2025. If the data that we’re seeing and the information we’re getting from our liaison and so on suggests that inflation is picking up again, so it’s not going to follow that trajectory, it’s going the other direction, then that would be a very big red flag for us. So again I think the focus has to be for us on inflation. There might be some indications of that coming out of the labour market, so if it looks like the labour market is increasing in tightness again then that might be another thing to watch. But provided we’ve got inflation continuing along this trajectory we think that we can stay where we are for the time being and this will deliver us the narrow path.

That was my last question on interest rates. There is one in the app, though, I’m sorry. We had a question here on the app which is the October Board minutes said you want more than one good quarterly inflation figure before rate cuts. Have we had a good one yet?

What I’d say is that so far what we’ve had is in line with what our forecasts are. So I think that’s positive. We’re continuing to see the trajectory we are forecasting. I don’t want to give the impression that we are focusing on one single data point, or two single data points. It’s broader than that. We are considering - yes, the inflation numbers do tell us a lot about what’s going on in the economy, but we’ll be looking at other things as well, and as I said we’ll also be looking at the forward indicators.

Slight change of tack, but another question from the app. Governor, are we in a recession disguised by immigration and public sector job growth funded by deficits because it feels like that in the private sector.

I wouldn’t say we’re in a recession, and the reason I wouldn’t say we’re in a recession is because the labour market is strong. Now, it’s true that the market sector in employment isn’t growing and the non-market sector is, and some people make quite a lot of that, and I think it is reflective of what’s going on in consumption of discretionary goods and services by people. That’s why the market sector isn’t doing as well. Having said that, growth in employment in the non-market sector is actually good. It’s teachers, it’s nurses, it’s aged care workers. These are all people that we need. So I don’t buy into the idea that growth in non-market sector employment is not a good thing. It is a good thing. We need these people, and what it’s just demonstrating, I think, is that - and some of these things obviously there’s going to be a bit of a shift in demand for some of these things as well. I don’t think we’re in recession. I think people are employed. When you see surveys and you see the unemployment statistics the underemployment numbers now have levelled out a bit, people are able to get jobs which means they’re able to meet - not everyone, but on average most people are able to get jobs and they’re able to meet their commitments. So for that reason I wouldn’t say we’re in a recession, no.

With the follow-on question on the app, therefore you don’t think we’re in a per capita recession?

See, I know - I don’t really like that term per capita recession. The concept of this you’re in a recession if you have two quarters of negative growth, it came out of I think an NBER article in the United States which correlated number of - what they called recessions with the number of quarters of negative growth. So people have now abstracted that to say, well, if I get two quarters of negative GDP per capita growth then that’s a per capita recession. I think defining it in that way actually abstracts from what’s important here and usually in recessions you’re experiencing high unemployment rates, people are losing their jobs, it’s just - it’s really, really bad, and I think in the current environment we’re not in a recession. Yes, people are having to spend yes, people are having to cut back, but as I said earlier, basically people are able to find work, they’re able to get the hours they want and that doesn’t feel to me like a recession.

I know your views on this next topic, but I just work here. Can you please share your thoughts on the need for greater productivity in Australia? Where do you think the improvements may come from?

I said this earlier. People seem to think that the Reserve Bank Governor in the expert on everything. Look, I’m not an expert on productivity and obviously we have a Productivity Commission headed up by Danielle Wood who is an exceptional economist, and the Productivity Commission has lots of great ideas on this. My only comments on this really would be that, yes, we’ve had a poor productivity performance. Productivity growth has been declining not only in Australia, but around the developed world for decades. Coming out of COVID the only exception to poor productivity has been the United States. They’ve had very strong productivity growth. Everyone else has, advanced economies, have typically had very poor productivity growth. It’s all been mucked around by COVID and it’s very difficult to read too much into the quarterly numbers. Having said that, if we want to grow our living standards we need productivity growth in the economy. I think that there is some hope in technology. It’s not going to happen tomorrow, but I think technology does provide hope for improvement in productivity. I also think that in that sense education and training is going to be really critical to productivity growth going forward because there’s going to be movement in the types of jobs that are available, people are going to need to be trained, some people are going to find their job no longer exists perhaps or it’s smaller, but other jobs will spring up. So it’s going to be really important that we have appropriate training and that’s the sort of thing that will help to improve productivity as well.

The productivity Commission has a long list of these things. Business dynamism is another thing that’s really important here, and I think coming out of COVID with lots of support for businesses and lots of support for hanging on to their staff maybe as we get back into more normal times we’ll get a bit more business dynamism, we’ll get more staff moving from less productive firms to more productive firms which will help. But again this isn’t going to happen overnight and I think we think that over the next few years we are still forecasting that we will get back to positive productivity growth, so maybe I’m the glass half full.

Turning to the RBA itself, one of our questions via the app is that the Senate is likely to vote tonight on the RBA Board reforms. What do you think those changes will mean for the Board and how you set policy?

If the changes go through, as some of you may know we’ll have a specialist monetary policy Board and then a governance Board. When I talked earlier I talked about a lot of the stuff we do which is not to do with monetary policy and there’s a lot. At the moment I am accountable for all of that. I am the accountable authority. Not the Board. Under the new framework if it goes through then the governance Board will be accountable for the operations of the bank, which is a substantial amount. So I think there’ll be two - obviously there’ll be a lot of things that the governance Board will take an interest in in assisting me. The monetary policy Board, the concept is that the monetary policy Board now can concentrate just on monetary policy. Having said that we’ve already made a lot of changes, as I set out, to the way we operate the Reserve Bank Board at the moment and we’re already leaning into some of these changes. So if it goes through I think there’s clearly going to be some structural things that are going to go on, but I think the monetary policy Board, I think we’re already moving from that direction so we’re just going to keep on moving in that direction and basically being agile.

Speaking of those reforms, you talked a little bit about the work the bank is doing to modernise and part of that transformation is building broader engagement, listening to a diversity of voices and outside opinions. I would have thought you’d get plenty of outside advice. How do you actually make sure that you are getting that outside advice and distinguishing that from just outside noise?

I talked earlier about our business liaison program. It’s really important, and it’s very structured. It, over a period of over 20 years, they catch up - they try to basically weight the businesses they talk to relative to the weights of the Australian economy, they have questions that they ask that they can track over time how these things are moving and we can see that actually with, a history of this, that these things don’t do a bad job of tracking sentiment and activity in the economy in many cases. So we do that. I would say, too, that I get a lot of letters, and I read them, so I get a lot of views that way. We get a lot of - we do get organisations coming in to meet with us at various times. Some of the ones that more recently I’ve been - I periodically meet with, Lifeline, I’ve met with Beyond Blue, for example, ACOSS, these sorts of organisations that we wouldn’t necessarily be picking up in stock standard - our liaison team meet with these organisations as well, but we wouldn’t necessarily be picking that up in statistics. I think they’re important liaisons. All of this information we gather whether it’s in a structured way through the liaison program, whether it’s talking to people and hearing views, we take that away, we lay it across in terms of what we can see in terms of the data and we see if it basically seems to line up. Sometimes it does and sometimes it doesn’t.

One of the questions that came through on the app was just in relation to the upcoming federal election. I guess the question really is about the risk of government spending and whether you would care to provide any advice to the parties as we lead up to the election in terms of - I’m assuming a restraint in spending

I have no advice. The only comment I would make is that the thing that - and it was a point made earlier that the private sector at the moment is growing very slowly. Consumption per capita is declining, consumption is growing slowly. It’s true government spending is helping to keep the economy at least on an even keel at the moment. If it wasn’t there, if it wasn’t filling that gap, then things might well be much worse in terms of the employment market and what we have in terms of our forecasts is that we are seeing, as I said, inflation is coming back down to target with the current sort of fiscal monetary settings, and we think we can get there with this and without completely tipping the labour market off the edge. So I think that’s positive.

I have a couple more questions, but I just want to make sure I’m not missing anybody in the audience who has got one. No? You talked about outside voices, and I know that part of the role is engaging with your counterparts around the globe. Any interesting insights coming from them about how the global economy is going and what the broader trends are there?

Nothing I can say here.

It’s a pretty tight group

Look, the only thing I would say is I think that my colleagues at other central banks, some of them are lowering interest rates, they are happy enough with the way that inflation is coming down. But I think they are all remaining still a little bit alert to the fact that inflation might surprise on the upside. It doesn’t mean we’re necessarily going to backtrack, but I think it’s just natural for central banks to worry a little bit about the upside because as I’ve sort of said, and others have said before me, it is very - if you let inflation get away and inflation expectations get away it’s very costly to get it down. So even though we are trying to keep inflation - not lower - not completely toss the economy into the abyss to get inflation down, we’re trying to bring it down slowly, we do need to be alert that we don’t let inflation expectations get out of control and we need to be alert, therefore, to those upside risks. So I think it’s a balance and I think my colleagues overseas are all alert to those sorts of things as well.

Just changing tack and just reflecting on your time in your role as Governor, which has been about 15 months, and obviously you were Deputy Governor before that, but what - has anything surprised you about being in the main gig?

Not greatly. I mean, I did observe - I was only Deputy Governor for a little over a year when Phil was there, Phil Lowe, and so I sort of observed what was going - wasn’t great surprises there, and I have worked in a lot of different areas of the bank so there wasn’t any surprises to me in terms of various areas of the bank. I knew basically the business, I’d worked in most of those areas. I think what’s marginally surprised me is the great deal of interest in me, and the media interest. I saw it, but I don’t think I quite realised what it was going to be like. So I think probably for me that’s been the most surprising thing, that and the fact that everyone expects me to have an opinion on everything and sometimes I don’t. Yeah, that’s probably the thing for me. But having said that, I mean it’s a great honour to have this - be appointed to this position and I am surrounded by smart, dedicated, professional people who really do have the public interest at heart. I know sometimes - and certainly in letters I get people don’t believe that, but we do really have the public interest at heart and I’m very fortunate to be in this job.

I might just close then just by - I think you mentioned maybe you were glass half full already, but just as you look forward, multiple challenges, local, global, lots of uncertainties, but are you in fact glass half full?

Yeah, I am a glass half full person and my deputy reckons he’s the glass half empty person, so maybe together we’re about right. I am the glass half full person and I do believe that there are better times ahead for us. We’ve just got to get inflation down because there’s a lot of publicity about interest rates and people saying, you know, interest rates are hurting, but the thing that is really hurting, and I know I’ve said this a lot, but I just really think it bears repeating, it’s inflation that is hurting people. That is hurting absolutely everyone. So we need to get that under control. I’m confident that we are getting it under control. I know the Board will do what we need to do to get it under control. There’s a lot of people in Australia who have never experienced inflation before this most recent episode because we hadn’t had any in 30 years, really. It had been around about 2, bit less. So it’s no surprise, really, that people are hurting and they’re really shocked by all of this. So we need to get it back and the phrase I use, I want it in the background. I don’t want people thinking about it. That means we’ve got to get it back down into the band and I’m confident we can. There’s going to be challenges ahead, but I’m confident that we and other authorities, we can rise to those challenges.

Thanks very much, Governor. I think that’s a great place to finish. Please, yes. Thank you.