Transcript of Question & Answer Session Monetary Policy: Forward Looking and Data Dependent in the Face of Uncertainty

Thank you very much, Sarah. I’m sure you’ll all agree that was a very informative speech, and I feel like it’s one that people will be referencing and looking back at for many years to come in understanding monetary policy. I’d encourage everyone, if you do have a question, to please think about one, and I will seek to sort of give you an opportunity. Before that, I might kick off with a couple of questions of my own.

Sarah, I guess you spoke about the tension between being data dependent and forward looking and that there are consistencies. I guess one thing that sort of strikes someone that’s been following central banks for a while is that, for a while, there was a struggle to get the forecasts right. Whether that influenced policy is uncertain, but it certainly affected the way central banks communicated and created all sorts of problems around the world. Now it feels like central banks, and particularly the RBA, are a lot more confident in their forecasts, I guess. Would you agree? If so, what do you think has changed? Is it purely in the environment or are there some process changes to it? Also, does that give you more confidence in setting monetary policy now that your forecasts are hitting the mark a bit closer?

I think there are a couple of things going on. I think this is really in reference to, say, the last five years or so. The first, rather obvious one I think, is the pandemic. When the pandemic hit, it was a huge, unprecedented shock. Certainly in the context of forecasting, we don’t have a historical data record of another pandemic and its impact. At that point in time, it was very hard to know what was going to happen and how it was going to play out, with lots of big assumptions to be made. The models that we would typically use hadn’t seen this before, so they didn’t really know how to think about it, for want of a better description.

I think what’s happened over time, over the last few years, is that the models have learned and we’ve learned. The models now are more reliable because conditions are more like what they’ve seen before. So, we’re not in another pandemic, thankfully. We’ve learned a bit about how the economy is responding and we’re always doing that. There’s always more to do and to improve on, but we’re really focused on that. I think, to the comments I made in the speech, it’s more about the balance between what you learn from the data and how you think about it and what your models will tell you. That balance does change over time as you’re dealing with different situations and different conditions, but it’s always coming together in a forward view. So, I think it’s a combination of a few things. In terms of confidence about policymaking, I’m not sure that that’s necessarily changed. It’s always hard, it’s always a tricky decision and there’s always uncertainty to face. For me and my team, it’s about helping the Board with that in our advice and then the Board have got the tough decision to make.

Still on the forecasting team, I know you were in the room earlier when Luci Ellis, formerly of the RBA, was on a panel. Hopefully I do justice in paraphrasing, but I think her comments were suggesting that either her forecasts or the consensus of the private economists were viewing an economy where they thought consumption would be slightly weaker, where unemployment would be a bit higher and, therefore, I guess the upshot or the consequences of that is they would probably think there would be more easing, based on that the RBA seem to have a more upbeat or optimistic forecast. Is that correct? Also, do you have a sense of what’s causing those differences?

Forecasters are always going to have differences of opinion. It’s what makes the subject really interesting. We always love talking to one another and interacting and discovering where we agree and where we disagree. I think, on the forecasts, particularly around consumption, you can take a view on how much you think consumption is going to pick up in terms of growth momentum. We think it’s going to broadly match with income. If we saw a bit softer than that, that would be signs of maybe a bit of a cautious household; the savings rate would be lifting up if that happened. There’s also some trickiness with consumption around energy rebates and when they roll off, and so when households start sort of having to pay for all of their bills as opposed to receiving that rebate. Different assumptions about that can have an impact.

On the broader picture, and perhaps with the unemployment rate and the labour market, it’s true we’re a little bit below consensus, but we’re all actually pretty close together. We’re sort of holding at around 4.2 per cent over the forecast horizon; consensus is sitting around 4.4. So, they’re not so far apart, I don’t think. But these differences matter in the context of policy setting. Certainly if we saw things were a bit softer, if inflationary pressures came off a bit more than we were anticipating, then that would change our advice to the Board, and we’ll find out over the next few months as the data starts to unwind.

We are out of time, but hopefully name redacted will allow me the luxury of at least getting one audience question in. If there are any, please raise your hand. I don’t see any so I will take that luxury and just ask one bank a question, because we are at a banking conference. I thought Jonathan Mott’s comments were quite interesting about the low percentage of people on certain income – they were getting loans and it seems like all of the credit growth is happening more in investors that had higher incomes or more assets. We’ve also seen from bank data how most of the spending, as interest rates were rising, was from older households that had saved more money and were sort of benefiting from high interest rates. It just seems like there’s a real bifurcation in who’s lending and who’s spending. I know it’s not the RBA’s remit, but I’m just wondering what the RBA’s observations are? I know the aggregate comes out, but parts of the aggregate are quite bifurcated. I just wondered if you had any thoughts on that?

Yes, and it’s something that we’re paying very close attention to. We’ve been looking at the distribution of how households have travelled through the recent period for some time now. We see the same in the data – that lower income households have struggled more through the current period. We think that’s because they tend to have lower buffers – so less savings in the bank – and they might be having to spend more of their income anyway. So, faced with a high inflation environment, it’s really tough, and they’re having to make some really tough choices. We know as well that those with a mortgage, particularly those that might have purchased relatively recently, who have high levels of debt, or high LVR and high debt to income ratios, again, are facing the most substantial increases in their repayments relative to income. We know that times have been pretty tough for them. We don’t see concerns from a financial stability perspective around arrears and things like that. But that doesn’t negate the fact that it’s been really tough for that group. Then, as you said, you’ve got the contrast of households who perhaps don’t have any debt anymore. They might have paid their mortgage off already and may be a bit older. If they’ve got savings in the bank, then they’ve been beneficiaries of higher rates. Those distribution impacts really do matter. We care about the aggregate, because we know that the aggregate is what drives, ultimately, inflation outcomes, labour market outcomes, and that’s our mandate. But we are very mindful of this, and we are now actually exploring how distribution might impact the transmission of monetary policy. So, maybe in a few years I’ll come back and do another speech on that. So, for us, these things matter through that particular lens. Then, obviously, our colleagues in Financial Stability are looking at that. But it’s not to negate what’s happening. There are always distribution shifts across the economy. They’ve perhaps been magnified in the recent period.

Excellent. Thank you, Sarah. I think we are out of time, so please all join me in thanking Sarah for her excellent speech.