Speech Interview with Bloomberg Australia

Such a rare treat to speak to you or to speak to anyone from the RBA, so we appreciate your time. I think what that introduction sort of left out is the fervour we have felt, this nationwide applause, sigh of relief. Do you feel like a bit of a rockstar this week?

In terms of what? I didn’t hear the introduction. Do you mean in terms of the labour data?

No, in terms of the first rate cut in four years.

Oh I see. Look, I mean, central bankers are probably not the people you want to invite to your rave or your dinner party, to be absolutely honest. We are paid to worry, and we are paid to be serious about the economy. So I wouldn’t say there was celebration in the RBA about this. We did what we always do – we look at the data and try to form a view about where monetary policy should go.

Was there consternation though? I do wonder in that room how hard was it to get to consensus given that there are still data points that would support a hold? Perhaps in a different environment?

Well look, it’s interesting, isn’t it? I am sure you are reporting this – the markets had formed a view that it was more or less a slam dunk that this would be a rate cut. The debate in the room, as the Governor Michele Bullock said earlier this week, was more balanced and that there was, as there always is, an exchange of views about the case for a hold and the case for a cut. And as you say, there were factors on both sides. We reached clear consensus on the decision in the end. But I think it would reassure you, and I hope it reassures markets too, that we are not sort of saying – oh well, the answer’s already there, so we follow the market and we just do what people are expecting – we look at the economics, and we make a decision.

There is nothing pre-determined about this particular trajectory of this easing cycle, for any central bank at the moment. It is interesting – we heard from the Treasurer that inflation is in the rearview mirror. With a lot of the risks – be they global tariffs and counter tariffs or election-year spending – do you think that’s going too far?

The Treasurer can speak for himself. There’s been a great deal of positive news about inflation in Australia. Just to remind you – and I know you know this – we adopted a somewhat different strategy to tackling the inflation spike in Australia to other countries. We raised interest rates to a level we thought that were restrictive, but we didn’t raise them to the sorts of levels that other central banks had done, precisely because we wanted to protect the gains in the labour market. And I think as you’ve been talking about earlier – labour data out today show that the labour market in Australia has been incredibly strong. But inflation has also come down as well. What we said in December is that we would form a view about whether we’ve become sufficiently confident that inflation would come sustainably back to target – to the midpoint of the target two and a half – to begin easing. We did reach that position of sufficient confidence, but this is not a done deal yet. The underlying rate of inflation is still 3.2 per cent, which is slightly above the band. The headline rate of inflation is in the band. And so although we’ve removed some of the restrictiveness that we had in policy, there is still restrictiveness in the system, and we still need to see a bit more good news on inflation coming back to that midpoint.

And the jobs data was quite nuanced, right? Because even though unemployment ticked up, even though we saw more full-time jobs than expected being added, participation is still really high. The wages data this week showed further slowing. And does that tell you that some of that robustness might start to fade in the coming months?

And which bit of it shows you that it might fade?

That we’re starting to see the signs of perhaps a little bit more vulnerability in the labour market. And of course, Australia’s not the only one that’s dealing with that scenario.

It’s quite hard to see bad news in the latest employment data. They remain very strong. I think the debate about the labour market is a slightly different one, which is although we know employment has been growing strongly, inflation has been coming down. And as you say, wage inflation has been coming down too. So, there’s a very lively debate about whether that employment growth leaves us with less capacity in the labour market or a bit more. If there is a bit more, then inflation will come down more quickly than we’re predicting. And that’ll be good news because it will mean that we can adjust policy more rapidly. But we need to see more information on that, I think, before we before we can be sure.

How does a change in immigration numbers potentially affect that, particularly with the labour market, but broader growth in general? Because we are expecting that regardless of who wins this year’s election.

So I tread into issues of migration with some tentativeness as a central banker. Obviously, Australia for long periods of time has had a model of substantial immigration as part of its growth model and it’s done very well out of that. In terms of the inflationary implications of immigration, broadly speaking, our view is that it’s a wash. So, every person that comes into the economy, in general, they increase the labour supply, which pushes down on inflation. But they also have to purchase things and they have to consume things and they have to spend money, and that increases demand. And broadly speaking – you can debate the details – those two effects probably factor out, leaving inflation roughly where it would be otherwise.

I do want to get your view on the property market. I know it’s not an RBA topic, but it is a national obsession, of course.

I’m a renter, I should say. That probably immediately puts me in the same category – I’ve got nothing at stake here.

But it is an ongoing problem, and it is something that feeds into the affordability and the cost-of-living crisis. Is there a balance there? Is there a policy balance that you can see?

Well, I think one of the quite encouraging bits of news in the latest decline in inflation is that some of those metrics, whether it’s dwelling costs or rents, have started to come off inflation in those two amounts. And that was one of the surprises in the undershoot of inflation that we and the market both saw in those numbers. And so, there is some cooling there. I hesitate to say that, you know, where this is going to leave us in two- or three-years’ time. And clearly there are major structural challenges in the Australian housing market that I’m not going to wade into. All we can do is, you know, take as an input our best read of what’s going on in the housing market.

Not two or three times, but two or three years in the future. But let’s look forward to April. If I put it to you that the monthly CPI data that you get – maybe the two readings beforehand – show that first quarter trimmed mean is going to come in under the forecasts from this week, would that trigger a move?

No single piece of data will ever trigger a cut or move. We get a lot of data in every month from surveys, from hard data, from our liaison people that are out around the country talking to businesses. And our job is to put all of that information into a hopper and form a view about the outlook for inflation. Clearly, the inflation numbers are important. As you know, there are challenges with using the monthly data in Australia because the monthly indicators are not even called inflation numbers, they are partial reads on inflation. We only get a full, 100 per cent read on inflation once a quarter. That causes us to aim off a little bit from the monthly numbers. But look, I mean if they come in weak, that will obviously be important for us. And as I say, I won’t quite say what’s not to like here, but a world in which our forecasts for inflation maybe being a little bit above on the basis of the market curve, if we get news on the downside of that, that’s a cause for celebration.

Do you envisage a challenge where rates stay the same – because there is, of course, so much caution, uncertainty – inflation continues to come down and you get that de facto financial tightening scenario? Is that a worry?

Well, it’s interesting actually, because our forecast, which shows inflation stabilising slightly above the midpoint, has got some interest. Point number one is that’s conditioned on the market curve, which assumes that there will be three or four more cuts. But one of the pieces of information that the Board reviewed before making its decision was an alternative version of that forecast, which looked at what would happen if we held interest rates constant – which I think is your question. And under that forecast – and we didn’t publish this, but I can tell you this is what it looked like – under that forecast, inflation didn’t stop at 2.7, it undershot the midpoint. Not by a lot, but by a little bit. And that factor alone was quite an important input into the Board’s decision. So, holding interest rates constant would have led inflation to undershoot, and that was an important part of our discussion.

Where do you see the neutral rate at the moment? There’s a note out from CBA this morning, modelling and coming out with it being around 2.9 per cent for the nominal neutral.

Well there’s a chart in the Statement on Monetary Policy that shows the range of estimates of the neutral rate and it runs from something like 1 to 4. Now, three percentage points of difference in such an important macroeconomic variable is pretty useless, to be honest. It’s far, far too vague for us to put a great deal of weight on that. We show that chart, I think to make two points. One is that it is very uncertain and if anyone ever tells you – and I don’t think you’ll ever get a senior central banker to tell you I know what neutral is going to be and it’s two point X or whatever – it shows how uncertain it is. But what they all show as well is that we’re clearly restrictive. And there has been a debate about that, too. You know, can you afford to cut interest rates if you don’t if you’re not sure you’re clearly restrictive? We are sure we’re clearly restrictive, both before the rate cut and now after it as well. But I would not want to put a number on it within that range.

Do you feel that markets, investors are on the same page as what the RBA is putting out now?

Well, no, but they never are. So let me let me clarify what I mean by that. I spent decades of my life in financial markets and I very much value them – listening to them, talking to them, being challenged by them – because markets, as you know, are not one view. There are many views coming together to trade to get to a single outcome. And so we learn a great deal from speaking with market participants and we learn a great deal from market prices. If you look at the interest rate curve in Australia at the moment, you will see still priced several further cuts. And all we were saying in our forecasts was that on our judgment, if you put that rate curve into our best guess about the economy, inflation is probably going to be a little bit above target. And so we don’t have the confidence that the market does that that number of cuts will bring inflation sustainably down to target. But let me be clear, we could be wrong. And I know it’s sort of a crime for central bankers to say we could be wrong, but I think we should be doing it more often. And in this case, if we’re wrong and the labour market shows it has more capacity and inflation comes through weaker, then policy will respond. So, I don’t think – I’m not abashed about that point – clearly, the market currently thinks that there will be greater capacity in the market. That’s not our central view, but it might be right. And if it is, we’ll learn from it.

To that point, Governor Bullock says that she’s more of a glass half full person, that you’re more of a glass half empty person.

She said that?

Yes, she did. She did quite recently. And I guess I put my question to you – as I guess, you know, perhaps the resident pessimist, that’s how she’s characterising you – what do you see as the biggest risks facing the economy?

I’ll tell you why she said that, actually – because she was given the, you may know this, by Phil Lowe when they handed over a cup that I think was his, which said glass half full. And I thought it would be rather funny to get a cup that said glass half empty. She didn’t actually think it was very funny. So I’m not quite sure about that. In terms of risk – look, I mean, number one, I’m going to be boring, but I’m going to say it anyway. The focus is still rigorously on inflation. There are risks in both directions to inflation; we’ve spent most of the interview talking about that. We’re not going to somehow stop worrying about other risks in preference to that. That’s our number one focus. We talked about the uncertainties around the labour market and the possibility that there is greater capacity. That would be a good risk to have, if it happens. We haven’t talked yet, I guess, about the global economy, and perhaps that’s where you’re going. Obviously things are changing and I think in a number – I’m sure you spend a lot of time talking about this on your show – anyone who tells you they know how this is all going to shake down in the long run is wrong. We’re all learning and things are moving very quickly. I think one of the important points I’d say is actually that very uncertainty about trade policy and about outcomes in general globally, not exclusively in Australia, may itself have an effect on activity in Australia. So, if you’re a firm or if you’re a household planning to make an expenditure that in some way depends on a certain outcome in the global economy and you know that – who knows what’s going to happen in the next period – you might just wait. Now, waiting is very sensible for an individual, but it could be really bad news for the economy. So, I think for me personally, one of the factors in the decision this week was actually a sense that, look, maybe that pervasive uncertainty itself may have some short-term depressing effect on activity. If you want to think about how the various initiatives that are being mooted around tariffs and non-tariff trade policy are going to affect Australia, there’s a huge range of outcomes – really huge. How big are the tariffs going to be? What are they going to be faced on? Will there be retaliation? Will it be in the main economies that we trade with, or will it not be? You plug those various uncertainties into a model and you can get almost any outcome. It’s not good news for Australia if there’s a widespread depression in global activity; that’s not what the financial markets currently expect to happen. But Australia has thrived when the global economy has thrived and it’s struggled when it hasn’t. So, we are very reliant on continued good global activity. The implications for inflation are less clear. Normally, if you impair the supply side of the economy, you’d expect inflation to rise. However, if it cuts demand, inflation may fall. So, although I think it’s pretty clear that tariffs – if they push through and they have a material effect on global activity – it will probably reduce activity in Australia, its impact on inflation is less clear. So, you know, everyone is crunching through numbers. We have a section in our latest report that talks about various scenarios. But the truth at the moment is you pay your money or you take your choice. We are waiting to see how this evolves.

Is it more of a broad global risk for you or is there still specific risk when it comes to China? Because, you know, traditionally Australia’s growth has relied so much on the strength of China. We know that they’re moving away from industrial production, from the property market. That’s not going to improve meaningfully anytime soon. Does that have strong implications or are we well diversified?

It could do. I mean, I was talking about this with your colleague earlier. I think if you look at Australia’s long history, Australia has actually been incredibly effective at responding to the changing shape of demand in the global economy. You talk about traditionally our links with China. Of course that’s true in recent years, but if you go back 20 years, 30 years, 50 years, 100 years, Australia’s actually specialised in a whole series of different activities and done very well out of it, based on where the demand in the global economy is. If the demand in the global economy moves on from steel being sold to China, then Australia will need to think about adjusting in that respect. And as I said, I have some optimism actually – this is not glass half empty – that Australia will respond to that in due course. But look, we are keeping a very close eye on Chinese activity, as I know you are too. It’s been challenging in China in recent years, with the demand growth and the adjustment in the property sector. One thing I would say is I think that steel production and iron ore exports from Australia have held up surprisingly well. Two or three years ago you could see all sorts of people drawing charts with big lines going down – you know, peak steel is far behind us. Actually, demand for steel has held up. And we have people in China, who are based in the Australian Embassy, that go around and talk to a very wide range of Chinese businesses and thinkers and academics and policymakers. China’s been quite clever about diversifying itself in its use of steel, away from the traditional uses and towards, you know, in data centres, for example. I suppose we all go – AI means you’re going to need a great deal more data centres that still need steel. So, the death of steel is probably foretold a little bit too early sometimes. But look, if we have to adjust, we’ll have to adjust.

And before we go, given the confounding global circumstances and challenges, would you rather be a central banker here in Australia or at the Bank of England?

I’d rather be a central banker here, actually. It’s been a fantastic year so far. And it was quite lively, back in the UK. I was at the centre of the LDI crisis a couple of years ago, so a little bit of calm can be helpful. But this has been a huge privilege to come here. It’s quite rare for non-nationals to be asked to be senior policymakers in the central bank, and I’ve hugely enjoyed it. But it’s also a very important responsibility that we’ve all been given to try and navigate Australia through this difficult set of circumstances. And the ability to live in Australia, to live in Sydney and travel around this great country is brilliant, to be honest. And so yes, I am glad – and hopefully Bloomberg doesn’t reach the UK, does it? Andrew Bailey won’t be watching this, I’m sure. But if it does – sorry Andrew. But no, definitely an upgrade trade.