Transcript of Question & Answer Session Fireside chat at the AFSA Annual Summit Panel

Tim Beresford (Chief Executive, Australian Financial Security Authority): I’m delighted to welcome Michele Bullock, Governor of the Reserve Bank of Australia, for a fireside chat. Michele commenced as the Governor of the Reserve Bank on 18 September 2023. Michele is the chair of the Reserve Bank Board, chair of the Payments System Board and chair of the Council of Financial Regulators. Prior to her current role, Michele was the Deputy Governor of the Reserve Bank and has had a variety of senior management positions at the Bank. She was the Assistant Governor (Financial System), Assistant Governor (Business Services), Assistant Governor (Currency), Adviser on the Currency Group and, before that, Head of Payments Policy Department. In this session, Michele will share her insights into the current economic climate, with a focus on systems stability. There will absolutely be an opportunity to ask questions, and you’ll see the events team roving with mics. Please, when asking questions, speak clearly and share the name of your organisation. Please join with me now in welcoming Michele to the stage.

Lovely to see you, Michele. Thanks for joining us.

Thank you.

Just to kick off with an opening question, obviously, in the economic statement or the outlook that was raised in May this year, the RBA announced that it was expected to be subdued for the remainder of this year because of high interest rates, cost-of-living pressures and decline in household wealth. Just to open up the conversation, can you just give us a bit of your current view of the economic climate, as we head towards the end of ‘23 and into ‘24?

Sure, Tim. Thanks. A fireside chat: the weather actually lends itself to that, I think. Look, I’d have to say, first off, I think it’s a challenging economic environment. What we’re observing is that we think monetary policy is starting to bite. We’re seeing a slowdown in consumption and we’re seeing, in fact, per capita consumption decline. And what, in fact, is keeping aggregate consumption growing is population growth – as many of you know, we’ve had quite a lot of immigration post-pandemic – but generally we’d say consumption is pretty subdued. We know that a lot of households are finding it difficult because interest rate rises have started to eat into their spare cashflow, and I can talk a bit more about that a bit later, if we like. We also know some businesses are finding it more challenging. As demand is starting to slow, businesses are finding it more difficult to pass on cost increases, and we know that there are underlying cost increases from things like energy and food and interest costs and rent; these sorts of things are also impacting businesses. So it is very challenging for a lot of parts of the economy.

On the other hand, though, there’s a few things that are suggestive that it’s going to be difficult to get inflation down. Inflation is declining – we know that – and just to remind everyone here, of course, that the Reserve Bank’s key mandate, it’s key central mandate, is bringing inflation down to a target band of between 2 and 3 per cent; that’s what we aim to do. Now, inflation peaked at the end of last year at about 7.8 per cent. Now, we’re not Robinson Crusoe here. Everywhere around the world there’s been an inflation outbreak, and that’s largely, initially, due to what we call supply constraints. During the pandemic, the supply chains got mucked up at the same time as there was sort of fiscal expansion, so governments were spending money to try and keep their economies afloat. Lots of demand with supply issues of goods in particular – couldn’t get goods around the world quickly enough, we couldn’t produce them. What happens when supply is constrained and demand is strong? Prices go up. And that’s exactly what happened. And just as things were unwinding there, then we had the Russian invasion of Ukraine and energy prices shot through the roof. Now, it hurt Europe and some other places much more than it hurt us, but it did, nevertheless, have flow-on effects.

So we’ve had all these impacts, which have resulted in inflation rising. And what we have now is that headline inflation, so the one that sort of sticks in people’s mind, tt’s coming down. It was 7.8 and it’s now 6; we expect it to come down further over the next couple of years. But now what we’ve got is a services inflation: inflation in things like takeaways, hairdressers, restaurants, those sorts of things. That inflation is running at a bit over 4 per cent, so it’s above our target and it’s pretty sticky, and that’s what we’re observing overseas as well. So we’ve got a slowdown in the economy, we’ve still got inflation a bit sticky, and we’ve also got housing prices increasing, again, which usually gives people a little bit of confidence: you know, their wealth is increasing. We’ve still got a very tight employment market. There are signs that the labour market is turning, but the labour market is still very tight, and that’s putting pressure on wages. So, all these sorts of things are – it’s a real balance here at the moment. As I said, some people are hurting, consumption is slowing, at the same time, you’ve got these other factors which are potentially keeping inflation a little bit sticky and a little bit elevated.

So, this is really what we’re contending with at the moment. And we, as the Bank, what we’re trying to do – and the previous Governor, Phil Lowe, he described it as the ‘narrow path’ – we’re trying to bring inflation back down in a reasonable amount of time, while preserving employment gains, by not really bringing the economy to its knees so that lots of people get unemployed. We’re trying very much to do it in a way that preserves the employment gains. So that’s sort of a summary, and we can pick up really what –

Yes, thank you. And, look, just thinking about a shock that’s happened in recent days / weeks: Israel. You’ve mentioned the Ukraine War and the impact that had with prices –

Yes.

The sense of that shock, as it feeds into the system.

Yes. So they just keep coming, really. So the initial response to that shock was oil prices rose again. One of the things you would have noticed – I’m sure you’ve noticed, I’ve noticed – is that the price of petrol, even prior to that, had been going up. So that’s likely to keep oil prices elevated, as people are a little bit unsure about how it’s going to impact the supply of oil. At the same time, there might be a concern that all of these sort of defence issues, these sort of war issues, might, in fact, lower growth in places like Europe, and that’s a challenge as well because, if that slows the world economy, that doesn’t help either. So it’s really, again, a bit of a balancing act here, the potential implications. I think, at the moment, we’re a little bit more worried about the potential inflation implications of this. Typically, when we think about shocks to supply that increase prices, you’d think: ‘Well, that’s probably okay; it’ll wash out.’ But the problem is that we’ve just got shock after shock after shock, and the more that that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking. And the more people adjust their inflation expectations, the more entrenched inflation is likely to become. So that’s the challenge.

Yes. By all means, people, feel free to ask questions. I’ve got a litany and a number, but I’m very open to people to put your hand up. But whilst there’s no names or hands, I’ll keep going.

So, look, Michele, you’ve talked about the supply side shocks, and that’s causing some reflection about what that means, in terms of the inflation number and how we get that down. Talk to me a little bit more about the demand side or what you’re seeing on that; just unpack a little bit more about it.

Sure, yes. Okay. So, as I said earlier, we are seeing demand slow and we’re seeing it in consumption. Consumption, as I’ve said, actually, per capita consumption is declining, so that means that every person in Australia is consuming less than they were a few months ago or a year ago. But because the population is growing, then that is actually meaning that aggregate consumption is being held up. Now, the sorts of things that we are seeing people start to cut back on are discretionary goods and services, which is part of the way through which monetary policy works its way through the system. That’s what we expect, so this is entirely what’s to be expected.

We also know that monetary policy operates with lags, so we don’t think we’ve seen the full impact of interest rate rises yet on consumption, so we are expecting to see discretionary consumption decline further. And, if you talk – so we have a Business Liaison Program, where we go out and we talk to businesses, and the sorts of stories we get from them are that people have smaller basket sizes, so they go in and they buy less than they did, or they’re trading down to home brand or something like that. So there’s signs that people are taking measures at the margin, and this would be particularly, I think, the case for people that are being impacted by higher interest rates, because if they want to make their mortgage payments, they’re going to have to cut back on some discretionary spending.

We also know from our recent Financial Stability Review –, we released that a couple of weeks ago now – and we did a good bit of analysis in there about looking at distributions of individuals and how they’re coping. And there is a small but not insignificant group of people who look like their income is not going to be able to cover mortgage payments and their essential expenditure. So, there is a group of people that really are hurting here, and that’s going to be very challenging for them.

There’s one caveat to all of this, though, and that is that, during the pandemic, Australians as a whole built up a substantial amount of savings, because we couldn’t spend. We spent what we could on, you know, computer monitors and new televisions and these sorts of things, but we couldn’t go out and we couldn’t go to restaurants and the end result was that the savings in the Australian economy has been a substantial amount of saving, and it’s still there; it hasn’t been used yet. So it’s quite possible that some of these households that are under stress might have buffers of savings that they can use to assist, and we have some signs that they’re using those buffers. But it’s also true that, with interest rates rising, to the extent that those savings buffers are in offset and redraw accounts, they’d rather keep them there, because they’re not paying the high interest rates on their mortgage. So that’s, I think, sort of the way we’re seeing the consumption and the challenges for households unfolding at the moment.

Good morning. I apologise to take you backwards, but I’d like to explore the word ‘shock’. ‘Shock’, in common terms, is something you don’t know is about to happen and has a negative impact. In fiscal terms, what can the RBA do where a shock becomes just simply a change? For example, Israeli-Palestinian conflict is not unknown; it does flare up. So why are we considering that a shock? Why are we not prepared for that?

So I think, a couple of things. It’s not unknown, but I think the extent of it was a little bit and the timing I think was – the thing about shocks sometimes is that you just don’t know when they’re going to occur. So some shocks are things that come completely out of the blue: I think the Russian invasion of Ukraine, possibly; the pandemic, definitely. The concept of shock in the case of the Israeli-Palestinian conflict is, yes, it’s been simmering, it’s been simmering, but I just don’t think anyone expected it to happen exactly when it happened. Now, it wasn’t as big a shock as either of the previous two, that’s true, but it just adds a little bit more on the top of two other previous shocks. It just adds a little bit more uncertainty, people aren’t sure how long it’s going to go, so now it goes into sort of the ‘uncertainty’ bucket rather than the ‘shock’ bucket, if you like, and how do we respond to that? So, we can use the term ‘shock’ loosely, I guess. But usually they’re things that are one-off events that have a reasonably clear impact on something that you weren’t necessarily expecting right at that moment, is the way I would think about it.

Thank you, Governor Bullock. I was wondering, just looking at the insolvency statistics and the arrears data for mortgages, they’re still incredibly low. Most of them are well below pre-pandemic and, to me, that is surprising. Has anything surprised you about the resiliency of the consumer or of the business sector?

I think – well, yes. Number one, insolvencies and arrears and all of those sort of indicators all went to historically low levels during the pandemic and, partly, it was low interest rates. And, partly, I think it was the way that the banking system dealt with people that were in hardship. They took a very – I remember coining the term ‘Team Australia’. Everyone was working together to make sure that we didn’t let anyone try and slip through the cracks, so I think there was a large chunk of that as well. We are starting to see them rise a bit now though, and I wouldn’t say that’s surprised me. I think, once you marry that with the fact that, just like households, a lot of businesses built up substantial savings buffers. So the households and businesses came out of the pandemic, somewhat ironically, actually, in much better balance-sheet shape than they went in. Now, that’s not to say, of course, everyone; but if you look in aggregate, they all came out a little bit better than they went in. So, I’m not surprised, in a sense, that arrears and insolvencies – we are starting to see them tick up, but they’re coming back up to more historical levels, average levels, and that’s a good thing. And at least if we can slow the economy without tanking it, if you like, then that will be good for those sorts of indicators, I think, so – hopeful.

Hi, Michele. I’m a restructuring practitioner and an insolvency practitioner, so I wholeheartedly concur with my surprise at the level of insolvencies at the moment. Let me start by saying congratulations on your recent appointment, by the way, and it’s possible there couldn’t be a more interesting time for you to be taking the charter. I don’t want to jinx it but, hopefully, nothing else is going to come up. I just want to explore that comment you made about buffers before. We hear a lot about the resilience in spending, particularly in consumer spending and household spending, and a lot of that is attributed to savings. Are we looking at potentially a much sharper decline once those are all used up, because they can’t go on forever? It’s been more than 12 months that we’ve been in a more normal environment, and we’ve had revenge spending and people going overseas and spending up on travelling and spending in restaurants, and particularly food and beverage spending has been very, very high. And, personally, I’ve noticed that it’s – I’m very surprised that we’re not busier in restructuring by now than I thought we would be. Is that something that factors into your consideration: that all this saving is going to be used up at some point, and does that mean, with where our settings are, we might be heading for a much sharper decline? By the way, I’m not saying that hopefully as a restructuring practitioner.

I guess a couple of points. The first is that, at an aggregate level, the savings rate is still positive. So Australians are still saving, they’re just not saving as much as they normally would. And what we observe in particular with respect to households is that, in normal times, people are usually paying off more on their mortgages than they have to. So, if you like, they’re saving; they like to save a bit more.

What I would say at the moment is there was around about, I think we calculated around, about $300 billion in excess savings accumulated over the pandemic period, and that really hasn’t been run down yet. And it’s actually the million-dollar question whether they will run it down, or will they regard it as: ‘Well, no, this now is part of my wealth’. And there are some signs that people are starting to run it down a little bit, but there doesn’t seem to be this wholesale, at the moment, spending of ‘all this money that I’ve suddenly got in my account’. And I think there’s an important reason for that. A lot of those savings, not all, but a lot of those savings are in offset and redraw accounts with respect to mortgages and, as I’ve said, people have a tendency to want to pay off their mortgages more quickly. And, if anything, with higher interest rates on their mortgages at the moment, holding those savings in those offset and redraw accounts is actually very beneficial for them. They’re basically not paying 7 per cent on the chunk of money that they’ve got sitting in those accounts. So, when I talked earlier about the potential impact of buffers, that’s sort of what we’re thinking about. What are people going to do with them? They may spend them; they may not. Now, I’d highlight the United States where, actually, it seems that the United States has, in fact, run down its buffers, it’s running down savings, whereas we still are not doing so and the indications, so far at least, are that there’s not a wholesale running down of buffers. Again, that’s in aggregate. There will no doubt be households that are doing that but, at an aggregate level, there aren’t any indications yet that that’s happening.

Hi. I’m a Financial Counsellor and Strategy Lead with Mob Strong Debt Help, the First Nations National Debt Helpline. I just want to go back to something you said. You said that Australians have built up substantial savings, and you also said that it will be about meeting your mortgage and cutting back on discretionary spending. It’s my experience that a lot of First Nations people are generationally behind in asset building. That’s because of colonisation policies, and so there isn’t anything left in discretionary spending. If you’ve been out to remote First Nations communities, you’ll know that there’s only one option for a store, so there is no option to cut back to a home brand product. It’s the product that’s available, or drive five hours to find something. So my question is, on the statistics you’re offering and the aggregates you’re offering, do you keep track of the First Nations people who are disadvantaged in this situation because we’re generationally behind?

It’s a very good question and I fully understand it. We don’t have statistics that break it down to that level. We have some statistics that break down mortgage holders, so we have some through particular financial market instruments, we have some data on that. And, when I was talking earlier about some of the analysis we’ve done, I was referring to analysis that we use those data for. But they don’t actually talk about First Nations or anything like that, so we can’t actually break that sort of information down. Now, it’s possible that there are some data collected on that for specific purposes that I’m not aware of, but I absolutely take your point, but we can’t drill down … we don’t have data that allow us to drill down to, specifically, the issues you’re talking about. I would come back, though, to the point that we have one instrument in our control, which is the interest rate, that’s all we have, and we set policy according to aggregates. We’re conscious and we do look at the distributions but, ultimately, we have to set policy according to aggregates and what that will mean for inflation in aggregate. Because the other thing I would add – and this goes to First Nations people as well and low-income people in particular – that inflation hurts low-income people the most. So, for us, the imperative is to get inflation down because that will help low-income people much, much more. And the other point I would make is that low-income people have benefited most from the strength in the labour market; their wages have risen the most and they’ve achieved employment the most. Now, I accept that, in remote communities, that probably is not the case. But, again, back to my point, I think we have one instrument. We will do our best to keep inflation low and stable. We want to bring it down; that will benefit all communities. And the government, with it’s much more targeted tools, is really the organisation that … the government is the one that has to target those policies to the very disadvantaged people you’re referring to.

Hi, Michele. I lead the AFP’s criminal asset confiscation command and the government-established task force, and Tim and his team are wonderful partners, managing all the houses, planes, crypto etc that we seize. Just a sort of a slight tangent but more probably to your leadership and the media aspect to it. I recall, I think the Friday your appointment was announced, looking at the mastheads, the major newspaper mastheads, on the Saturday morning, including the ‘Aus’ and others, to see the reception in terms of that announcement. And it was pleasing to see, I think, a universal sort of tick in that regard. But in terms of the media, it was sort of almost to the point of farcical, surely, that your predecessor almost became the Australian public enemy number one at times. And what is the so-called ‘media’ is so broadly defined these days and it’s all about clickbait and stuff like that and just sensational sort of headlines at times, rather than the deeper analysis we might have all sort of grown up with, I think. And the reason I was looking at the media reception, I was thinking, because you, as a leader are now coming into your role, and particularly at this time, having this very narrow path and this sort of confluence of challenges may be an unprecedented kind time, I’m interested in your – and a lot of us all have to do a lot of media in our roles, building that bridge to community, connecting with our stakeholders and giving that reassurance. I’m interested if you could just sort of share as a leader what your – and I’m sure you’ve thought about it – what’s your media strategy going to be. It seems like less is more in these times but, obviously, you’ve still got to be out there. And I don’t think Australia has heard of the Reserve Bank as much as we ever have in more recent times, with inflation and with interest rates and things like that. So how you’re going to navigate that communication with the community and stakeholders through the media – what’s your sort of thinking and strategy there?

Well, I’ve hopefully got lots of good advisers that will help me with that. I wouldn’t say it’s a media strategy, as such. I mean, I think what we want to do is communicate with the Australian people, and the media can help us to do that, but I wouldn’t say we are aiming at media. So, for me, the most important thing is to try and improve our communication. We try very hard to communicate with all levels of people. We communicate with financial markets; we communicate with journalists; we try to communicate with people who don’t have much economics training. We try to do all of that, and I’m going to continue to try and do that. The media will be a conduit for that, but I wouldn’t say I’m aiming at the media and I want to be as clear and put thing in as simple terms as I can, without sort of making it sound simpler than it is, because it’s not simple. The media have been very focused on the fact that interest rates are rising and there’s a certain portion of the community who are very hurt by that. But there’s a large portion of the community that are not impacted by rising interest rates either, and some people have benefited from rising interest rates. And this is part of the issue; some people are benefiting and some people aren’t. And interest rates, rises in interest rates, they impact people in different ways. They have distributional impacts. We can’t impact that; the government can address those sorts of things. So, I think one of the things about the independence of the Reserve Bank – and I’m sure Phil would … I think he said this and he would concur with it – is that, because we are independent of the government, we can take difficult decisions. And, yes, he did cop a lot and I think he got knocked off, though, by Alan Joyce.

I’m a financial counsellor with the Financial Rights Legal Centre. I work on the National Debt Helpline. I’m glad you asked this question. I’ve got a follow-up one and it’s about back to inflation. It seems to me inflation has a lot to do with expectations, whether elevated or low, for a very, very long time. So, what can the RBA do, or what does the RBA do, in order to help manage those expectations in the community without, of course tipping over into some of the silliness that we saw with Phil?

Yes, sure. Thank you. Just as an aside, pre-pandemic, I actually went into the National Debt Helpline and I sat on a few calls, and you do great work, so well done.

This is the million-dollar question. At the moment, inflation expectations for the very near term, like the next year, are elevated; they’re high. And that’s not unexpected, because a lot of the things that are in people’s faces, when they are doing their shopping or whatever – petrol prices, food prices, rents – all these sorts of things are going up. So inflation expectations are elevated. What we know so far, though, is that, if you go out a bit further than that, if you’re looking at financial markets, expectations of inflation – so these are the people who put their money where their mouth is, if you like – they’re around about 2½ per cent. So they’re reasonably anchored. So the challenge is to bring inflation back down in a reasonable period of time so that those expectations a year or so out don’t get de-anchored; that’s the challenge.

Now, if inflation expectations continue to be really elevated year after year and we don’t bring inflation back down, that will mean that it will be harder to bring it back down in the future. So how do we manage that? 1. we have to be very alert to it and we have to alert people to the fact that, if inflation continues to be higher than expected and the risks are on the upside, then we’re going to have to respond with monetary policy; that’s what we need to make people understand. Now, at the moment here and in most countries overseas, most people believe that. Most people believe that central banks will do what it takes to get inflation back down to 2–3 per cent, and I’d say that’s still the case here in Australia as well. But the longer inflation stays above target and the more people observe it happening in their day-to-day lives, the harder it will be. We think we’re running that narrow path at the moment, but we’re very alert to the upside risks because that would be the worst for all worlds, really, yes.

I’m a registered trustee and liquidator from RSM. I’m just interested in your opinion on the housing market. Often, some people view it as a Ponzi scheme. Unlike America, Australians do everything they can to try and save their house. Obviously, interest rates directly impact on that and, as we know, predominantly the younger people who bought in the last five years since COVID are really, really struggling, and we’re seeing that as well. So I’m just interested to see whether the government tried to increase supply and, also, we’ve experienced a lot of builders, major builders, go under, and that’s had a huge ripple effect down to the subcontractors and down to the mum-and-dad investors, homeowners, so …

Someone asked me earlier what surprised me. Actually, the housing market has surprised me a bit. So, if you remember the history, when COVID first hit, housing prices actually declined and then, after a few months, they shot up, and they shot up about 20, 25 per cent; they really rose very, very sharply. And this was around the world, I should add; this happened all the way around the world. Then, when interest rates started to rise, housing prices started to decline, and we thought that they would continue to decline, this is of the existing housing stock, if you like. But, actually, they bottomed sooner than we thought and, basically, now they’re back to where they were in their peaks of the pandemic.

Now, there’s a few things going on here, I think. One is that, as you alluded to, there’s difficulties in the construction of new housing at the moment. There’s a pipeline there; there’s an unfinished pipeline of housing stock, detached housing stock, which because of supply chain issues, inflation in construction costs, shortages of labour, particularly subcontractors, that isn’t being finished. And so the cost of new housing has risen quite sharply and that, I think, has made the equation between ‘build a new house’ or ‘buy an existing house’ change, somewhat. So people have sort of thought, ‘Well, existing housing now is looking a bit more attractive relative to [new housing]’. The other thing that’s happened is rents have risen a lot, and that’s that the supply of housing isn’t meeting the demands for housing. So, as rents rise, again, the equation between ‘do I buy my own home’ or ‘do I rent’ also shifts, somewhat, so there are things going on there as well. At least until recently, the other thing has been that the turnover in the housing market hasn’t been particularly high, so there hasn’t been a lot coming onto the market. What has been coming onto the market? So, again, supply and demand: if people are looking to buy and there’s not much listing going on, then prices will go up.

One of the interesting facts that we’ve highlighted before but I might just mention again is that, during the pandemic, the average household size declined quite sharply. Average household size has been declining over time anyway but during the pandemic, it actually took another step down. And that was because people decided, ‘Well, if I’m going to work from home, I’m going to have a spare room so I can have an office.’ Or ‘Do you know what? I don’t want to share with four flatmates anymore, because I’ve got to work from home.’ Or for health reasons, ‘so I’m just going to share with my partner,’ or whatever. A whole lot of decisions went into people having more housing stock per person, if you like. Now, I might get the number specifically wrong, but I saw something to the effect of, the effect of that decline was, in effect, the same as an additional 140,000 homes, just by that decline in household size. Now, household size has turned around a bit, and you would expect it to because rents are rising, so people are thinking, ‘Oh, well, do I really need that spare room now, could I rent it out?’ etc. But, nevertheless, I think average household size has been another factor here that’s impacted the supply/demand imbalance in the housing market. So there’s just a few reactions for you.

Hi, Michele. I’m another insolvency practitioner and restructuring practitioner. I’m also a fellow UNE alumni –

Oh, are you?

A good country boy.

Good.

Two questions. During the pandemic this new-world economic theory came out and said it would be non-inflationary in going through. So, firstly, your opinion on this new-world economic theory, whether it is new world, or whether, ‘No, we’ve got to go back to the traditional models in going through.’ And, secondly, you mentioned the 2–3 per cent growth rate that the RBA has set and has set for a long time. We know moderate inflation is good for an economy to keep it growing. But that has been set for decades now, and is it time to look at that and re-adjust it and maybe push it to the 3–4 per cent, or something like that?

Has the paradigm changed? No, I don’t think the paradigm has changed. In fact, I think the experience post-pandemic demonstrates that inflation still arises in circumstance where … I mean, what we had everywhere around the world, really, but Australia as well, monetary policy and fiscal policy just really, really expansionary together. And, lo and behold, inflation. Yes, there were supply issues associated with it. Now, I think initially, when inflation took off, a lot of people said, ‘Oh, look, it’s just supply side; it will come off’. But, actually, demand was a big component of it, and I think the answer is, I don’t think the paradigm has shifted.

On the 2–3 per cent, we recently had a review of the Reserve Bank and they did look at this issue of our inflation target and they came to the view that it remained appropriate. One of the things about changing the target is – it comes back to the issues we were talking about before about inflation expectations – if you shift your target around too much, the public is not going to really be able to anchor on something. And one of the advantages of keeping the 2–3 per cent … and let me just add as an aside, our inflation target is a bit more flexible than in some other countries. They have sort of point estimates, so 2 per cent, their target is 2 per cent. We’ve always had this target band and sort of said, ‘Well, look, as long as on average, over time, it’s in this band, we don’t have to react too sharply if it rises a bit or falls a bit; we’ve got a bit of flexibility,’ and I think that’s been to our benefit over a long period of time. And it’s to our benefit now because we can say, ‘Well, okay, it’s high, but we don’t have to absolutely crunch the economy to get it down at all costs; we can take our time, provided we keep inflation expectations under control.’ I think, if we were to review it and raise it, I think that would be immediately difficult for inflation expectations. Two to three per cent: it’s a bit different than overseas, but it’s around the ballpark of advanced economies and I would say it’s appropriate where it is.

I am the Chair of COSBOA, so the small-business angle. Let me take a different tack. You spoke about only one lever of the Reserve Bank being inflation. From the small-business angle, you’ve got a number of other levers: the regulation, the payment systems and, hopefully, if Treasury enables it, a whole lot more power coming your way. Any comment on that regulation of the systems that impose costs on small business? Small businesses are doing it tough; 43 per cent earn less than the minimum wage, if they’re making a profit at all. We’re looking at the Reserve Bank and your regulatory regime to expand and to help us control the costs of doing business. I’d be interested in your thoughts.

Well, an issue very close to my heart: payment costs, and payment costs to businesses and small business in particular. I’ve been fighting this battle since 1998, when we first lowered interchange fees and ended up in court with Visa and MasterCard. I’d say we’ve done more than almost any country around the world to try and get payment costs down for small businesses. It’s been challenging recently because, as you mention, new players, in particular large tech companies, have made it … we don’t think we necessarily have jurisdiction over them; we’re pretty sure we don’t. So that’s made it challenging. Well, that’s the proposal: that we will. We’ve spent a lot of time – we’ve been lowering interchange fees and merchant service fees through that purpose. We’ve been … as you know, we’ve been big on least-cost routing to try and get banks to offer that; we’re still working on the banks to deliver that. That’s been challenging, but we’re making some progress. And, hopefully, the new, expanded powers will allow us to have some leverage over some of the newcomers that are imposing extra costs in the system. When I first started in Payments, it was a very simple equation. There was a merchant, a consumer, an issuer of a card and an acquirer of a card, and that was it. Now, the chain of everyone taking their clip of the transaction, it’s very, very long now. So I guess all I can say is we’re still on the case.

Thanks. Well, look, ladies and gentlemen, could you please join with me in just thanking the Governor of the Reserve Bank, Michele Bullock, for sharing her perspectives and insights. Thank you very much.