Transcript Interview with Money News, Nine Radio

Sarah, welcome to exchanges. I need to start first and foremost with the question you guys get asked almost every single meeting and almost every Senate inquiry. How are you viewing the transition in inflation back to the target range?

Thanks, Evan. And it’s a real pleasure to be here with you today. Thank you for having me on the show. Yeah. No. And it’s obviously the question that’s been occupying, our minds here at the reserve Bank. Well, for the last few years, really, I’m generally speaking, you know, touch wood. We think the transition is going pretty well. We’ve now managed to get inflation down from almost 8% where it was at the end of 2022. We’re now coming in, and inside the target band for trimmed mean that’s underlying inflation. So that’s what we look at to cut out all the noise and the things that are volatile and can jump up and down and so now we’ve managed to get that back down to under 3%. So, we’re inside our 2 to 3% target. So really the job from here for us is that we want to get it to the midpoint of that target. We don’t want to be, sort of skirting the top because that means we could pop out and that wouldn’t be right. We equally don’t want to be skirting the bottom of the bank, because then we might risk, dropping out the other side. And that’s also not good. So, we want to try and keep it in the middle. Around 2.5%. But that’s the job from here, on is what do we have to do to the cash rate policy settings to try and keep inflation where we are? Keep the economy, on a steady queue.

So on that, some of the things that sort of talk about that sort of skirting to the top and the bottom that people are pointing out and services inflation is one that clearly is, you know, touching the top of the band and obviously takes longer to get through, whereas the bottom coats inflation and things like that is, is at the bottom. What are those two, occupying your minds more because services as I say, it takes longer and is a broader part of the Australian economy. Is that where you are sort of leading to at the moment?

Yeah, no. And it’s a really good question. And you can sort of, think of it in two ways, actually. If firstly, if you sort of take a long history of looking at inflation, data, which I do, and I’ll get into absolutely into the weeds, what you’ll see is that it’s not uncommon in history for different goods to have different inflation rates. So very, very rare. In fact, I don’t think we’ve ever experienced this, where every single part of the CPI, every single good and service, has been increasing at 2.5% at just doesn’t happen. It’s pretty common for goods in general, to have a lower inflation rate than services. And there’s lots of reasons for that. We benefit from being in a small open economy. We get, globalization flowing through and the NZ productivity, improvements that push down on the price of goods in particular. And you tend to see less of that on the services side. So, in and of itself, I’m not too worried if I see goods running a bit slower and services running a bit stronger, because that’s what we normally see in in history. Having said that, there are you’re right, there are components of the CPI that we’re paying close attention to at the moment because we really just want to make sure we stick the landing. Right. We don’t want to, have inflation popping back up. And, what we’ve been focused on just recently, just looking at the data has been, housing, services. So that’s rents, but also the cost of new dwelling construction, which is actually a mix of, of services and goods. And we’re also, as you mentioned, paying, pretty close attention to market services and a couple of reasons for that. One, as you said, it’s a pretty big chunk of the basket overall if you put them all together. And also, two, it’s they one of the parts of the CPI that’s particularly influenced by domestic factors. So that and that’s why obviously we’re having most impact when we’re setting the cash rate. So, we’re looking at both of those two. But you know, they have been coming down and that’s good. And that’s what we want to see. We just want to make sure that that continues. And in the very latest monthly data, the last couple of months, we did see some signs at some of those components that perhaps been a bit stronger than we were expecting. And so that’s a watch point for us right now.

Yeah. So can I go back then to the housing data, particularly the rental data. So, the latest data from Cotality and also from Prop Track is that rental is now running at about 4.1. And it’s ticking up quite neatly in terms of that, you know, rental increase in pricing. How concerned are you about that? But also, the fact that over the next two years, as your governor points out, very clearly, micro pulling with the supply side, taking at least two years to actually hit the numbers, does rent get slightly out of hand over the coming 24 months?

Yeah. So, it’s a good question. It’s definitely, a watch area for us. So, we’re paying very close attention to it. And so, we, what we were expecting was that we would see sort of rental inflation pass, sort of soften a little bit further here. Not too much but really hold. And so, we weren’t expecting rental inflation to be one of those categories that would be running below 2.5%. And that’s for those reasons I was talking about earlier on, in terms of that supply response for housing and that taking time. Yeah. I mean, what the governor was really talking about was it very basically, if you if you’re trying to build an apartment block as a developer, by the time you’ve gone through the process of getting an approval, getting, you know, the building construction work in place and you and your actual builder doing the work, I mean, it takes time to build a big block of flats. And then getting up to the final, dwellings to market. That just takes years, right? I think we can all empathise with that. So, she was really just making a comment about that and the time it takes to get stuff done. So, we are watching it. I mean, we were expecting it to take a bit of time, for dwelling investment to really pick up, but that’s in our forecasts already that you can see. And so, we factor that in when we think about rents and things. And from here it’s just a question of monitoring that, seeing what actually happens in terms of the response and around dwelling construction and then what, what that flows through into the rental market. But, yeah, all of these things are watch points for us. It would be, fantastic if we can see a stronger housing supply response. I mean, as the governor said, most people want to see that most people want to try and tackle affordability. But it does take a bit of time. We’ve been expecting that. We’ve known that we’ve seen that before. So, we won’t be surprised if we see it again this time round.

Other thing that’s also inside the inflation data, the, you know, is, is quite closely monitored labour, you know, costs, certainly still, you know, about trend in terms of where they are. And yes, also we’ve seen the unemployment start to tick up, but overall, historically and still pretty tight in terms of where the employment market is. Do you see the wage growth scenario still more so putting yourself at the top end of the band rather than the bottom end, with the way that the employment market is playing out and the fact that, you know, you know, labour costs still remain probably about historical trends as well.

Yeah. It’s a really good question. We talk a lot about the labour market and what’s happening in the labour market. And wages is obviously part of that. Because it’s a really, it’s a really crucial key part of the economy, you know, pretty much everything that we, consume, every good, every service that gets made in the economy, involves the use of people. So, you know, jobs are everywhere. And so that’s why we, pay such close attention to the labour market. Because it gives us a really good read on what’s happening across, across the whole economy, across all regions, and sectors. And so, the big question for us, that relates to what you’ve asked is what is full employment? And how close are we to full employment? We think that the labour market is still a little bit tight. We can still see some pockets. It’s different in different sectors, in different regions. So, I, I travel around the country, and I meet businesses as part of our liaison program, and I meet our industry groups and what have you, when I go up to, say, Queensland, or if I go, over to Adelaide, I get told there it’s still a pretty tight market for construction. There’s a lot of work going on. And they’re still struggling a bit to get the labour that they need, just as one example of where we think that the market’s a bit tight. If you go to other parts of the country though, it does look a bit softer, a bit looser, particularly down in Victoria. And actually, just you mentioned the unemployment rate. We can even see that in the aggregate data that we track the unemployment rate in Victoria is a bit higher than it is in other parts of the country. So, it’s always good to, cross, reference and check, the information that you’re getting and see if it’s consistent. So really what we’re, we’re trying to do at the moment still with policy, is get the economy to a point where we’re at full employment. If we can get there, then, there’s, inflationary pressures that you talked about on the cost side, what we expect to happen is that they will sort of return to normal. So, return to what would be consistent with inflation at around 2.5% in aggregate. And we’re still just going through the back end of that process. I said we’re pretty close. We hope. Touchwood. But we’re not quite there yet. So, it is broadly about keeping us where we are today. But we’ve just got to make sure we get the job finished. And, yeah, tracking those cost pressures is one of those things. So, we just want to see them come off a little bit more, and then we’ll be even more reassure them that, for at least in terms of the Covid, surge of inflation, perhaps we’re definitely, definitely past it, but we think we’re getting close.

So, then the featured question comes into the last time that you and I met was in August with regards to the last meeting, and you are talking now about what happens in November, the fact that we go from the quarterly data into finally having monthly data has the full suite of the basket inside it. Take us through first either work that you and your team have done over the last couple of years to get us to that point, but also how the RBA is going to transition over probably an 18-to-24-month period, using the monthly data as your core data, rather than sitting at the moment with them with the quarterly figures you’re using.

Yeah. Look, I thank you for the question. This is so exciting. I mean, this isn’t just once in a lifetime. This is once ever. So, for the team that are working on this, I mean, this is a really great thing for them to do, but lots for them to be doing as well. As you said, we have put a lot of work in and with our abs colleagues, colleagues in Treasury and so on. And we’re very, very grateful, particularly to our ABS colleagues, for making this happen. For us. It is a massive step forward. It will be fantastic to get full monthly data. So, we get 12 rates a year, not four is a year of what’s happening. But so, but as you said, there is going to be a bit of a transition. So, what will happen? Come, the late November, it will be the first release for the October, the month of October. So, it’s kind of what the ABS are going to put out at that point is, is you said that full monthly release. So, we’ll get a full read of, what we call not seasonally adjusted data. So, this is the data where they just tell you what the price level was in any given month, and they don’t move through any of the regular seasonal events. So, Boxing Day sales, for example, Black Friday is actually a better example. And a financial year that was a yeah put out. Right? Yeah. Exactly. Through December is no longer like it used to be. And it’s really interesting you say that because so with the not seasonally adjusted data, you can just sort of, sort of pick it up and plug it in and there it is. But really what we want to do is smooth through those sorts of things. I don’t really want to be, looking at a drop in prices because it’s Black Friday and thinking that’s something that’s fundamental, real, right? It’s not. It’s, you know, happens every year. And so, one of the challenges for the abs with the monthly series is getting a complete picture of what those seasonal patterns are for everything that’s in the CPI. So, some stuff yeah. You know, your televisions and whatever we know about Black Friday. Other stuff though it’s a bit harder to get a handle on the seasonal patterns’ services. For instance, you know, there are seasonal patterns in those series too, but they’re not quite, as regular. They might shift around given the timing of school holidays and things like that. And so, what the transition period is going to involve is the abs are going to keep on gathering the data, and they’re going to learn what the seasonal pattern is for everything. They know some of the seasonal patterns already. In fact, they know most, but not all of them. They’re going to learn what those seasonal patterns are. And for us here at the bank, we’re going to be learning to do with them, with everyone else. But just what we’re learning, we’re going to keep focusing on and keep looking at that quarterly trend being series, because we know what the seasonal patterns in that.

We’ve had that for a long, long time now. It’s very reliable. For us, it’s the series that we use to give an indicator or a lead, if you like, on what’s happening, you’re going to have to headline CPI. That’s why we focus on it. And just through that transition, we’re going to keep looking at that quarterly series as well as taking in the new information from the monthly. So, it’s only an improvement. We’re not going to ignore the new monthly completely. Far, far from it. We’re going to make full use of it. And over time, we’ll get to a point where, you know, the seasonal patterns. We’ll do job will understand it. Us here at the bank and everyone else, and then we can make that final transition. But as you say, it is going to be, sort of 18 months and two years before the abs are ready to do that. And that’s why they’re going to keep publishing that quarterly trim mean through to mid-2027 ish, at the very least. So, I’m going to throw in a little bit of a different one for you there as well.

We talked about learning and about how you can start applying that using AI to help you with that modelling.

Yeah. Good question. And I should say like one of the absolute joys and pleasures of my job, is I work with a team who are curious and are constantly wanting to learn. We want to improve our understanding of the economy. It’s what means that we can do our job better. So, we’re always looking at new ways, new techniques, new data sources. And we’re so lucky at the moment. I think over my career, the amount of data that we have now compared to when I started, it’s like night and day. It’s just fantastic. And as you say, tools like I, one of the things that we can use to really dig into that data and assess it in a different way. And so, the short answer to your question is we already use AI, actually, to help us with our analysis. So, people may know we have a liaison program. We do about 900 or so interviews a year with, institutions, businesses, not for profits. We were sort of writing down what people were saying, and we had qualitative information, which was super useful, but it wasn’t really anything you can plug into a model. Now we’ve got a large language model that we’ve developed internally, and we use it to effectively extract information from those liaison notes that we have and turn them into quantitative series. So, we have a range of different indices that tell us, what’s happening, how people feel about their forward orders compared to activity today, what they expect to do to their prices in the future compared, and so on and so on. And we are now starting to use some of those series in our models. So, the short answer is yes. We will continue to do more of it, experiment with it and play with it. But it’s already helping. So, I think it’s the kind of technology, if you can figure out how to harness it, it will definitely, improve how you work.

So that’s my flow onto to the next pivot. So, we’re going to move slowly away from, from inflation until we meet. Because the next one to this we will discuss which the RBA is clearly doing a lot of research around is productivity. And I do want to read this statement that you had in your first part of your statement on monetary policy. That really caught my attention when I saw this, which was we’ve revised down aggregate demand in line with potential output. The assumptions that trend productivity growth in the future has not changed, but our assessment of the current and future balance between supply capacity and demand, and therefore inflationary pressure. This reflects that assumption that businesses and consumers have already adjusted to a lower productivity growth environment, and they expect lower growth in productivity, incomes and revenues to persist over the forecast period. So, this is this question is what everybody is dividing by. We had an economic roundtable around this, etc. we know that productivity in Australia is at a level that is a decade lows, first and foremost. Can I get you to define how you look at productivity? Because I think the word productivity is seen as do more with less. It’s not that, but also the fact that we are now as your you know, your statement puts out there that unfortunately we are starting to accept low productivity as Trend and how we can possibly break out of it. Yeah. No, it’s a great question. And you’re absolutely right that the word productivity means different things to different people.

So, I’ll just going to yeah, we use a really, sort of technical macro economist definition here at the bank, as you might expect. For us, productivity or productivity growth means that for the same amount of inputs so that, that the workers in businesses, the capital that they might have that’s everything from factories to laptops to infrastructure, everything else, you know, the higher education, everything that you have that goes into making stuff, you’re able to make, a little bit more for the same amount of inputs. So, I suppose my example from earlier is, is that’s a really good one. By making use of AI technology, we’re now able to free up some time for economists that used to be doing the manual processing themselves, and they can do other work. So, and it’s and other higher value work as well. You know, manual processing of data is pretty time intensive, and you don’t get much back from it.

It’s an analysis that you do with it that really counts. So that’s, that’s for us at the bank. That’s what productivity growth looks like. But in in different organisations it’s going to look different. It maybe is giving people, if you’re to run a factory, you, put in the latest machinery and equipment in your space and that means that you can fit your same number of workers. You can just increase the amount of products that you make or what have you. So that’s how we define productivity and productivity growth, in terms of how we look at it, and why we look at it and what kind of forecast horizon are we looking over? Yeah, we we’re observing the same data as everybody else. And it’s. Yeah, you can see it in the statistics that productivity growth has slowed generally in all countries over the last two decades or so. There is an exception, across advanced economies, which is the US, and that is an exceptional performance there just recently. But setting them to one side, generally most advanced economies have seen this. So, we’re not alone in this experience. And it just means that those incremental improvements I was talking about, the pace of those incremental improvements just slow down. We’ve been observing it. We thought that, particularly with Covid, Covid was so disruptive, we weren’t quite sure what was happening to that underlying trend for a little while. We’ve now got to a point where we think actually, some of what we thought might be unwound and was related to Covid and Covid disruption, it actually looks like, it’s a bit more, sticky, if you like, what’s a bit more structural? And that’s really, what we’re reflecting in that productivity growth assumption downgrade. So, in a way, you can think of it as us catching up with what has actually been happening on the ground. And the reason we’ve had to catch up is because for a while, what we were seeing in the data was so noisy and messy with Covid, we just weren’t quite sure, what was structural and what was, sort of related to that disruption that that naturally went away. So, we’ve caught up, if you like, with, with what’s been happening. And that’s why we don’t expect, there to be any fundamental changes in how people, make the decisions that they make as a result of this. This is us catching up with everyone else, not everyone else moving to us. So that’s why we’ve not really changed our view of the balance of demand and supply in the economy right now as a result of this assumption. And why we’ve effectively just passed it through into our GDP outlook going forward. So that those things have yes, the GDP growth forecast has been downgraded, but the fundamentals in terms of inflation haven’t really changed. The final point I make on this is that, just to stress, our forecast of rising is only a couple of years to two and a half years. We run through to the end of 27 at the moment because that’s the horizon. That monetary policy really has an impact on the economy. That’s why we focus. It’s really quite short term, particularly in productivity world. So, productivity, if you do anything to change productivity, I’m sure some of your listeners can empathise with this. If you install some new machinery and equipment or you put some training into your workforce, you have to wait time for that to really start to manifest. Same thing for any changes that government might make to regulations or other policies. They just take time. So, we’re going to keep looking at this. We’ll come back and we’ll talk about it again, over time as we move forward. But we’re not really saying anything about the next ten years, 20 years, 30 years. We’re just really focused on that short term horizon.

So, I’m going to get back to the I question that again. Is that the word you’re basically using there is enhancement. Right. So, enhancing workforce by freeing up, you know, human capital to do the more advanced information etc. Is AI that technology important that kind of start to free up, not just the productivity that will take time, but the productivity will happen now because that’s the argument it’s presenting to you guys at the board say that also being the case.

Yeah. Well, I think the answer to that is potentially right way. I certainly don’t have any crystal ball on this one. And I’m not an expert. So maybe, and that’s the thing, what we’re all going to learn, I, I think if I look back through history and think about, generalist technologies like this. So, I, as a technology you can imagine using in pretty much any job in any sector, as opposed to an improvement, there might be quite sector specific, like a new medical device or something like that, something to help me in my job. But, you know, great for the doctors using it. But if you think about generalist technologies like this, the history shows you the previous sort of ways of this kind of thing, if that’s electrification or if that’s, the, the establishment of the, the factory production line, that happened in the late 1800s or early 1900s and things like this. They take a long time to filter all the way through, because we’ve all got to work out how to use them. And really, when we when I say work out how to use them, it’s not usually the first version of using the technology that really gets you the advances. It’ll be, the second and the third wave where we really figure out, oh, wow, it can really take on a lot of tasks that, we previously had to do ourselves and that really frees up our time. So, I don’t know is the answer. That’s the question. Right? We’re going to be monitoring it. I think we’re all going to find out over the next, three, five, ten years and even beyond that, and, and that’s, you know, watch this space and await and see. I think, you know, some, some tasks that we do. I think most people can already see you could use AI to do them instead, and which is great, but I’m interested in what tasks that we haven’t even tried to use AI for yet, and how transformative it might be in those spaces

That careful pivots nicely to. The final thing is, it discusses growth, which is the Australian economy is, you know, growing below historical trends, but certainly moving in the right direction. There are signs, very small size, but there are signs that the pivot from public to private numbers is starting to happen. What are your views for 2026 and 2027? Which is your two-year time frame? If you forecast through with, you know, monetary policy still, in your view, slightly restricting that as restrictive as it was, public fiscal policy is still quite open in terms. What’s the weak? Wait, wait, is the starting price profile it for the next two years.

Yeah. No, it’s a great question. Obviously, it’s something that we really focus on. So, I suppose maybe a couple of points just to frame is one in terms of what do we think now is the, a sustainable pace of growth for the economy or the pace of growth. We think the economy can, can, could achieve without generating inflationary pressures. And this is over, you know, over that one two-year horizon. Not in any given quarter. Things can be volatile from, month to month. Well, we think that pace now is around about 2%. So, that’s that point 7%, productivity growth is, is one chunk of that and the rest of it, around about, you know, 1.3 and 1.4% is what we think the population growth is going to be. I should say, actually, we use, treasury sense for population studies, population forecasts to, and our forecasts of that. That number really just comes from them, and you bet more or less add the two together, roughly speaking, and you come up with around 2%. So that’s what that number comes from. And that’s what we think the pace, is that we can say sustain on an ongoing basis without generating inflationary pressures. And so, over the next, sort of few quarters, we think the economy is sort of going to get to that pace there or thereabouts. And then we think it’s going to stay there. If you look in the August S&P forecast, you’ll see in the forecast table that there’s lots of low twos for GDP growth over the next couple of years.

And that’s consistent with what I’ve just said. So, we think we’re going to, you know, get back to full employment. We hope that we’re going to get inflation back in around the middle of the band. And then we we’re trying to set policy to kind of keep it there and keep the economy ticking over. If you look at that trend, pace of growth, in terms of the composition of demand, you right. We’ve been watching for some time and expecting for some time that the private sector, momentum would pick up a bit. We could see in the government budgets that the momentum on the government spending side was going to soften. So, thinking about state government investment, it’s not that it’s necessarily going to fall, but it’s just not going to keep growing as quickly as it has. And so, we’ve been expecting that. Wait, as you said, we’re starting to see that. So, some of the headwinds that households are facing, we think are easing, we know it’s still pretty tough for some people. And we know the cost of living is still a challenge. Right? The prices are higher and that’s uncomfortable. But the good news for households is that, on average wages are now growing faster than inflation. So, people are getting real wage gains, which is obviously really helpful to see. We still got some of the impacts of the tax cuts that were, fed through last year are still coming through, as well and helping to support incomes. And we’ve still got, as you said, the end of the labour market. We think it’s pretty close to full employment. So, more people working proportionately than we’ve had in the past. And that’s really good for household income, too. So, households we think are starting to lift their, their consumption. And that’s, helping to support growth. And we do think that dwelling investment is also going to pick up. We talked about it earlier. It does take time, but we know the start of the cycle isn’t today. It’s a bit earlier in the piece. And so, we’re starting to see a bit of a pickup there. And, and we know that, cash rate cuts, interest rate cuts, particularly, impactful in that, in that housing sector. So, there is that transition going on. And we think there’s a bit more of that to run. But really, you know, in the over the next sort of six months or so perhaps will be getting back to around about the pace of trend growth. And what we’re trying to do is, is keep us there, because we also think we’ll be back at that pace where, at a time where we ask around about full employment, which will be great, and we hope that we’ll also have inflation around about the midpoint of the target band. And so, the trick for policy now that that that the board, the decision that they’re making every time is what do we need to do to the cash rate to keep that there, to make sure that we’ve got enough demand in the in the system? If you like that we can keep up with supply, but we don’t want to overcook it. We don’t want to have demand running too strong because that will generate inflation. Equally, we don’t want to have demand running too weak because then we’ll undercook it and we’ll have inflation falling through the target at the bottom of the target band. So, it’s that it’s a balancing act I suppose. Now, and that’s the job.

So, there’s so much to unpack there. So first and foremost, I just want to go right back to what you said around, you know, now accepting this sort of, you know, that that equilibrium point is 2%. So, Australians have long believed that actually the equilibrium point in the 80s, 90s, early 2000 is more two and a half to 3%. Do you think that a) we haven’t accepted that and B) can that also explain why in the consumer confidence surveys, etc., that we remain pessimistic that low growth is happening? We don’t believe it’s happening at a rate that it should be. We don’t feel like we’re getting the kinds of returns that we probably once did in the previous decades. Does that all filter into how you view that now is that we need to accept we’re not just a, you know, a developed economy, but we’re actually a mature economy that can’t grow at the same rate we used to. But also, that that pessimism we’re feeling is the transition away from a slightly higher growth economy into a more middle of the road growth economy.

Yes. It’s a really good question. I mean, you know, economies change. And as our at and evolve all the time in every, every country in the world goes through this, Australia is not alone. And so, you know, there is some sense of, this is our assessment right now. And we do think it’s a slower pace than in the past. Maybe it doesn’t have to be in the future. Let’s see, as I said, we’re really focused on that two-year horizon. So, you know, it doesn’t that this isn’t us saying that this is it forevermore. But just, you know, at the moment, this is what we think it is. And you’re right, it is a bit of, a slower pace of growth than we’ve seen in the past, partly because population growth is a little bit slower than it was in particularly the 80s and the 90s, and partly because productivity growth, is a bit slower than it was back then as well. And so, you know, we put off you out there and yeah, let’s see what happens. I should also say it is our assessment, but we are.

So that’s my flow onto to the next pivot. So, we’re going to move slowly away from, from inflation until we meet. Because the next one to this we will discuss which the RBA is clearly doing a lot of research around is productivity. And I do want to read this statement that you had in your first part of your statement on monetary policy. That really caught my attention when I saw this, which was we’ve revised down aggregate demand in line with potential output. The assumptions that trend productivity growth in the future has not changed, but our assessment of the current and future balance between supply capacity and demand, and therefore inflationary pressure. This reflects that assumption that businesses and consumers have already adjusted to a lower productivity growth environment, and they expect lower growth in productivity, incomes and revenues to persist over the forecast period. So, this is this question is what everybody is dividing by. We had an economic roundtable around this, etc. we know that productivity in Australia is at a level that is a decade lows, first and foremost. Can I get you to define how you look at productivity? Because I think the word productivity is seen as do more with less. It’s not that, but also the fact that we are now as your you know, your statement puts out there that unfortunately we are starting to accept low productivity as trend and how we can possibly break out of it.

Yeah. No, it’s a great question. And you’re absolutely right that the word productivity means different things to different people. So, I’ll just going to yeah, we use a really, sort of technical macro economist definition here at the bank, as you might expect. For us, productivity or productivity growth means that for the same amount of inputs so that, that the workers in businesses, the capital that they might have that’s everything from factories to laptops to infrastructure, everything else, you know, the higher education, everything that you have that goes into making stuff, you’re able to make, a little bit more for the same amount of inputs. So, I suppose my example from earlier is, is that’s a really good one. By making use of AI technology, we’re now able to free up some time for economists that used to be doing the manual processing themselves, and they can do other work. So, and it’s and other higher value work as well. You know, manual processing of data is pretty time intensive, and you don’t get much back from it. It’s an analysis that you do with it that really counts. So that’s, that’s for us at the bank. That’s what productivity growth looks like. But in in different organizations it’s going to look different. It maybe is giving people, if you’re to run a factory, you, put in the latest machinery and equipment in your space.

And that means that you can fit your same number of workers. You can just increase the amount of products that you make or what have you. So that’s how we define productivity and productivity growth, in terms of how we look at it, and why we look at it and what kind of forecast horizon are we looking over? Yeah, we we’re observing the same data as everybody else. And it’s. Yeah, you can see it in the statistics that productivity growth has slowed generally in all countries over the last two decades or so. There is an exception, across advanced economies, which is the US, and that is an exceptional performance there just recently. But setting them to one side, generally most advanced economies have seen this. So, we’re not alone in this experience. And it just means that those incremental improvements I was talking about, the pace of those incremental improvements just slow down. We’ve been observing it. We thought that, particularly with Covid, Covid was so disruptive, we weren’t quite sure what was happening to that underlying trend for a little while. We’ve now got to a point where we think actually, some of what we thought might be unwound and was related to Covid and Covid disruption, it actually looks like, it’s a bit more, sticky, if you like, what’s a bit more structural? And that’s really, what we’re reflecting in that productivity growth assumption downgrade. So, in a way, you can think of it as us catching up with what has actually been happening on the ground. And the reason we’ve had to catch up is because for a while, what we were seeing in the data was so noisy and messy with Covid, we just weren’t quite sure, what was structural and what was, sort of related to that disruption that that naturally went away. So, we’ve caught up, if you like, with, with what’s been happening. And that’s why we don’t expect, there to be any fundamental changes in how people, make the decisions that they make as a result of this. This is us catching up with everyone else, not everyone else moving to us. So that’s why we’ve not really changed our view of the balance of demand and supply in the economy right now as a result of this assumption. And why we’ve effectively just passed it through into our GDP outlook going forward. So that those things have yes, the GDP growth forecast has been downgraded, but the fundamentals in terms of inflation haven’t really changed. The final point I make on this is that, just to stress, our forecast of rising is only a couple of years to two and a half years. We run through to the end of 27 at the moment because that’s the horizon. That monetary policy really has an impact on the economy. That’s why we focus. It’s really quite short term, particularly in productivity world. So, productivity, if you do anything to change productivity, I’m sure some of your listeners can empathize with this. If you install some new machinery and equipment or you put some training into your workforce, you have to wait time for that to really start to manifest. Same thing for any changes that government might make to regulations or other policies. They just take time. So, we’re going to keep looking at this. We’ll come back and we’ll talk about it again, over time as we move forward. But we’re not really saying anything about the next ten years, 20 years, 30 years. We’re just really focused on that short term horizon.

So, I’m going to get back to the I question that again. Is that the word you’re basically using there is enhancement. Right. So enhancing workforce by freeing up, you know, human capital to do the more advanced information etc. Is AI that technology important that kind of start to free up, not just the productivity that will take time, but the productivity will happen now because that’s the argument it’s presenting to you guys at the board say that also being the case.

Yeah. Well, I think the answer to that is potentially right way. I certainly don’t have any crystal ball on this one. And I’m not an expert. So maybe, and that’s the thing, what we’re all going to learn, I, I think if I look back through history and think about, generalist technologies like this. So, I, as a technology you can imagine using in pretty much any job in any sector, as opposed to an improvement, there might be quite sector specific, like a new medical device or something like that, something to help me in my job. But, you know, great for the doctors using it. But if you think about generalist technologies like this, the history shows you the previous sort of ways of this kind of thing, if that’s electrification or if that’s, the, the establishment of the, the factory production line, that happened in the late 1800s or early 1900s and things like this. They take a long time to filter all the way through, because we’ve all got to work out how to use them. And really, when we when I say work out how to use them, it’s not usually the first version of using the technology that really gets you the advances. It’ll be, the second and the third wave where we really figure out, oh, wow, it can really take on a lot of tasks that, we previously had to do ourselves. And that really frees up our time. So, I don’t know is the answer. That’s the question. Right? We’re going to be monitoring it. I think we’re all going to find out over the next, three, five, ten years and even beyond that, and, and that’s, you know, watch this space and wait and see. I think, you know, some, some tasks that we do. I think most people can already see you could use AI to do them instead, and which is great, but I’m interested in what tasks that we haven’t even tried to use AI for yet, and how transformative it might be in those spaces.

That careful pivots nicely to. The final thing is, it discusses growth, which is the Australian economy is, you know, growing below historical trends, but certainly moving in the right direction. There are signs, very small size, but there are signs that the pivot from public to private numbers is starting to happen. What are your views for 2026 and 2027? Which is your two-year time frame? If you forecast through with, you know, monetary policy still, in your view, slightly restricting that as restrictive as it was, public fiscal policy is still quite open in terms. What’s the weak? Where does the starting price profile it for the next two years.

Yeah. No, it’s a great question. Obviously, it’s something that we really focus on. So, I suppose maybe a couple of points just to frame is one in terms of what do we think now is the, a sustainable pace of growth for the economy or the pace of growth. We think the economy can, can, could achieve without generating inflationary pressures. And this is over, you know, over that one two-year horizon. Not in any given quarter. Things can be volatile from, month to month. Well, we think that pace now is around about 2%. So, that’s that point 7%, productivity growth is, is one chunk of that and the rest of it, around about, you know, 1.3 and 1.4% is what we think the population growth is going to be. I should say, actually, we use, treasury sense for population studies, population forecasts to, and our forecasts of that. That number really just comes from them, and you bet more or less add the two together, roughly speaking, and you come up with around 2%. So that’s what that number comes from. And that’s what we think the pace, is that we can say sustain on an ongoing basis without generating inflationary pressures. And so, over the next, sort of few quarters, we think the economy is sort of going to get to that pace there or thereabouts. And then we think it’s going to stay there. If you look in the August SMP forecast, you’ll see in the forecast table that there’s lots of low twos for GDP growth over the next couple of years. And that’s consistent with what I’ve just said. So, we think we’re going to, you know, get back to full employment. We hope that we’re going to get inflation back in around the middle of the band. And then we we’re trying to set policy to kind of keep it there and keep the economy ticking over. If you look at that trend, pace of growth, in terms of the composition of demand, you right. We’ve been watching for some time and expecting for some time that the private sector, momentum would pick up a bit. We could see in the government budgets that the momentum on the government spending side was going to soften. So, thinking about state government investment, it’s not that it’s necessarily going to fall, but it’s just not going to keep growing as quickly as it has. And so, we’ve been expecting that. Wait, as you said, we’re starting to see that. So, some of the headwinds that households are facing, we think are easing, we know it’s still pretty tough for some people. And we know the cost of living is still a challenge. Right? The prices are higher and that’s uncomfortable. But the good news for households is that, on average wages are now growing faster than inflation. So, people are getting real wage gains, which is obviously really helpful to see. We still got some of the impacts of the tax cuts that were, fed through last year are still coming through, as well and helping to support incomes. And we’ve still got, as you said, the end of the labour market. We think it’s pretty close to full employment. So, more people working proportionately than we’ve had in the past. And that’s really good for household income, too. So, households we think are starting to lift their, their consumption. And that’s, helping to support growth. And we do think that dwelling investment is also going to pick up. We talked about it earlier. It does take time, but we know the start of the cycle isn’t today. It’s a bit earlier in the piece. And so, we’re starting to see a bit of a pickup there. And, and we know that, cash rate cuts, interest rate cuts, particularly, impactful in that, in that housing sector. So, there is that transition going on. And we think there’s a bit more of that to run. But really, you know, in the over the next sort of six months or so perhaps will be getting back to around about the pace of trend growth. And what we’re trying to do is, is keep us there, because we also think we’ll be back at that pace where, at a time where we ask around about full employment, which will be great, and we hope that we’ll also have inflation around about the midpoint of the target band. And so, the trick for policy now that that that the board, the decision that they’re making every time is what do we need to do to the cash rate to keep that there, to make sure that we’ve got enough demand in the in the system? If you like that we can keep up with supply, but we don’t want to overcook it. We don’t want to have demand running too strong because that will generate inflation. Equally, we don’t want to have demand running too weak because then we’ll undercook it and we’ll have inflation falling through the target at the bottom of the target band. So, it’s that it’s a balancing act I suppose. Now, and that’s the job. So, there’s so much to unpack there.

So first and foremost, I just want to go right back to what you said around, you know, now accepting this sort of, you know, that that equilibrium point is 2%. So, Australians have long believed that actually the equilibrium point in the 80s, 90s, early 2000 is more two and a half to 3%. Do you think that A) we haven’t accepted that. And B) can that also explain why in the consumer confidence surveys, etc., that we remain pessimistic that low growth is happening? We don’t believe it’s happening at a rate that it should be. We don’t feel like we’re getting the kinds of returns that we probably once did in the previous decades. Does that all filter into how you view that now is that we need to accept we’re not just a, you know, a developed economy, but we’re actually a mature economy that can’t grow at the same rate we used to. But also, that that pessimism we’re feeling is the transition away from a slightly higher growth economy into a more middle of the road growth economy.

Yes. It’s a really good question. I mean, you know, economies change. And as us at and evolve all the time in every, every country in the world goes through this, Australia is not alone. And so, you know, there is some sense of, this is our assessment right now. And we do think it’s a slower pace than in the past. Maybe it doesn’t have to be in the future. Let’s see, as I said, we’re really focused on that two-year horizon. So, you know, it doesn’t that this isn’t us saying that this is it forevermore. But just, you know, at the moment, this is what we think it is. And you’re right, it is a bit of, a slower pace of growth than we’ve seen in the past, population growth is a little bit slower than it was in particularly the 80s and the 90s, and partly because productivity growth, is a bit slower than it was back then as well. And so, you know, we put off you out there and yeah, let’s see what happens. I should also say it is our assessment, but we are. So, I will be looking at the data very carefully to see what plays out. In terms of consumer confidence. That’s a really interesting question. I have to say, we’re not 100% sure why consumer confidence is still, as low as it is. It’s as you said, it still generally depends on which metric you look at, but all of them pretty much are sitting below their long run historical averages. I think maybe part of that might be, the cost of living and the shift up in the cost of living or the price level. So, it’s just taking us all a bit of time to get used to that shift up. And in that price level, but that, that possibly isn’t explaining everything though. And the other really interesting feature is that this, sort of subdued level of consumer confidence relative to historical averages is actually a common experience across most advanced economies. So, again, we’re not alone in this either. If you look at some of the American series, for instance, they’re also, pretty depressed. You can see that across some of the European countries, too, so that it feels like there’s a common global aspect to this as well, which we can’t quite put our finger on. And maybe that’s the cost-of-living point that I just made. Or maybe it’s something else I so I don’t entirely have the answer for you. Is, really interesting to observe. It’s interesting to see that confidence has picked up a bit this year but perhaps hasn’t quite got to the levels you would expect, given what’s happened to spend spending that historical relationship is, it’s shifted a bit, and I think it’ll just be, we’ll have to just see how it plays out. We’ll be learning along with everybody else. But I don’t rightly have an answer for you. We have dug into it. We’ve got partial answers, but we haven’t got a complete answer.

So, then the final part of that debate question is rates. I mean, I haven’t deliberately asked you about where the cash rate is. You’ve taken three rate cards out in this current rate cycle. Your own forecasts suggest that you still got a few more to come over the coming 12 months. What are you getting close to? What you believe is non-restrictive but obviously almost an equilibrium point. And do you feel that you’ve got enough data to feel confident that your current forecasts of cutting rates a couple more times before you finish here is where you’re going to say you’re going to get to. Or do you believe with what we’ve just discussed over the last half an hour, might sort of hold your hand as well as we wait to see that data? Really simple to throw in a bit more detail.

Yeah, it’s a great question. And so, as you’ve alluded to our forecasts, whatever we do, we do them and the latest ones that we have from August at the moment, we have to build them on an assumption for the cash rate because, you know, we know it matters clearly. And so, we take the market process as that assumption so that what the markets expect, just ahead of the August, meeting was the setting assumption, if you like, for our forecasts. And so really, the job from here for us is assessing how things are actually playing out relative to our forecasts. And then obviously we advise the board on what that might mean in terms of the direction for policy. And, you know, any future cash rate cuts or not or whatever. And so, I, you know, I certainly can’t guarantee, that the forecasts are going to come through. In fact, I’d say the opposite. The one thing I can guarantee is that they won’t exactly come through, as we have them there. I’m a forecaster. I’ve, many, many more, misses than hits in my career. And that’s entirely typical. So, I and what we’ve seen in the latest data actually, if anything, it’s come through a touch stronger than we were expecting in August. So, we got the national accounts data for the June quarter this year. They were stronger consumption, that we talked about earlier, certainly came through stronger. And overall GDP growth. We’ve also had a couple of our monthly inflation prints. They’ve been a touch stronger on the other side though. We’ve had a slowdown in employment growth and that’s, if anything, a little bit weaker than we were expecting. And we do still have a lot of uncertainty, particularly around the global outlook. You know, there’s new announcements around tariffs and trade settings, still coming through at a fairly quick pace and other developments as well. So, we’re weighing up all of these things, at the moment. And in fact, it’s only, three weeks or so until our next board meeting and our next set of forecasts will go out. So, we’re in the process now of updating the view and we’ll have, a refresh if you like, to say at that point in time, I but in terms of, restrictive ness and how we see that, a couple of comments I’d make there. I’m often asked, what do we think the neutral rate of interest for the economy is, what’s the number? And, and, and a bit of a history as well. Exactly, exactly. But I won’t repeat too much of that, because I know we’ve said that in the past, but very, very hard to estimate. Is what I’ll say to that. But more than that, it’s never the case that we’re aiming for a specific number for the cash rate at any given point in time, because the neutral rate, when you estimate it with all of the uncertainties around that, you’re really what you’re trying to extract is a long run fundamental measure for the economy and you base it on decades of data. So we go, you know, our models ran back into the 1990s, but at any given point in time, there’s always a whole bunch of other things that are impacting the economy that you have to respond to when you set, monetary policy. So, that can be those international conditions I just talked about. It can be, a shift in, maybe consumer confidence and that’s responding a bit differently. So, and that’s and that’s something that we’ve seen that’s not been seen in the past. We obviously take into account what our government spending is doing and, you know, business, investment, pensions, all of those things come together and we’re really setting, the Board are really setting the interest rate to take all of those things to account. So, it’s really not a question of what’s the number and how quickly do we get that far, far from it. It really is a question of what’s the right setting for the cash rate today, given everything that’s going on in the economy. So, I’d always caution people to not look, at whatever they think their estimate of neutral is and just, sort of mechanically say, oh, well, that’s where the cash rate is going to go for sure, because that’s really not how it works. It’s a long run concept that gives you a bit of a guide, to whether or not you’ll being restrictive and how much, but it really is.

I can’t believe it’s been an incredible conversation. So, I’m going to finish, as I do with every single guest I have on exchanges. Sarah Hunter if you’re in charge for just one day, what would you do?

Oh goodness. Such a good question. So, you know, I don’t know if I’m in charge of my own family or, my neighbourhood or the whole world here, but I feel like the we move really quickly. I think the news cycle moves really fast at the moment. There’s things coming at us all the time, and we’re all feeling like we’re rushed off our feet. Everyone tells that, and I certainly feel that myself. I would love to give us all, a bit of a breath and a pause so that we can, pause and take stock. And I’m really just sort of think about the fundamentals and perhaps so perhaps I’m trying to tell myself to stay away from, the news, x and other social media for at least an hour or two. So, so I can take a breath.

Yeah. Sarah Hunter, it’s been an absolute pleasure. Thank you for joining exchanges.

Thank you so much for having me.