Transcript Interview with The Conversation’s Politics with Michelle Grattan Podcast

Andrew Hauser. Can we start with the assessments being made for the prospects for the price and supply of oil? What’s the best current information?

Well, economists usually think that the best current information is in the price. But the price of oil on global markets has been extraordinarily volatile. As you know, Michelle, Brent crude, one of the standard benchmarks, was $70 a barrel before the attack at the end of February. It reached a high of 117 yesterday, but it’s currently falling back to about 90. I’ve got my screen open and perhaps we should come back at the end of the podcast for an update. What’s driving that volatility? Look, I think, you know, there’s a key concern is the impact of the threatened closure of the Strait of Hormuz from Iran. 20 per cent of oil production goes through that. And the potential for the Gulf states having to throttle oil output, particularly with their storage also being attacked, is judged to be pretty significant. The promises that President Trump made on insurance and support for shipping in the Strait, I think were treated with a degree of scepticism by some in the market. And the sense that the war could drag on for a very long time as more countries have drawn in and the uncertainty over regime change in Iran have all led to, you know, those big up and those big downs. As you know, the fall today and overnight came from two things. The statement by the G7 that they were looking to release their strategic reserves and President Trump saying that the war was very complete, to use his language. I think the reality is that this is all in real time at the moment. It’s a global price. We’re all facing the same volatility, we’re all watching the same screens, but so far we are up materially on before the conflict, but nothing like as large as we were yesterday.

Well, you’ll be doing some numbers, obviously, ahead of next week’s meeting. How does the RBA begin to assess the impact of these prices, given the volatility?

Yeah, I mean, it’s a genuine challenge. On the upside, we did an exercise last year, middle of last year, when it looked like conflict between Israel and Iran was going to pick up. And so we do have a framework. The first point I think I’d make is an obvious one, that it does depend on the size and the persistence of the price shock itself. And as we’ve just discussed, that’s very uncertain. So we need to keep our assessment updated in real time. And we also need to work on the basis of scenarios, what ifs. In terms of the channels, on inflation for Australia, you have the immediate effects on the cost of petrol at the pumps. Everyone’s seeing that in real time today, of course, over time that pickup in the cost of fuel will push up on prices and costs for firms and it has implications over the longer term for people’s expectations about wages and prices. So there’s a few channels there. On activity, well, this is a classic adverse supply shock, to use the jargon, which means that higher cost for firms is likely to reduce their output, but it also weakens demand, lower consumption spending, the impact of uncertainty on households and companies, tighter financial conditions. And that’s not just in Australia, that’s overseas as well who demand our output. So, you know, you have a couple of offsetting factors there. But there is one other important point to mention, and that is although Australia is a big oil importer, we’re a net exporter of energy. And if you assume that the oil price is well correlated with the price of gas and other outputs that we export, there will be some positive demand effect for Australian exporters that offset some of those effects on activity. The final channel so that this wasn’t long enough is the Australian dollar. Obviously the Aussie dollar is often thought of as the sort of risk-on currency and this is a risk-off move. Actually, the Australian dollar obviously picked up a little bit over the past week or so. It’s been relatively stable in the past 24 hours. But that can also affect inflation. So a lot of channels to think through and the team here is hard at work crunching through those numbers.

Particularly on inflation The National Australia Bank has predicted that inflation, which is now at an annual 3.8 per cent, could be 5 per cent by mid year. Is this in line with the Bank’s current assessment? And how alarming is that sort of prediction or forecast?

I think it’s worth remembering the economic backdrop that we face here. The Australian economy in many ways is in good shape. Growth has recovered quite materially over the past year. Unemployment is close to historic lows and compares very favourably internationally. And average levels of wealth and income in the economy are pretty good by international comparisons. But you know, we have a problem with inflation. It’s too high. The latest data, as you say, headline inflation in January is 3.8, underlying 3.4 per cent on a year earlier. And our projection is that inflation will only return to the target range by the end of this year or into next year and only back to the midpoint of that target range in 2028.

That was all before this oil shock and other events.

That was all before this oil shock in February. As you say, Sally Auld, who’s chief economist of NAB and I have a lot of time for Sally, actually. She’s a very thoughtful economist. I think she spotted that that projection, as we discussed that preceded Iran, had a peak of headline inflation already at 4.2 per cent in the middle of 2026. So that was the base she was working off. I know the 5 per cent number has grabbed headlines, but when I went and looked at her piece, it’s in fact very thoughtful. She’s worked through many different scenarios for the possibility of oil prices. The current oil price in global markets around the sort of mid $80. I’m not sure, actually, that her scenarios for inflation get quite as high as that 5 per cent number. That 5 per cent, I think, assumes that the oil price is in the sort of $100 range, which we were well into yesterday, but not into today. We don’t have updated numbers on our forecasts now. We don’t actually formally update our forecasts until May, which is the meeting after the one coming up. But it clearly is the case that it’s an upside risk to that projection in February. It’s still in flux. There are a number of offsetting factors for us to crunch through. So we have a whole army of our economists at the moment working through that. I don’t want to give a number that might give a false sense of accuracy, but certainly directionally it’s higher than the projection we published in February.

But are you saying that this 5 per cent, which as you say, has grabbed the headlines, that’s a big piece of mystique without being more precise than that?

Well, if you read Sally’s own analysis, I think the 5 per cent number assumes a level of oil prices in international markets that’s a little bit higher than today, but as we said at the outset of the interview, Michelle, you know, this number could be back there before we’ve finished talking. So it all depends on where that oil price goes. I think it probably looks a little on the pessimistic side compared with where we are today, but who knows where we’ll be by the time the Board meets next week?

Now, Governor Bullock has said that next week’s meeting will be live, which means there could be a rate change. Does the Middle East conflict with its impact on oil prices and a whole lot of other effects make more or less likely a rise in rates in the near term?

Well, let’s just say this. There’s going to be a lot for the Board to discuss next week. As I mentioned a minute ago, our projection in February before the Iran attacks was for inflation only to return to the midpoint of the target on the assumption, the technical assumption, that the cash rate did pick up a little bit further from where it is now. So the question is how the data since then, both in the domestic economy and on Iran, change that picture. There’s clearly information on the upside for inflation over that period. We’ve had some data that seem to have confirmed even more decisively than we had before, that our economy currently has limited spare capacity. Unemployment came in a bit below expectations. Job adverts and other measures of demand for labour were a little higher. GDP growth came in at 2.6 per cent on the year earlier, which is great news, of course, but it’s rather bigger than our 2 per cent estimate of the capacity of the sustainable rate of growth in the economy. Inflation was in line in January with our expectations, so there wasn’t a whole load of news. But as we already discussed, that’s well above our target range. So against that backdrop, you know, it’s fair to say, you know, further increases of prices from Iran, if that is what we end up seeing, and that is a big if, is not a helpful development from the perspective of our policy discussion.

That said, there are arguments to discuss on the other side as well. I pick out two in particular. The first, as we already discussed half a dozen times on this call, is the uncertainty over developments in Iran is extremely high. That will, if it persists, press down on global activity, and that’s a downside effect to throw into the mix. The other point is, if you look at the domestic data carefully, not everything came in as strongly as expected. Consumption growth in the last quarter of last year was a bit weaker, and unit labour costs, which is something that we look at closely, fell back a little bit further than we’ve been expecting. So there are arguments on both sides. I’m sorry, that’s sort of a bit of an either or argument. I know journalists don’t like this very much, but I think there will be a very genuine debate. Inflation is too high. Higher prices don’t help that debate. But there are arguments on both sides and I think if ever there was a time when Board members will earn their meagre salary, it will be this month.

Obviously, things are likely to be just as uncertain next week as they are as we speak this week. So in those circumstances, how difficult is it for the Board to make a decision on rates and what’s the danger of not making a decision? It does seem to me the more you speak, you know it’s an each way bet. But on the other hand, a decision has to be made. There are three choices. You go up, you go down, you sit on your hands and it’s dangerous wherever you land, surely.

Well, I was always taught long ago not to complain about the difficulty of our job as central bankers, we have an important and serious job to make. But if you want to see a difficult job, go and look at firefighters, go and look at nurses. So in all seriousness, we approach these decisions seriously every month. But I don’t want to make it seem that somehow we’re paralysed by that fact. We’re always balancing risks. There’s never an obvious answer for policy, whatever you might read in the press, except in arrears, perhaps when it’s terribly easy to know what policy should have done a year ago, it’s not always easy to know in real time. We’ve got important data to process as we discussed, and I think there are risks on both sides. If we fail to act decisively enough to prevent inflation staying high or even rising and expectations of inflation disanchor as they have not today in a long term sense. But if we do see that disanchoring, it will be bad for everyone and it’s worth us continuously reminding ourselves just how toxic inflation is. We’ve only just had an experience of that and we don’t want to go through that period again. So failing to raise rates to the level they need to be and allowing inflation to get out of control is a clear problem. However, there are risks, as you say on the other side as well. If you act precipitously, if you compound uncertainty, if you drive the economy to slow down too rapidly, then you are going to push inflation down and you are going to harm people as unemployment picks up. To be frank, we are always balancing those two alternative risks. I think you are right to say the scale of both the upside and potentially the downside risk for us this month is probably rather larger than normal.

Looking further down the track, I think what homeowners want to know or those paying mortgages want to know is what can we expect in the next year in terms of movements in interest rates?

Well, look, if we do meet again in 12 months’ time, it feels a bit dangerous to say this. What I do hope we’ll be able to show is that we have brought inflation back down into or close to the target range, that employment has remained close to full employment and growth has held up. I will be very happy indeed if we manage to get those macroeconomic outcomes. That’s the mandate we’ve been asked to deliver by the Australian people, and we’re all very committed to delivering it. I’m afraid to say that what path of interest rates is required to get us to that outcome is less certain. It’s always less certain than the outcomes we’re targeting. And it’s probably a bit less certain still against the backdrop of the developments that we’ve been discussing. And to be honest with you, I’d be lying if I told you otherwise. So what I hope we will be able to say is that we have delivered on our macroeconomic mandate and that interest rates are on a sensible path back to normality. But whether we’re able to say that or not, only time will tell.

Well, indeed, over the years, the Bank has often missed its target on inflation. Do you think this has lessened the Bank’s credibility with the public and raised the risk of a blowout in inflationary expectations?

I went back and looked actually at the average inflation outturn since inflation targeting came in. It’s a bit of a debate exactly when, but let’s call it 1992, which I think is when Bernie Fraser gave a speech on the subject. And the average inflation rate over that long period of time is actually 2.6 per cent. In other words, give or take a tiny amount bang on that midpoint of the 2 to 3 per cent target range. And you can take a very long view, and I will honestly come back to your question in a minute. The presumption that the Bank has on average missed its target, if that were to be the suggestion, isn’t quite right. And I think maybe that’s one reason why long term inflation expectations actually are still well anchored in the middle of that target range. You might ask, well, how on earth do you come up with a number like that? Have you cooked the books, Andrew? I don’t think I have. But it reflects the fact, as you’ll know better than me, Michelle, that there was a long period before COVID when in fact inflation was coming in too low and not as it currently is, too high. And so those two periods somewhat average out. But look, you can never take the credibility of what we’re here to do for granted. And that’s why it’s so important actually that we do take the steps needed to bring inflation back to target from its too high level at the moment. And I don’t think people should be in any doubt about our commitment to do that. If we deliver on that I hope people will continue to expect, as they appear to at the moment, that the inflation target will be hit in the long run.

Well, the Middle East war is making the Bank’s task much more difficult than usual. It’s also causing the Treasurer some traumas. It has, though, both positive and negative effects for the preparation of a budget, doesn’t it? And I wonder if for our listeners you could just walk us through those pluses and minuses.

Yeah, it seems an odd thing to say, doesn’t it, that such a serious war in such a key part of the world potentially has a silver lining. The important point here, I think, goes back to a point I made it earlier on. We are as a country, a net energy exporter and therefore when the demand for, and therefore the price of, those energy exports on average goes up, you know, our national income at the margin, at least in gross terms, may increase, it may decrease for other reasons, but for those sectors it may increase. And to the extent that the government is effective in levying a value-based tax on those outputs, its income for those reasons alone, will go up. I think our assessment is it’s not necessarily a huge effect. The fuel excise tax, as I understand it, is based on volumes rather than prices of petrol sold. And obviously we only have a limited ability to diversify away from what we use. And natural gas receipts, although a big export of ours, are not a huge share of total government receipts, but it may have a positive sign on it, that effect. Far more important though, for the fiscal accounts as for the economy, will be the outcomes for inflation and activity and employment. And as we’ve discussed, there are some challenges to all of those macro variables from the Iranian outcome. So I’m sure as the Treasury crunches through those numbers, they’ll be working on a sort of balanced picture, just as we are for monetary policy.

More generally, you welcomed the growth figures of the other day. How, in broad terms is the Australian economy travelling compared with comparable economies? And especially how well is it travelling, or how badly, if you like, in terms of productivity?

Well, in many ways, Australia can be quite quietly proud of its economic achievements in the recent period. As I said, growth is recovering. Unemployment is close to historic lows and certainly very enviable by international comparisons. And wealth levels in the economy, on average, of course not at the lower end, compare very favourably with other countries, including, I should say my own in the UK. I think of Australia is about 25 per cent more wealthy on average per head than the United Kingdom. That’s a good baseline. But as you say productivity is not such a good story in Australia in recent years. The level of productivity still remains pretty close to where it was in the sort of mid 2010s, and that’s a very unusually weak performance. Our assumption is that productivity growth only rises by about 0.7 per cent a year in the next couple of years, which gives you a sustainable growth rate of about 2 per cent. So that isn’t spectacular by historical standards. Why are we in that situation?

What about other countries?

Yes, apart from the United States, where, as you say, I’ve just returned from, which is experiencing something of a productivity miracle for reasons largely related to the AI and tech boom, most developed countries are struggling with a very similar picture to Australia. We have seen a wave of growth in our recent past, but we are not seeing the same productive capacity strength today. There’s an enormous list of potential drivers that people smarter than me at the Productivity Commission, the Treasury and elsewhere would list as drivers for that. And as you well know, the Treasurer and the government have said that their three key priorities this year are productivity, inflation and the world economy. It’s looking like that was a pretty good take on the three things that we’re all going to be facing into this year. So we aren’t looking good by historic comparisons, but we’re not out of the pack for most developed countries other than the United States. We need to do better. And I know that that’s very much on the mind of government and of companies here as well.

Do you think there’s hope that AI will transform the situation or will its effect be lesser than that on productivity?

Well, I mean, this is a fascinating question, and were it not for Iran, I think we’d probably be spending a lot longer on this call talking about it. Of the many conversations I had in the US when I was out there, you know, fully 80 to 85 per cent of them were dominated by discussions about AI. What was it going to do to employment in the US? How is it going to change the organisation of companies? How is it going to drive productivity growth? What was it going to do to social cohesion? It’s a very, very live debate in the US. I detect that we are not at the same level of advancement here, or maturity or whatever the right word is without being rude about my adopted country on that issue in Australia. But it is terrifically important for every negative story that you hear. There are some very strong positive stories as well about people co working with AI to produce better products. One of the more interesting stories I heard from many in the US was not that they were being asked to deploy AI to cut their headcount, but they will use deploy AI to very aggressively boost their revenues. One company said that their CEO confidently expected them to double the size of their already very large company over the next five years, with no increase in headcount at all. Who knows if that can be achieved? But I don’t think it’s all gloom and doom with AI, but it’s a very important debate and it will come to Australia in due course as well.

Do you think there’s a lot of fear in Australia about AI? Does the fear outweigh the perceived benefits at least in ordinary people’s minds?

I think if you look at surveys of this question and, Michelle, you’re closer to it than me, the short answer to that is probably yes, at the moment. I think it’s right to be asking serious questions about what AI might mean for the privacy of our data, for our children, for the future nature of work. Those are sensible questions to be asking. We’re asking them internally in the RBA as well as externally as well. But I think we can afford to think about ways in which those technologies can be deployed to our advantage as well. One of the things I never tire of saying about Australia is that as an outsider to the country, when I look at the recent economic … and when I say recent, I mean the last 50 to 100 years of Australia … Australia has time and again shown an incredible capacity to harness technologies and its natural raw material strengths and its natural ingenuity and human capital to profit, frankly, or to benefit from challenges in the global economy. And secretly, I am more optimistic than many people I speak here that Australia might pull that off again.

When you talk about us being behind on this AI question, are you talking about the deployment of the technology or are you talking about the general debate about the deployment of AI?

I mean, the first. I think on the second, Australia, as in many things, leads the world on the richness, diversity and quality of the debate. It’s one of the things I was told to expect when I came to this country about monetary policy. And I think it’s a great feature of the country. I think, as we’ve discussed here already, I think I look forward to having a balanced discussion about the benefits it could give to a country whose history has been so strong in terms of harnessing new technologies, whilst being realistic and open also about the potential costs and risks that it poses to us.

Just returning to the Bank for a moment, the Reserve Bank is much more open than it used to be in terms of the economic debate, talking about what it does, and this has especially been enhanced since the reforms that this government brought in. But it does have a downside. And Michele Bullock is repeatedly having to fend off questions about the level of government spending and dodge questions. In general, do you think this openness is a net benefit, or does it risk the Bank being drawn into the political debate and thus being politicised to a greater extent than has been the case previously?

Well, I mean, I don’t want to answer my own homework, so I should ask you, and maybe your listeners as well, whether the greater openness, which you’re quite right to say we have tried to embrace in the last year or two, is a net benefit or not. I think certainly the finding of the RBA Review was that being more open came with the territory and was important to do. And I should say I personally strongly agree with that. It’s our duty, I believe, to speak, explain and importantly also listen on issues relevant to our job of delivering low and stable inflation and full employment. And it’s right that we’re held to account by the press, by the public, by Parliament, you know, if necessary, robustly for our successes, but also where we don’t deliver on those things. And I came to Australia looking forward to that part of the role. And to be frank with you, it’s not just that I tolerate it. I actually like being challenged and debating what we do well and what we don’t and hearing alternative views. That said, it’s emphatically not the place, in my view, of unelected central bankers like me, to stray from our lane and start giving free advice to governments on how to make decisions, political decisions, about the allocation of national income across different priorities. I always say, you know, I grew up in Europe, obviously ‘small e’ Europe, where the ECB, the European Central Bank, spent years of its life giving advice to the national governments of Europe about how they should do fiscal policy. It had absolutely no effect and ultimately led, arguably, to the ECB taking its eye off its own ball. We had similar experiences in the UK. And for everyone who thinks, wouldn’t it be great if an unelected official like me came in alongside them and said, why doesn’t the government do X, Y and Z? I always say to them, what would you think if I, an equally unelected government official, came in and took the opposite view? You’d say, ‘How bloody dare you get involved with politics? You’ve been given a job to do, you haven’t done it as well as you might have done over the past year. Get back to your knitting.’ So I think we should be out there and about speaking about the things that we’re asked to do. And personally I don’t find these criticisms that we’re not giving free advice to government at all persuasive. So yes, there’s a risk of being drawn into the political fray, but if we stick to the discussions relevant to us, I don’t see a downside to us being open.

I want to ask you a question about a former colleague you worked with, the Canadian Prime Minister Mark Carney when he was Governor of the Bank of England. And now of course he’s making quite a splash internationally when his calls for the middle powers to step up and he repeated that call when he was addressing the Parliament last week. Just give us some personal impressions of him. And are you surprised at where he’s landed?

Well, it was a great privilege to work with Mark at the Bank of England. He was a very different type of Governor to his predecessor and indeed his successor. I’d say, what words would I use? Demanding but inspirational I think would be two words I chose, through some very big important periods that we work together, including perhaps most importantly Brexit, which of course has all sorts of echoes with the kind of global trade issues that we’re dealing with now. He always had his horizons on the world stage, even when he was at the Bank of England. So frankly it’s no surprise to me to see him ending up as the Prime Minister of Canada. He was always very values-driven. You’ll know that was the title of his book, I think in 2021. A believer in free trade, the role of markets. If he had a doubt, it was that sometimes those principles hadn’t been put into effect as clearly as they might. But he is also, and you see this more in private, perhaps than public, very hardheaded frankly about global politics and global economics. He was at Goldman Sachs for many years, the Canadian Ministry of Finance since he left the Bank of England at Brookfield, Bloomberg, Stripe the payment company, you know, you name it. So, he always saw perhaps more than some of us slightly soft-hearted career central bankers, you know the realities of the global scene with very hard eyes. And I think that, you know, since he left has obviously led him to recognise that when times change, policies have to change too in countries like Canada and Australia, of course, who fundamentally rely on the health of the global economy have to recognise those new realities. So I’m not at all surprised where he’s ended up and that he’s an important global voice but let me end, I guess on one note, that I think the vision that Mark is espousing perhaps is uniquely his, is actually the one that Australia has been operating itself for at least the last quarter century. The concepts of variable geometry, focus on comparative advantages, minerals, energy, education, our openness to people and capital, position of regional understanding in Asia Pacific and so forth are things that, you know, Australia has always, well certainly in the last few decades, has certainly implemented with some skill and panache and as I say, has helped it to navigate periods of global upheaval with real nimbleness and intelligence. And I personally have some sneaking confidence that we can do so again. The RBA’s job is limited but important in that project and that’s to strive to maintain low and stable inflation and full employment through this period of turbulence that we undoubtedly are in and may lie ahead.

Just before we finish up, I want you to check that oil price, see if it’s moved in the last half hour.

Well, perhaps fate is smiling on us and actually it looks relatively stable. It’s down a little bit. $88 Brent, at the moment per barrel, which is slightly down on that sort of 90-ish number that I think we had a little while ago. But a blessed period of calm against what I’m sure is yet not going to be a particularly easy next few days.

Andrew Hauser, thank you very much for talking with us today and giving us some insights in this very difficult and volatile period. Good luck with the prep for the exam next week, and we’ll talk again in the future.