Transcript of Question & Answer Session The Economic Outlook

Thank you, Michele, for a very engaging and insightful speech. So, as Michele implied just then, she’s agreed to take some questions from the floor. Please don’t make any speeches. Michele has just made a speech, we don’t need anymore. So, please, just a question. We start of with …

Cheers, thank you. Tapas Strickland from National Australia Bank. I think I speak for many of my fellow economists in this room and maybe for some businesses as well. I’m very confused about the latest ’song’. You have inflation a little above three per cent in 2024, implying that inflation doesn’t get back to target until 2025. How should we as economists and businesses interpret this? And is there an implication in terms of the RBA’s inflation target: how happy it is to have inflation above three per cent? And, specifically, this isn’t in relation to Governor Lowe’s comments back in 2014 to 2016, when he was saying he was happy that inflation or inflation expectations were that people were thinking inflation was going to be two per cent or it had a ’two’ handle, and a lot of people interpreted that as actually decreasing inflation expectations during that period. Should we interpret this as saying the RBA is happy with inflation at three or three per cent plus? Thank you.

I wouldn’t necessarily interpret it that way. Our target band is two to three per cent, but the ’over time’ is the critical qualifier on the end. What I think we are trying to achieve here is a slowdown in the economy, which is sufficient to bring inflation back down to that. It’s not quite there in the forecast period. But, if we went a bit further out, we’re expecting that it will come back down within target; it’s just not within the forecast horizon that we’ve currently published. We’ve made some really big gains in terms of employment in the Australian economy and, we could crunch the economy very hard and bring inflation down very quickly, but we would very likely lose those gains. So, I know the Governor has talked about the narrow path. What we are trying to achieve here is keep those gains in employment that we have achieved. The unemployment rate will have to rise, the economy does have to slow, but we think that we can, hopefully, bring the inflation rate back down to that target band. It might take a little bit longer, but we can preserve some of those gains for employment that we’ve achieved over the last few years. So that, I think, is the key.

Thank you.

Thanks, Richard Yetsenga from ANZ. Thanks, Michele. Yes, I’m over here. I just want to follow up the discussion of the labour market. I think, coming into this period of inflation, the Governor had outlined a framework where really ’wages’ was the key transmission mechanism through to inflation and it doesn’t seem to have been that way this time; and, in fact, despite labour market conditions being exceptionally tight, we don’t actually have a particularly meaningful pick-up in rates of pay at all. What are your thoughts about what that implies: what you think about inflation and the wage generation process in Australia? Is there something a bit broken?

I wouldn’t say broken. The first point I’d make is that we are still watching wages quite closely. There are signs that wages growth is picking up. And I think we’ve made the point in the past that, prior to the pandemic, wages growth was actually too low to generate inflation in the target band. If you think about, say, 2½ per cent on average over time for inflation, if you think productivity of one per cent, then you should be able to sustain wages growth of 3½-ish per cent.

What’s happening at the moment, I think, is one of the big uncertainties that I referred to. In some other countries, we are observing wages responding very quickly to tight labour markets. We’re seeing that in the US, we’re seeing that in New Zealand and we’re seeing it in the UK. One difference that we’ve noticed with Australia is that our labour supply has responded whereas, at least in those countries, their participation rates are actually still lower than they were prior to the pandemic. So one thing that is suggesting is that our supply has been more flexible than theirs and we haven’t had the outflows from the labour force. The other possibility is that our particular wage-setting arrangements—in particular, EBAs with a number of years’ setting—have actually delayed the pass-through of these sorts of things. So, if you’re a little more pessimistic or optimistic, depending on who you are, in terms of wage rises, it might be that, as those things start to roll over, that wage rises start to come through there.

The one thing I would say is that there does seem to be a recognition or an acceptance that this period of inflation is temporary. Financial market expectations of inflation remain pretty well anchored in the medium term and, anecdotally, even a lot of the wage decisions we’re seeing—the EBAs and so on—they’re not coming in dramatically above. They’re putting in higher claims, but they’re settling for something a little bit lower. So, some increase in wage rises, I think, is important. But at the moment we’re not seeing the same pressures from overseas, and I think that’s positive for the inflation outlook. But we still need wage rises of the order of 3½ per cent to sustain inflation in the band.

Thanks for your speech, Michele, and particularly thanks for talking through some of the processes that the Bank goes through, both tonight and in your speech the other day. Jo Masters from Barrenjoey. I just want to pick up on your comment about the importance of inflation psychology. So it feels to me that we have reasonable measures around consumer expectations and trade union expectations for people in this room, but we don’t get a lot of data or information around the business side of that inflation psychology. So, I’m interested, in terms of your business liaison, what are businesses telling you about the number that are passing on price increases or the amount that’s being passed on and, in fact, how they think about the wage pressure and the energy bills that are coming for businesses as well as households, in terms of their pricing going forward over the next year?

Thanks, Jo. We are hearing from our business liaison that businesses are … finding input cost pressures and wage pressures are affecting them. We are also hearing that they are more willing than in the past to look at passing these prices on. I know that big companies like Coles and Woolworths have explicitly said that they’re willing now to consider suppliers’ requests for increased prices … And that’s partly what is driving us to make sure that we get the signal out there or the message out there that we will do what it takes. We don’t want one-off price increases to generate a cycle where, ’Well, that’s now the norm; we’ll do that again next year.’ There’s a difference between a one-off level shift and a continual shift, which increases by more and more each year. So, we are hearing that from businesses. That is partly what is driving our messaging, to make sure that we get this message across that: yes, we understand that there are one-off price increases, but this doesn’t have to embed itself in the inflationary impetus in the country.

Rob Henderson, independent economist. Thanks, a fantastic presentation. You spoke about some of the uncertainties looking ahead, concerning the potential for a wage-price spiral, and you were addressing that in your answer to Jo’s question there and you did mention the supermarkets, I noticed. Isn’t it true that, if you look at the ABS’s preferred measure—and I think this comes from an RBA paper published a while back—capital share of national income is now at historic highs? So, doesn’t that basically mean that profit margins are at historic highs? So, shouldn’t that mean that with enough competition in the economy, we should be in a position where wages can rise and wages’ share of national income could go up without any need for price increases? So, does this whole debate, basically, is it about the fact that we don’t have enough competition in our economy anymore? And it’s interesting that you should bring the supermarkets up in the answer to your last question in that context.

No, I don’t think there’s any evidence that margins are what’s driving this. I think the data showed that, if you take the mining companies out, the profit share actually hasn’t increased that much at all. There’s a very large chunk of mining in there. So, yes, by definition, profit share goes up, wages share goes down. But, if you take the mining companies out, actually, in recent years, it doesn’t look as stark. There’s been a more longer term trend in that respect, but the recent rise that people are talking about doesn’t look as obvious. So, no, I don’t believe that that is what’s driving things.

I think, if you look at what small businesses in particular are telling us, they’re still telling us that it’s very competitive out there. And small businesses are, interestingly, I think, what’s driving a lot of the expenditure at the moment. The consumption is all in these services and the non-discretionary expenditure, in which the small business community is really heavily involved, and I think competition is alive and well there. So I don’t think it’s a margin story.

Michele, thank you very much for your speech. Sarah Hunter from KPMG. I was thinking a bit about the risks around the forecast as well and I want to ask you about migration, which I don’t think you mentioned. But, just looking at some of the latest data, both on the long-term arrivals and the visa processing that’s going through the system, it looks as though we are going to get a significantly faster recovery than perhaps we were all anticipating three to six months ago. It would be really great to hear what the Bank sees and thinks about that in the context of both the labour market but also demand conditions in the local economy.

Sure. I think we heard a lot about—during the pandemic and the labour shortages—about ’immigration might be the solution to this’. The challenge, of course—and you would all know this—the challenge, of course, is that migrants also bring demand with them, as you alluded to. They come in, they want to go to restaurants and buy clothes and buy food and so on. So it’s not a simple solution just to say ’the tight labour market’. It’s true that there are some particular pockets of labour shortages, and the classic ones are agriculture and hospitality, where the lack of backpackers and so on has generated particular problems for those industries. But an overall immigration increase doesn’t necessarily solve the supply/demand problem completely, because it generates both. So what comes out on top I don’t really know. But, as I said, there are certain pockets it will relieve labour tightness in. But the overall effect, it could be marginal, in terms of effect on the labour market.

Good evening, Deputy Governor Bullock.

You can call me Michele, Rory, it’s okay. You know me better than that.

Michele, I keep reading in the newspapers opinion pieces by academic economists, stating basically that monetary policy would be much better formulated in Australia if there was a greater intellectual contribution from academic economists. There’s a review underway at present. Has the Reserve Bank of Australia made a submission to the review panel, and, if so, did it argue that, if only the Reserve Bank Board could have more academic economists on it, that might be the silver bullet for better forecasting and better policy outcomes from the Reserve Bank?

Well, it’s actually a fairly simple answer: no, we haven’t made a submission to the review committee, Rory. And we’ll leave the review panel to decide how they want to handle that particular issue.

Thank you.

Good evening, and thank you for your presentation before. Kristian Kolding from Oxford Economics. I want to touch on … maybe an extension of Jo Master’s question earlier about inflation expectations, and I note that you were talking about inflation expectations as a risk to the outlook but not quite the baseline. Now, inflation expectation seems to have been well anchored in Australia, which is a great outcome, hasn’t been so well anchored overseas in comparable economies. So, I’d love to know a little bit about why do you think we’ve been able to anchor inflation expectations as well as we have in Australia relative to some of the comparable economies out there?

Well, it depends on whose expectations you’re talking about, I think. Financial market expectations overseas in the medium term, their expectations have remained reasonably well anchored. If you want to equate wage rises with inflationary expectations in some of these other countries, then, yes, their expectations have been less well anchored. And, as I said earlier, I think that’s partly driven by what’s going on in their labour markets, which is a bit different to ours. Ours is tight, but our supply has responded and theirs hasn’t.

Other than that … I’d like to say it’s just that we’re really, really good at our messaging, but I don’t think that’s the reason. I do think though that what’s been happening with wages overseas, and remember that, in some of those countries, their inflation … inflation in the UK and Europe is over 10 per cent, it’s much higher than here. We’re going to get to eight, and that’s pretty shocking. So it might just be that, so far, we haven’t got up to the same levels. And the other thing is that, there has been a certain amount of government assistance in rebates, some of those things are going to roll off in December, which might come as a shock to people. So there have been a number of other things going on as well, which just might have helped to temper the inflationary expectations of households in particular.

Thank you.

Michele told me earlier that she’s an early riser and I promised I’ll get you out of here early, so these are going to be the last two questions. Tapas is having a second go, so it had better be good. Then we’ll go to a questioner over here.

Thank you, Deputy Governor, and thank you for indulging my second question, and it goes back a little bit in terms of what we were talking about in terms of my first question. It’s really, what is the Board’s commitment to getting inflation back to target? And, specifically, this is in reference to the ’even keel’ comments and the ’narrow path’. Chairman Powell was asked these types of questions in his congressional and senate testimony and saying he was willing to do a ’Paul Volcker’ in order to get inflation back to target. I get no sense that the RBA is willing to do a ’Volcker’ in order to get inflation back to target, if that’s required. I’m not saying it is, but are you able to say or give a little bit more guidance in terms of what the ’even keel’ comment actually means? Thank you.

’Even keel’, sailing analogies aren’t really my thing. But we are committed, we’re very committed to get it back down to target. But we have a flexible inflation target, and we have a flexible inflation target for a reason. And, in many ways, the easy solution might be to have a scorched earth and, yes, you could scorch the earth and get inflation back down very quickly. Is that the right thing to do, or is it better to try, as I said earlier, and preserve some of the gains while you bring it back down?

Don’t doubt our resolve that, if we get some particularly bad news on inflation or … all the reasons we think we might be different on wages and it turns out we’re not, then don’t doubt our resolve to increase interest rates quite quickly. We have increased, but I think people forget. We’ve already increased interest rates by 2¾ percentage points in seven months. We’ve moved as quickly as others because we move every month. That’s 40 basis points per month, and people say: ’Oh, you know, super-sized 75 basis points in eight weeks.’ It sounds the same to me. So this idea that somehow we’re being soft and we’re not moving as quickly as others and we haven’t got the resolve, I don’t get that argument. Your point about the forecast meaning we’re not back in target by the end of 2024, yes, that’s right. But, if we really thought we weren’t going to get there at all, we’ll move quicker.

Okay. Thank you, and that has helped clarify things. My only comment there would be, if inflation isn’t expected to get back to target until 2025, I think businesses and employees would be assuming higher inflation expectations in that environment. Thank you.

That’s borderline speech. We’ll go to Michael, the last question.

Thank you, Deputy Governor. Michael Potter from the Financial Services Council. My question is following on from Rory’s [Robertson] question earlier. So you’ve told us that the Bank has not made a submission to the review. I’m wondering if you could tell us why the Bank has chosen not to make a submission to the review. Thank you.

We haven’t made a submission to the review because I think we feel that it’s appropriate that we provide all assistance to the review without actually putting our views formally into a submission. I should say that we’ve actually provided them with a lot of information. They’ve asked us for a lot of information, a lot of data … They’ve asked us a lot of questions about our policy processes and so on, and we’ve answered all those questions, we just haven’t put them into a submission specifically for the review committee. I should also add that we’ve had conversations with them. They have talked to all the Board members. They have talked to some of the senior staff. They’re doing a session for the staff where they’re going to talk to the staff as well. And so, although we haven’t put in a submission, it doesn’t mean we haven’t actually provided some input to them.

Thank you.

Thanks again, Michele. That’s fantastic. Please thank Ms Bullock again.