Transcript of Question & Answer Session Achieving Full Employment

Michele, can I just ask the first question? A lot of businesses in this room and around Australia, as I mentioned and you acknowledged, are finding it incredibly difficult to find staff – you talked about holding onto staff – but to find staff in the first place, and you’ve talked about the increased jobs in the Newcastle area of around 25,000. Does the Bank have a view around how those staff shortages – which, in turn, will impact, hopefully, potentially, positively on productivity – how those staff shortages can be alleviated, or is it really a productivity issue that businesses are facing at the moment?

I think a couple of things. Firstly, migration has assisted to some extent, in the sense that there were shortages in some areas, for which – particularly students and backpackers have alleviated some shortages. I’m thinking hospitality, I’m thinking agriculture and those sorts of areas where they were struggling to find staff and these were the people that typically did this sort of work, and I think the net migration has helped that. The challenge with this, of course, is that net migration brings with it more demand: these people need to find somewhere to live; they need to eat; they need to send their children to schools, if they’re families, and so on. So migration isn’t the solution to filling these roles. I think where we would see the issue – I highlighted it in my graphs – is that we’re at a point where those that are unemployed don’t fit the skillset and the needs of where the roles are at the moment, and that’s what’s indicating to us that we’re above full employment. In those circumstances, the way that works itself out, if it doesn’t get resolved by perhaps reducing demand for labour, is that it works out in wage rises and it works out in churn, which is not good for businesses either. So my answer to the question really is that we need to slow demand for goods and services and slow demand for labour a bit, and that ultimately is what’s going to bring things back into balance. Having said that, to your point on productivity, one of the things that often happens, when labour is expensive and it’s hard to get, is that businesses are incentivised, if you like, to look for labour-saving things, so investing in labour saving: automation and those sorts of things. I don’t know if I’ve seen much of that, and maybe some of you, as businesses, have already thought something about that. But that’s typically one response that you would see in these circumstances, and it might be something that we start to see flow through in the future.

It’s certainly more and more part of conversations. Before I go to the floor, I’ll just ask a question from … I think the question that a lot of people have is: other than changes in the prime interest rate, what other tools, if any, does the Reserve Bank have at its disposal to control inflation?

This question does get asked a lot lately and I know people are interested in it. The bottom line is none, we only have the interest rate. But it is a challenge, and we acknowledge that rising interest rates does affect certain parts, certain people and certain groups of the economy more than others. There are a number of channels through which rising interest rates can slow demand. The one that most people focus on, which is the cash flow channel, which is that people who have borrowings have less cash flow because they’re paying higher interest rates. But that’s not the only channel. As interest rates rise, people are incentivised to save more rather than consume, and that reduces demand. It also keeps the exchange rate a bit higher, which means that imported inflation is lower. So it is our only tool; it works through a number of different mechanisms. But, really, in bringing down inflation, that’s the only tool we have.

One of the things that we’re looking at in our business is a slowdown occurring in the construction side. On top of that, we have interest rates going up, so people aren’t going and buying homes. We have energy going up; we’ve now been told there’s going to be a 25 per cent or 30 per cent increase in domestic energy, and then you’ve got commercial. Then you’ve got on top of that a potential breakout of wages; the CFMEU have said that they’re going to be looking at five to six per cent or maybe more at the end of the year. What can the government do? You’re the RBA. How can you advise government? There must be things that the government can do to slow this down a bit because we’re going to come to an edge where are we going to end up, like in New Zealand, with a recession or, hopefully, like the US, with an inflation rate of four per cent?

Yes, another question I get asked a lot: what can the government do? Look, I can’t advise the government; I can only talk about monetary policy. But I think the governments are trying to do what they can. I think they have made some moves in terms of some subsidies that will help to bring inflation down a little bit, which will help to contain inflation expectations, I hope. The most recent budget was broadly neutral, it’s not adding to inflation. So I think there are things that the government can do and I think there are things that the state governments can do as well. So it’s going to be important that the governments focus on not adding too much to aggregate demand and, where they can … not let wages increases get too far ahead of ourselves, because wages haven’t been a contributor to inflation really yet; but there is a risk if inflation expectations get ingrained and wages respond to that and wage demands respond to that, we end up in a situation where inflation is very difficult to get down.

I have a question here from Sam. Sam sits on the board of one of Australia’s largest (inaudible) banks headquartered here in the Hunter and she’s interested in the payments system and how the growing number of technology companies, such as Apple, Google, Afterpay and Zip with digital wallets – how would a new governance regime impact them; and have you any thoughts around those new payments systems?

This is a really interesting question. Payments has gone from being the plumbing of the system to ‘everyone is interested in it’ all of a sudden. And, looking out at businesses around the tables here, payments and the cost of payments are actually really important. What we’ve observed over time is that we’ve gone from a situation where, basically, payments was the purview of the banks and they had merchant customers and consumers, and now there’s all sorts of organisations involved in the payments’ chain, and the mention of some of the large big-techs in this is an important one. The reason I think this is important is that they’re all taking a clip and, if they all take a clip, that puts costs up to merchants typically, and the Reserve Bank’s focus over the last few years has been on trying to put downward pressure on payment costs for merchants … For those of you who aren’t aware, we’ve got some new legislation coming in that would give us the power to regulate other participants in the payments’ chain that we currently don’t have. How are they going to take to that? I think they’re going to be not very happy. Our focus is and remains on making sure that we can keep payment costs low for merchants, and that’s going to involve making sure that competition is working in that market. And so I’m glad we’ve got those powers and I think it’s going to be very important for the next few years.

Thank you … Just to bring it down to a Hunter level just for a second if that’s alright, and picking up on your comments earlier about the employment and how it has changed significantly. Here in the Hunter at the moment we’ve got about 7,000 jobs out there on the Internet Vacancy Index, there’s about 10,000 in the pool of unemployed across the region on the ABS statistics and there’s about 23,000 that are on the Jobs and Skills Australia – that’s their new name, isn’t it? – list, which are people that are getting a benefit and many of which are actually not working the hours to qualify for a full-time job so they do get a benefit. But given the tight situation, I’m interested in what the Reserve Bank does in looking into the Jobs and Skills list to see what matching we can do and what options there are and what advice you might give to government to unlock that pool, which is obviously far greater than the people that are running and working an hour or less a week to be able to relieve the situation that we have currently across many regions in Australia.

Yes. So, again, back to my original point: we’ve got one tool and that’s the interest rate. And the way that works is that if it can’t be addressed by other means, then it works by slowing demand – ultimately, slowing demand for labour, and that’s the way the whole thing resolves. Having said that, the governments are doing work in this area. They’ve got the Employment White Paper coming out. What you’ve highlighted is what we refer to as ‘structural unemployment’: the unemployed don’t have the skills that fit the vacancies that are going. And what that says to you is that there needs to be a training gap somewhere along the line. So the government’s Employment White Paper is going to be very important in this context because this is going to be basically about policies to give people the right skills to meet these vacancies. I should add that this is not only a short-term issue but it’s a longer term issue because the economy’s structure changes over time and the skills that we all need and people need are going to change over time. So this isn’t just sort of a one-off ‘we’ve to fix this problem now’; we’ve got to have policies that take us into the future and make sure that we are educating and skilling people up to meet the challenges of what’s coming in 10 years’ time in terms of all the different industries and skills that will be needed. So … we’re very positive about the government doing work in this area, and I know that they’re working very hard on their Employment White Paper.

Thank you very much for your speech today. I notice the charts that you had thinking about the dual mandate. Would it be fair to say that you’re sort of over-clubbing it maybe on the employment side and maybe under-clubbing it on the inflation side? And, with that in mind, during the speech, you mentioned that, if the unemployment rate stays too low for too long, inflation expectations could get away. So I wonder if that’s maybe what’s going on at the moment that inflation expectations are getting away and if there’s a risk, maybe, you need to take the unemployment rate back to where it was pre-pandemic, more like 5½ rather than 4½, to get things under control?

Well, we hope that’s not the case and we’re not aiming for that. A couple of points to make. The labour market is lagging. We do know it lags and we do know that consumption has come off quite a lot. So the question is: is it just a matter of time before the labour market starts to ease off or, as you are suggesting, we just haven’t put interest rates up high enough yet? I mentioned in my speech that we are aiming to bring inflation back to target with a slightly longer period than countries overseas and, in many ways, it might be much easier just to jack up interest rates; because official cash rates equivalent overseas are higher than they are here in Australia. We are hoping that we can bring inflation down a bit more gradually, keep inflation expectations anchored and keep at least – the unemployment rate will have to rise but, hopefully, not – we think, actually, probably the unemployment rate was above the NAIRU before the pandemic. We think there was lots of evidence that suggested that it could come lower; 4½ probably looks, we think, maybe in the ballpark. So, yes, that’s an issue that we’re worried about and the risk is on the upside that we don’t clamp down on inflation soon enough. Having said that, the indicators we look at in terms of inflation expectations, short-term and long-term expectations, at the moment still remain pretty anchored, but we’ll be watching those very, very closely in terms of our thoughts on our next decisions.

I’m a resident of Newcastle and I wonder. There’s some talk that there will be more interest rate rises fairly quickly, but then we’ve heard a gentleman in the room down here talking about the costs of power et cetera that are actually exponential, and also we’re having some big corporations that have actually left this town in our major shopping centres, and I’m just wondering: to put the interest rates up too quickly now, wouldn’t you do a bit of wait and see, because we’re actually having a big steer away into sort of renewable energies pretty quickly, especially on our port here, and our skills base, as you’ve said here, is another issue. There’s a lot of other things into play, and I have no idea about how the Reserve Bank sees its philosophy or the economic understanding, and you’re an economic honours student, which is amazing. But I think wouldn’t you just hold off for a while and see what happens in the next six months, rather than gear into further interest rises, so that you see how the power prices play out and how the lack of skills and lack of training play out a bit. But then the renewable energies are going through the Central West and also around Young and Yass in a big way. That’s a lot of heavy lifting happening too. Wouldn’t some of this balance out a bit more? Because I think it’s a bit frightening that the only tool we still have in the First World is interest rates. The world has shifted, and I think observation might help. What do you think?

I’d just make the point that we are data driven and we are looking at what’s going on; we’re not being bloody minded in any sense. I think we are watching what’s going on and we are trying to forecast as well; and forecasts aren’t perfect, but we’ve got to do them because we’ve got to have an idea of where we think we’re going. And we are being data driven and we do have a Business Liaison Program, where we are going around talking to businesses all around the country and getting signals from them on how conditions are going. So that would be my answer: that we’re not actually on a pre-set path; we are basically watching very closely what’s going on and we’re using – including liaison to inform our forecasts and get ourselves onto what we think is the best path of bringing inflation down while trying to maintain employment.

My first job was at the Reserve Bank of Australia. As a 16­year­nine-month-old person from Woy Woy, who used to travel two hours daylight to sunset, I just want to congratulate you. I want to welcome you to Newcastle. You’re the first woman on that Board; male-dominated, I presume. Will you take the job, if offered to you, if your president is forced out by media or is forced out by whatever: another job offer? As a woman, I’d like to congratulate you and I’d like you to do some whale watching while you’re here.

Well, thank you very much, and no comment.

That was a no comment. Michele, could I just ask you one last question. Everyone is focused on inflation and, to put it bluntly, wondering when the cash rate rises will end. I’m not asking you to say when they will end, because that’s like asking you to punt on currency as well. But what are the sorts of signs that you are looking for that perhaps things are moderating, if they’re not moderating already?

The things that we highlight that we are continuing to focus on are, obviously, inflation and particularly services inflation because we are observing goods/prices inflation coming down. But we’re still seeing quite sticky services inflation, and that’s actually something that’s happening overseas as well; this isn’t just us. So we’ll be watching that. We’ll be watching the employment market. We’ll be watching consumption quite closely, and one of the big things that is occupying our minds is: how are households responding with their very large savings buffers that they have built up? During the pandemic, Australians on average – not all households but on average – Australians built up a massive buffer of savings. They couldn’t spend it. They spent what they could on goods and then they couldn’t spend anything on going out or going on holidays, so they just saved it all. The million-dollar question is: what do they do with it? Do they spend it, or do they decide, ‘Well, no, I’ll sit on that now and I’ll just use it as a bit of a buffer for the future’? So that’s another thing that we’re watching. We’re obviously watching what’s going on overseas as well quite closely because we are tending to follow a little bit what’s happening overseas and what’s going on in other countries in terms of inflation and, finally, what’s going on in China, because China is very important to the Australian economy, and there are signs there that China has slowed a little bit perhaps, so that might be something to watch as well. So they’re a range of factors that we’re focusing on in deciding how to go.

Michele, thank you for that.