Transcript of Question & Answer Session A Monetary Policy Fit for the Future

David Orsmond (Macquarie University)

Great speech but more importantly, what a terrific set of ways of enhancing the Bank that’s been embraced by yourself and also within the Bank. It’s really wonderful to hear that sort of stuff. In a nutshell, what you’re really doing is bringing more of the uncertainty of how the future looks, the diversity of viewpoints and so forth, into the decision-making, particularly at the highest levels. But the challenge we have as a central bank is holding the credibility of the public within that large fog of uncertainty. I mean, if you had put up the fan charts in your inflation forecast they wouldn’t look as impressive as the single lines that are going down and I wonder what your thoughts are about within this process of getting more diversity and more uncertainties and more questions of how do we hold the public’s credibility knowing that the public is less informed than the experts, that in fact this is the right pathway forward within that uncertainty?

Michele Bullock

Thanks, David. You’ve basically hit upon the communication challenge. The Review noted that we hadn’t communicated as well as we could have. I think we have attempted to communicate very well in the past with the financial markets and the media, but we’ve had less success, I think, at communicating with the public and I think that’s our challenge. So one of the jobs of Sally, when she starts at the Bank, is to think about ways that we can get our messages out in a digestible way to the Australian public. That, I think, is our real challenge because I don’t think we really hit the mark there yet, so I think you’ve hit upon something that we’re just going to have to work hard on.

Tapas Strickland (National Australia Bank)

I really enjoyed the speech and really appreciate you’re taking on 100 per cent of the Review recommendations. Just in regards to the Review recommendations, one of them was to target or communicate about the midpoint of the inflation target. I was wondering if you could explore your thoughts on that and just in the context that when I speak to offshore clients, they ask whether the RBA is actually running a 3 per cent cap because the communication is all about getting back to the top of the inflation target by the end of 2025.

Michele Bullock

Thanks. Yes, the recommendation was to aim for the middle of the target and that is, in fact, what we will be aiming for and when a new Statement on the Conduct of Monetary Policy comes out, and I think that might be before the end of the year, then that will be reflected in that Statement. So that should help to give the international community some confidence that, in fact, we are not just aiming to get to the cap. That we are, in fact, aiming to get to the midpoint. But the strength of our system has always been that we’ve had a little bit of flexibility to address uncertainty, shocks, those sorts of things. That’s always been the advantage, I think, of our system; so we’re not, sort of, just saying, well, if we get back down to 3, that will be good enough because it doesn’t give you much leeway on the upside. So I think that will become clear once the Statement on the Conduct on Monetary Policy comes out.

Jonathan McMenamin (Barrenjoey)

My question was I suppose from the demand side you were talking about. In the effort of raising rates, you’re trying to slow demand at the moment. How do you think about the very high level population growth we’ve got at the moment and how do you overcome that, given where we are in the cycle? Interested in your thoughts in that area.

Michele Bullock

So, a lot of people have made quite a deal about the fact that the per capita consumption is declining but aggregate consumption is rising, obviously slowly. What people often don’t realise is that – well, they may forget, I think, is that the increased population also adds to supply. And I think our judgment is that, yes, there is a bit of adding to inflation pressures from demand but at the same time the increase in the population is adding to supply of labour and that’s helping on the demand side, on the demand supply and balance in the labour market as well. So it’s not clear cut that immigration is just simply causing lots of inflation. Sure, you can point to housing and rents as being one particular area where there’s a particular bottleneck, but I think it’s a subtler argument than that. I think we would argue, and I think we’ve probably said it in our Statement on Monetary Policy, that actually if you take into account what it’s doing on the supply side, it’s not clear that it’s adding heaps to inflationary pressures.

Paul Bloxham (HSBC)

Thank you for your speech, Governor. As you set out the task is to either slow down aggregate demand or get aggregate supply to catch up in order to get inflation down. One of the fundamental errors that central banks made through the pandemic is that they didn’t really understand the supply side well enough and that’s why the inflation shock came along in the end. So you spoke a lot about the idea that you are tracking aggregate demand and it’s still running strongly but where is the evidence that the supply side is going to be sufficiently flexible to allow the inflation to get back to target over the horizon you’ve described? And, in particular, for that to happen and still see an unemployment rate that only lifts a little bit, lifts by under 1 percentage point over this cycle and still gets inflation down? What should we be looking for in terms of evidence that the supply side is actually proving to be as flexible as you are assuming?

Michele Bullock

Well, let me say what I’m suggesting is that if we don’t get any more supply side shocks the evidence we are seeing, in terms of things like shipping costs, in terms of the business liaison information we have from businesses talking about their supply side challenges, all of that suggests that it is unwinding. Your point in a longer run sense though is, and we’ve made this point before, is that supply shocks seem to be coming more frequently. And one of the lessons I think we learnt from the pandemic was that our modelling and forecasting didn’t deal with the supply side very well. I think we’ve taken those lessons now. We are looking to try and build more thinking about supply side into our modelling and our forecasting. That’s certainly what we’re trying to do. And I’d like to think that we’d be a little more alert to that in the future. Certainly, I gave a speech fairly recently about the potential impacts of climate change on supply side issues and I think it’s going to be quite challenging coming the next few years. We’ve had three supply side shocks arguably in the last few years and it’s quite possible we’ll have more and we’re going to have to learn from all the central banks, having to learn from their experience in not really having a very good handle on either – you can’t predict them necessarily, but we should have a much better handle on how they will impact inflation.

Stephen Halmarick (CBA)

Thank you for your speech, Governor. Actually, I’ve got two quick questions if I may. The first is again on supply side, particularly residential property. So there seems to be a real inability for the property construction sector to actually deliver the number of dwellings that we need in Australia, or the way I put it is kind of the ecosystem is quite dysfunctional to deliver the property. So is anything you’re hearing in all your liaison work, where are the bottlenecks and is there anything we can do to help that? My second question is a process one. So, you’ve mentioned that the Statement of Monetary Policy is going to come out at exactly the same time as the policy decision, four times a year. But assuming if you make a change in interest rates at that meeting the SMP won’t know that you’ve made the decision to change rates up or down at that meeting. So is it the press conference we should look forward to then in explaining how the SMP forecast might change given the decision that was made on that day?

Michele Bullock

Well, that’s a good question and I’m not sure I really know the answer to that last question. As you know, we do have assumptions in our forecasts which usually use the cash rate path for – it’s a mix of professional economists and financial markets. We will continue to use something like that, I suspect, but it might be that at the media conference we’re explaining how it is that that has played into the particular decision and how it might be. Now, the first question was on what we’re hearing about the –

Stephen Halmarick

On your liaison work.

Michele Bullock

Yeah. So what we’re hearing in liaison is that the pipeline of residential work is still running off because it’s experienced labour and material shortages. It’s still running off but actually there’s not much left after the pipeline finishes. The other thing we’re hearing about is that there is contention for resources from infrastructure and that’s not so much for single dwellings or things like that but there is contention for infrastructure. So we do have a bit of an issue in Australia with being able to build housing and certainly the targets set by the government, it’s great that they’re focusing on it but they’re much higher targets than we’ve ever managed to hit before. So, look, it’s no easy answer.

Sophia Rodrigues (Observatory Group)

A similar question was asked before but I’ll still press on that. Earlier this week on the topic of immigration you reminded us that immigration also contributes to supply not just demand. But now that the labour market is showing signs of softening, do you think we need to think of immigration differently? That now maybe it’s contribution to supply is minimal and it’s adding a lot to demand, especially in the context where you’re trying to slow demand in the economy.


The labour market is softening a bit but it’s still quite tight. If you look at vacancies, vacancies are still pretty high, relative to history. They’ve come down a lot. And we also know that there have been skill shortages. I’m not an immigration expert and I’m not going to tell the government how to run their immigration program but one thing we have observed is that getting back to the student numbers that we had prior to the pandemic, just getting back onto that trend, we’re basically back there now and so we’ve got a situation where we’ve had to bring in all these students that we didn’t have for a few years and none of them are leaving, normally they’d be turning over and they’re not. So I think in some sense the immigration thing is going to settle down anyway, as we start to see the normal flows in and out of the student population. But immigration, I think in general, is a good thing for Australia. It’s always been a good thing and obviously there’s contention for housing and the things that the government has to think about but the concept of immigration in and of itself, I think, ultimately is a good thing if it’s run well.

Peter Hannam, (The Guardian)

As you know journalists like scenarios. So may I ask about two, which is masking, if you like, two questions. One is, assuming everything goes quite smoothly in the next year or so and the next move is either an interest rate rise or maybe one that’s a cut, one thing that’s a little bit hard for us to understand is this weighting between employment gains, trying to keep those versus bringing down the inflation to the 3 per cent target. So what would be more worrying for the RBA to say, it’s time to cut? A rise of unemployment, let’s say to 4.5 per cent, now that you’re predicting 4.25, say, or that we don’t hit 3 per cent until 2026? So that’s the first part. That scenario, which one is more worrying. And, secondly, the RBA is factoring in stage three tax cuts. That’s legislated. You’ve got that in your plans. Might it not be advantageous to cutting inflation should the stage three tax cuts be modified in some way such as to stimulatory move?

Michele Bullock

On the second point, yes, they’re in our forecast already for inflation. I’m not going to cast comments on the government’s stage three tax cut but they’re already in our inflation and therefore already in our thinking about monetary policy, so that’s what I’d say. On the first one, the scenarios, it would depend. I think what would be really important in deciding between those scenarios is what’s happening to inflation expectations. So if it was a choice between tightening further, even though unemployment is going up, you would probably be thinking that inflation expectations are at danger of becoming de-anchored. I think it would be really critical in thinking between those scenarios to be thinking about that point and that would be the thing I think we would be making judgments on.

Hans Lee (Livewire Markets)

Good evening, Governor. Thank you for your address. You’ve obviously spoken a lot this morning about the role that consumer demand has in the fight against inflation but beyond more rate hikes, what changes can the RBA make to its policy and approach to ensure those demand pressures come down and hopefully inflation comes back down to target maybe even earlier than the end of 2025?

Michele Bullock

Well, we’ve only got one instrument really. And it’s the interest rate. Some people talk about QT but if you look at our analysis of our quantitative easing program it’s pretty marginal, the impact it has. So really we’ve only got one instrument and I think that was why the Review – and we’re not unique in that way, every central bank pretty much has that. And I think that’s why one of the reasons the Review mentioned we need to be making sure fiscal policy and monetary policy are working together in the same direction. I know the Treasurer has made comments on that and certainly I think that’s one major focus going forward is how do we – the government is independent in setting theirs. We’re independent in setting our policy but how do we work together to make sure that we’re working in the same direction.

Wayne Fitzgibbons (Market Insights)

Yesterday’s panel session at ASIC raised the very important long-term issue that inequality in all its forms has eroded, for want of a better term, the democratic social contract. Now, as I’m sure you’re aware the BIS and various other organisations have been talking about the impact of both past and present monetary policy in generating greater inequality. So my question to you is not so much about the RBA but the whole framework for central banking. How can you weigh up the costs of reducing inflation by 1 to 2 per cent versus the potential impact of further erosion of that democratic social contract?

Michele Bullock

So the best thing that monetary policy can do for that social contract is to keep inflation low and stable because that gives the best conditions for strong employment growth. And the best thing you can do for equality is to give people meaningful work and give lots of people meaningful work – that’s the best thing you can do. So I don’t see it as inconsistent. I think that making sure that we keep inflation and inflation expectations anchored gives the best possibilities for strong employment growth and then if there are other issues to do with particular distributional income things, that’s a matter for the government. But the best contribution monetary policy can make is low and stable inflation because that’s what will help deliver good jobs growth.

Peter Ryan (ABC)

Thanks very much for the question. You mentioned earlier the importance of culture and leadership which is important in all organisations. You’ve also said you’re 100 per cent supportive of the changes in the Reserve Bank Review. I was wondering whether you could talk to us a little bit about maybe some of the push back you might have found inside the Reserve Bank, being a veteran there. A very conservative organisation. How difficult it is to actually change attitudes, change culture and make it easier for staff to feel free to speak up and perhaps challenge people who might even be the Governor?

Michele Bullock

Let me say first of all I think most of the staff are actually really behind the changes that we’re implementing. Some of the issues I focused on earlier about not willing to speak up or not willing to challenge senior staff and these sorts of things, we’ve known about this for years and we’ve been working on it for years. And I think the problem we’ve struck is that we have focused on it as being ‘speak up’. It’s the responsibility of the speakers. We haven’t addressed the issue which is, are the leaders listening? So I think that it’s going to be a challenge to some leaders because they are going to have to learn to actively listen and that’s going to be not the way that some people have come through the organisation. We haven’t managed to nail it in the past. I’m hopeful now that I, leading by example and I know I’ve got my executives behind me on this, we are actively looking to change the way we do that. So I think that’s going to be the challenge.

Peter Ryan (ABC)

If I may just follow up; did you find those challenges as you worked your career through the Reserve Bank over the years, that difficulty in being able to be confident enough in challenging?

Michele Bullock

Yes, I did at times, to be honest. And one other thing I would add, and it’s to do with diversity and inclusion, is that not all people communicate in the same way and a standard model of everyone in a meeting and put your opinion on the table and if you don’t, you’re a chicken; that doesn’t work necessarily for all people. Some people like to consider things more. They don’t want to react immediately. They’d rather come back after the meeting and have a discussion. So, I think there’s a whole series of issues around the way we run debate, challenge, which actually isn’t very inclusive. It actually excludes people because they don’t work in the same way. Sorry, that’s a bit philosophical but that’s just my view.