Transcript of Question & Answer Session Remarks at the Australian Industry Group Executive Luncheon

Three subject matters of great interest there, but we’re not constrained to those, either. There’s also this desire to get some direct feedback. I should say we have representatives from companies from right across the economy around the table, not just one sector but a range of sectors of the economy. We have people from within those businesses who are decision-makers around how their resources are allocated and why. I hope you’ll be able to get some strong feedback there. I’m going to ask a couple of questions and I’m going to throw it open to everyone here. Please start eating as you go. We’re being efficient with time here. You mentioned inflation, a word on everyone’s lips. If it’s not ‘productivity’, it’s ‘inflation’. We’re seeing inflation rise. You mentioned you were - I think we were all - surprised a little bit by where it got to in the last data. But you are now going to be collecting inflation data a bit differently, I think, and on a monthly basis?

Mm.

A little bit like what happens with unemployment, in some ways; like the monthly unemployment data, there will be monthly inflation data. How will that collection of monthly inflation impact your thinking and how will you collect it and what will you do with it?

Great question. We’re very excited about this development. Colleagues at the ABS are going to start publishing the monthly CPI series, a complete CPI series.

We actually get the first print next week, which will cover the month of October and then we’ll get it every month forward from then.

So, in terms of what data we’ll actually get, it will look like the quarterly inflation data, but it will just be for a month rather than for a quarter. This is the key sort of innovation from the ABS. They’ve actually now got to a point where they’re collecting series on a monthly basis across the full basket that they can now publish, whereas previously some series they were able to collect high frequency, but others they were only collecting quarterly or even less frequent than that. That’s a really big step forward for us. It means that we’ll get a complete read on inflation 12 times a year rather than four times a year. This is very helpful for us in terms of information.

In terms of what we’re going to do, there is going to be a bit of a transition period through the next little while. You can think about the inflation data as having two features to it. The basic version of inflation - you go out and you measure the price of all the things that households spend their money on once a month now and then you publish that. That can get a little bit messy, though, month to month, because things like sales, the seasons, big events can all have an impact.

For example, Black Friday - when you get to Black Friday, stuff that is priced in October at a certain price and then quite a few things get cheap in November and maybe stay a bit cheap at the start of December; then they’ll go back up in price. You can see if we just looked from October to November, we’d get a bit of a misread on that if we just took that and didn’t think about Black Friday. That’s just one example. Christmas happens every year, affects the prices of things, school, holidays; there’s lots and lots of factors.

To take account of all of that, the ABS have to go through a process of what’s called seasonal adjustment, which adjusts for known regular events like Black Friday, happens at the same time every year, Christmas and so on. But to begin with, they’re not going to have a complete set of data for all of the components of CPI.

The seasonal adjustment process is going to be a bit tricky for them. They’ve put out quite a lot of information. Very helpful for us to know this. To begin with, we’re going to look at the monthly data but we’re also going to keep looking at the quarterly series that we currently look at. Trimmed mean is the one that we particularly focus on to give us a sense of the underlying impulse for inflation. Just through that transition period, whilst things settle down, if you like, we’re going to be looking at both.

A final comment to finish up on. You mentioned, Ennis, it’s going to be like we have for the labour force, where we have monthly labour force data, the unemployment rate and so on; we’re going to have the monthly CPI. What you’ll notice in the labour data - if you’re an aficionado and you track it - is that it can be quite volatile month to month. That unemployment rate, for example, can jump up, it can jump down; it just does. It’s statistical noise. It’s just what happens.

The way we look at the labour market is to try and sort of smooth through and look through that. We don’t jump at a single month’s data. We want to make sure that what we’re seeing is true. It’s going to be the same for inflation; it’s going to be volatile month to month. It will jump around a little bit. Again, it’s a statistical sort of prophecy of a monthly series relative to a quarterly series.

We’re not going to be jumping at one month’s data. We’re going to want to make sure what we’re seeing is true. We’re going to treat it in a similar way in principle to how we treat the labor force data. But I can’t stress enough, it is going to be fantastic to get a full read of a CPI on a monthly basis. Once we’ve gone through this learning process - we’ve all gone through this learning process - it’s going to make things a lot easier for us to really understand what’s going on. So, it’s a very exciting once-ever innovation.

An economist’s Christmas!

It is an economist’s Christmas. You’re absolutely right. You only get this once. It’s very exciting that it’s happening right now. But will it become of more value, just to follow up, sort of in a year or two from now when you can then track the month-on-month over --

Yes, that’s right. The ABS will release a bit of back history. We’ll get at least a year’s worth of history and a bit longer actually from them. So, we’ll be able to see a little bit of history to begin with. But you’re right; it will build up over time and that’s that learning process and why we’ve just got to go through that for the first 18 months or so.

Sarah, I wanted to ask you about Deputy Governor Andrew Hauser’s comments last week, which got a lot of attention around, I think as he put it, the economy being boxed in by its own capacity constraints. I just wanted to draw you out a little bit on that and what he and you meant by that, and then how do we unbox ourselves?

Excellent question. To tackle the first part of it, what we’re really focused on - as I said in my remarks, when we think about the economy and we think about how it evolves over time, what we’re really interested in is how quickly or how fast can the economy grow without generating inflationary pressures. We call that the trend pace of growth. So, if the economy is sort of growing at that pace and we’re sitting around about full employment, so everyone that wants a job can get one in a reasonable amount of time or has already got one, if we’re in that place, if that’s where the labour market is, and the economy is growing around about trend pace of growth, then inflation will be in the target band, 2 to 3 per cent, And that’s what we want to see, obviously, as central bankers. That’s our mandate, the first and last of those points.

A key question for us, then, is: well, what is this trend pace of growth? At the moment we think that that trend pace of growth is around about 2 per cent. In our August SMP, we put out a special paper, if you like, on productivity, because we’ve taken a view that the trend pace of productivity growth now is a bit weaker than it was before, before COVID in particular. We previously thought that it was around about 1 per cent a year, and we’re now assuming it’s around about 0.7 per cent a year.

That’s an assumption that covers the next sort of couple of years. Doesn’t mean that’s forever. Trend productivity growth can rise and fall; we can see that historically. But we need to have a sense of what we think for right now because that’s what matters for monetary policy. And that’s that revision I talked about. If you believe our assessment of around about 2 per cent growth for GDP, it’s about the pace the economy is growing right now. We don’t have the data for the September quarter yet, but for the June quarter, if you looked, we weren’t far off 2 per cent year-on-year growth for GDP. We think actually when we get the September quarter data and then through to the end of this year, we’ll get a number around about 2 per cent. Actually over our forecast horizon, that’s about the pace we expect to be sustained. You could describe that as being boxed in. It’s certainly a slower pace of growth than we’ve seen historically. The economy has generally been able to sustain a higher pace of growth in the past than 2 per cent, partly because population growth has been a bit stronger, but also because productivity growth has been stronger in the past.

So, how do you lift trend growth? You’ve got two sort of broad levers. I’ve mentioned them there. One is population growth. So, that’s quite hard work to lift, especially if you think about births and deaths. We already know what the labour force in 20 years is going to be. Those kids are alive today and going through school and what have you. So, you can’t do too much really on the population side. But trend productivity growth you do see more variation on.

So, if you want to try and increase the pace of growth, then the question becomes: well, how do we lift trend productivity growth? Now, that’s not a lever we have to pull in terms of policy. Interest rates, we know, don’t really have much of an impact on structural outcomes like productivity. But when we talk to businesses and get their input and their thinking and what they see as some of the constraints, you get a wide range of factors. In some sectors it can be sort of regulation or planning permissions and things like that. And obviously our state governments are trying to tackle that, particularly with respect to residential construction at the moment.

Quite often you’ll hear there are skill shortages in certain sectors. I referred to that in my opening remarks, that sort of match between the skills that we have in the labour force versus the skills that businesses want, and if you can get a better match on that then that can lift productivity. A whole range of different factors really, but it sort of comes down to, if you want to grow faster, how do you lift productivity growth?

I’m just going to ask you another question which you referred to in your remarks and you touched on a bit there too. Post pandemic our economy has changed. It’s changed quite dramatically. And coming out of the pandemic, business absorbed a lot of pandemic induced inflation, if I can call it that. Do you get the sense that that is coming to an end, the ability of business to absorb is coming to an end, or is that changing shape? How is that impacting us?

It’s a good question. It sort of shows up on both the cost side and the price side. The price - the cost base for businesses is lifted, and we can see that clearly in the data. But we can also see the price level has lifted. Those two things do tend to move together in the long run. And that makes sense. Businesses do have to eventually pass costs through, but equally it’s unlikely to be the case that price inflation runs ahead of costs on a sustained basis, because that would suggest maybe there are some gains to be made from businesses entering certain markets so they can make some good profits if demand is strong. So, the two things tend to move together.

Really, I suppose, the answer to your question, it sort of comes back a bit to: what do we see as the outlook for inflation? That’s on the cost side and on the price side. As I mentioned in my remarks - and you referred to as well in this - we did get that slightly surprising print for the September quarter, a bit stronger for trimmed mean, and that through to headline inflation as well. We do think that the majority of that is actually noise. Even the quarterly inflation data can be a bit noisy. So, we think about two-thirds of that is probably a bit of noise that will go away once we get the next quarter of data, but they’re still left with a third that’s not that we took some signal from, roughly speaking, and that’s what we’re going to be really watching quite closely: how are inflationary pressures developing through the economy? Are we still seeing some pressure on the cost sides coming through that then ends up flowing into prices?

Our current forecast, we think that that pressure will be sustained over the next year or so. We’ve got a bit of a hump in inflation, so it sort of lifts up. But then once we get into late ‘26 and into 2027 we think that that’s going to sort of ease away and inflation will come back down to towards the 2.5 per cent midpoint of the target band. But, look, it’s a good question and that’s really what we’re paying attention to. That’s to go back to the second question. While we’re very concerned with what is that sort of trend pace of growth, what can the economy sustain - and if we see growth sort of running beyond it, significantly beyond it, for a sustained amount of time, then that would tend to generate inflationary pressures. It’s that balance that we’ll be paying attention to and that will really give us the answer to where those cost pressures are going.

My last question before I open it up is a labour market question. Can I please have your questions or thoughts; either is as valued as the other. Labour market question: estimate is 8 or 9 out of 10 jobs that are being created at the moment are being created in the public sector, that government directly or government funded jobs. So, it’s a two-part question. How do you look at that? And the concern is that those jobs that have been created by their nature are less productive than private sector jobs, given where they are what they do, so have less of a productivity outcome.

At the same time, business is grappling with AI as we sort of both talked about. When you put those two together, what do you see as sort of the short- to mid-term impact on the labour market more broadly?

Really great question. Certainly an active area of research for us. You’re absolutely right that the majority of jobs in the last few years have been created at - we usually call it the non-market sector because it’s the public sector, and then jobs which might be in a private organisation but are very closely tied to public spending. Health care is a good example, childcare institutions, things like that. And you’re right; the majority of the jobs growth recently has been in that sector. We’re waiting on the data for the September quarter, but actually the data for the first half of this year did start to show a bit of a rebalancing. We got quite a marked slowdown in growth and jobs in that non-market sector and at the same time a bit of a pickup in the market sector, which is everything else, every other part of the economy. So, we’ll be paying close attention to see if that continues. But that dynamic does sort of line up a bit with what we’ve seen in the GDP data, where we’ve seen the growth in public spending slow down a bit in recent quarters, and we’ve seen growth in spending in the private sector, particularly household spending, has picked up a bit. We’d sort of expect those two things to line up and obviously we’ll get data in a couple of weeks that will tell us a bit more about what happened through to the end of September.

In terms of AI and AI’s impact on the workforce, our current view on that is it’s likely to take a little bit of time to play out. That’s because we think that it’s going to be similar to other technological step-forwards that we’ve seen in the past. It’s very rare for a big generalist technology like this. When we say ‘generalist’ we mean it can be used in lots of different sectors as opposed to much more specific technology like a refinement of a machine in a specific sector’s factory; where that’s a targeted technology, this is generalist technology. It’s used right across the economy. Generally speaking, it takes time to diffuse, takes businesses time to learn what to do with it, how to get the most out of it. It looks a bit different in different sectors, but there’s usually commonalities. And because it takes a bit of time, our current view is that we may not really see much of an impact over the next sort of year or two, but perhaps beyond that we’ll start to see it showing up more and more. How it shows up, though, and the impact it has on the labour force is also really interesting. It is likely, I think, that specific tasks end up being done by AI, whereas today or in the recent past they were done by humans. They’re probably going to be, based on what the technology is, the repeatable standard tasks that you can write down a sort of clear set of instructions and the AI can go and do it. But for the more complex, unstructured, idiosyncratic tasks, it seems like those are more likely, and creative tasks and where you’re sort of pushing boundaries and at the frontier, seems likely that those types of tasks are going to be retained by humans. The technology has learnt from what we’ve done in the past, so it’s going to be pretty hard for it to invent something new and different because we’ve not done it yet and it’s trained on what we have done. It’s not got a brain that thinks about what we haven’t done. I think it will be interesting to see what all of that means for the labour force. I think it will change all jobs. Will it mean that some jobs disappear or eventually are no longer needed? Well, possibly, but I think for workers, it will just mean that their jobs change and that we can adapt and change over time. So, I don’t think it’s going to cannibalise a significant number of roles or a significant number of people’s jobs, but I do think it will change our jobs as we go forward from here.

My only final thing to say on it is that part of what I’ve just said is not just RBA view, it’s actually the view from many of the businesses in our liaison program, because we recently ran a targeted survey asking about artificial intelligence, the uptake of it, what it was doing to jobs, what the expectations were around employment, what it was doing to investment plans and things like that. And so a lot of what I’ve just said was actually what came out of that survey. It was interesting to hear from such a wide range of businesses those types of commonalities. But we could also see in some of the specific responses that it looks different in different sectors and that everyone’s learning still.

It’s a very new technology. We’re all still learning. It feels like it’s moving fast, but there’s more to come from it.

Thank you. Rich pickings and a lot to work through. I’m just going to throw it open. Any questions or observations? We have a microphone to let you have as we go around the room. So, any questions?

Thanks very much, Sarah. Fantastic that you could join us after your long trip back. And thanks for staying awake as well. I think on AI, it’s the scale of change and the rate of change that are the unknowns in this. I think we’re at the earliest stage; it’s almost beyond our imagination to know as to how far it will go. So, seeing how those things affect the way our economy is working now and how it will work and shifting the workforce balance, skills, needs, all that, you guys have got an enormous task and I congratulate you guys on the way you do it. This year must have been an exceptional year, though, in terms of global shifts in policy affecting Australia. There must have been moments, I guess, in the bank, in the Reserve Bank, where you were going, ‘What the …?’ Because while things were seen to be possible as happening, and then suddenly, suddenly were - poor old Macquarie Island and the penguins were freaking out about the tariffs. How did the Reserve Bank handle that? What was the feeling like? How did you relate to the government? I’m assuming there was interaction with the government ministers particularly involved. I’m just interested to know that, because I suspect some of those disruptions, unexpected or otherwise, are going to happen again maybe over the next year or two. So, just any words on that? Huge respect for the way the Reserve Bank works, by the way, and congratulations on handling things. But what was it like when the tariffs were announced, for example?

Thank you for what you said, and I’ll certainly take that back to the team because they work incredibly hard. You’re right. So, April in particular - thinking that we had the sort of April 2nd I think the tariffs were.

Liberation.

And it was the day after we had a board meeting. So, we had the board meeting on the Tuesday and it was the Wednesday, although Wednesday US time. So, obviously a little bit later, again. We sort of knew it was coming, but we didn’t know at that meeting and then we had the announcement. You have to be agile and dynamic in that situation. I think in the build up to that, there was a bit of a sense of what might be coming, but obviously we didn’t know the specifics. The way we treat it, just from a sort of technical analysis perspective, when we get these kind of highly uncertain and unpredictable situations, we like to use scenario analysis to really help us walk through what might happen. That can be qualitative or quantitative, but it’s really a case of what are the possibles and how do they look different from today or from where you started from and then sort of tracing those channels through the economy. And actually for those particular tariffs that were announced in April and then have since been changed and adjusted, but just taking what was announced as a given, and then some of the ramping up, particularly between the US and China, we actually, in our May SMP, which was the next meeting, so about a sort of six week or so period, we actually had in that paper two distinct scenarios that we were considering. And so that’s how we adopted the work and incorporated all of this uncertainty from a technical perspective, was to have these sort of two alternatives. And then we were, I hope we were, pretty clear at the time to say, ‘Well, now let’s just see how it all plays out.’ And then obviously we’ll continually reassess, that agility point.

In terms of for the team, how they got through it and having to deal with all of that uncertainty and, as I say, unpredictability, I think it was really a question of everybody prioritising in a way that was sensible. You’ve mentioned that it’s likely we’ll see more of these types of shocks in the future. I agree. The world feels a lot more uncertain; it feels a lot more complex than it did pre Covid. I think you’ve got to think it’s a marathon, not a sprint. You’ve got to be able to deal with tomorrow as well as dealing with today. So, we’re very mindful of that too. And it’s just building up the tools and the frameworks that let us think about what might happen so that as things play out we know sort of maybe what track we might be going down and then we can reassess again and again. So, a bit of preparation, a bit of having some of the tools, particularly around scenario analysis, and then, yes, just managing ourselves through it, I think is critical. I’m not saying anything that all of your organisations around the table have had to do as well, but it has been a tricky year at times, that’s for sure.

(inaudible)

Indeed. This is a specific policy change that we were dealing with, but the general idea that we were going to have to deal with more uncertainty, that things are moving faster, that policy changes could show up in a number of different places and ways. I think we were expecting that. So, this was the specific application of a general approach that we’d started to bed down beforehand.

Sarah, thank you for your remarks. Very interesting. If I might start with an observation, our business services over 60,000 other businesses around Australia and certainly over the last 12 to 18 months it has felt like our customers are experiencing margin squeeze. So, a lot more focus on cost reduction rather than necessarily quality or innovation at the moment. And then I listened to your remarks about - and I’m probably incorrectly paraphrasing - the sort of channels of influence for monetary policy and how the bank looks at those. And I’m wondering about the impact of other datasets like producer price indices as opposed to just the consumer price that so often makes the headlines and how that influences your thinking?

Really great question. And you’re absolutely right; we do pay attention to a really broad range of data series and other metrics to tell us about inflationary pressures. Our target is the CPI. It’s always going to be important to us. It’s the core series. But we do look much more broadly. In fact, we were surprised by the CPI data that we got in the September quarter, but actually in the August SMP what we now have in our Statement of Monetary Policy is a section up front where we talk about our key judgments. So, what we think we’re seeing through the economy and what that means for the outlook. And then we also have a section after we’ve talked about the baseline forecast where we flag the key risks. So, how might it play out differently? What are the things we’re particularly watching? The reason to tell you that is because in August one of the three key risks was that we could see some of these other inflation metrics that we track were actually showing a bit of pressure. They were sort of running at a pace that was a bit higher than would be consistent with CPI inflation at around 2.5 per cent. We could see this in August. We were sort of looking at it - and the PPI was in there - looking at it and thinking, ‘Well, okay, we think what might have been happening just through the last little while is that those other metrics were softening and coming down towards the CPI.’ And we thought that that was going to continue for the CPI to sort of stay around - this is the trimmed mean, sorry, core CPI, to stay around 2.5 per cent. And then what it looks like has happened at least a little bit in the September quarter is actually, yes, there’s a bit of softening, but the CPI had sort of come up and that’s why we’re a bit more concerned about inflation now than we were back then. But you’re absolutely right; we don’t just look at that one index. And that’s quite important, because we need to get a handle not just on what inflation is today or more accurately what it has been in the recent past. What we really need to do is get a handle on where it’s going in the future because, with monetary policy lags, that’s what we actually care about. I can’t do anything about the rate of inflation today. It is what it is and we’ll find out in a few months, but what policy can do something about is the rate of inflation in 12 to 18 months time. So actually we want to look at some of these other metrics because they give us a bit of a lead on what might be happening.

Questions, observations? What are you seeing, feeling, hearing?

In your comments you were talking about the Reserve Bank looking at housing and the impact on housing of your policy setting. How does the Reserve Bank look at superannuation and the impact of your policy setting and the impact that your policy setting has through superannuation on the economy? I think the housing market’s worth about 11.6 trillion at the moment. Superannuation is just over 4. Does there come a point where monetary policy starts to operate in reverse because superannuation is so big in relative size to the economy?

It’s a great question and it’s certainly an active area of research. I was probably a little bit opaque in my remarks when I talked about households and the composition of those that are borrowers, usually with a mortgage on their home versus savers. If you’re retired you’ve probably either paid off your home or perhaps you’re still renting; either way, you don’t hold a mortgage is usual, and you’ve got superannuation and you’re potentially either at least using the income from it to fund your spending or if not drawing down on it. Yes, that composition shift is really important. It is a slow burn. That superannuation has obviously been tracking up since the early ‘90s and it will keep on doing that and property is also going to keep moving as well, but we are really conscious of that and how that comes through in terms of other sources of non-labour income sources for households. That’s what we would call any income you take from your superannuation, and what it means in the context of wealth effects for households. So, if households can see that their super is growing a bit faster than they were expecting maybe they’re comfortable spending a bit more today. And that’s the wealth channel. That’s akin to what we think about for the value of a home as well when we talk about wealth effects. In the past, the focus was mostly on your home, the value of your home, but increasingly the value of your super should start to count.

So, yes, is the short answer. It’s something that’s on our mind. We’re very consciously looking at it and thinking about it. Because it’s a slow burn it’s not something that I would expect to change monetary policy transmission in the next year or two. So, we do still think - and the data still suggests - if we cut interest rates overall from a cash flow perspective that improves household incomes. Because more people have got a larger pool of debt than there is of interest-bearing savings. But, yeah, these dynamics do change over time. So, that’s why when I say part of what we do today is to help us with decisions for tomorrow, this is one of those examples.

Questions, thoughts, insights? I’m going to ask you, you’ve been back from Basel for 6 hours, 22 hours on the plane. What was the mood like internationally among your peers?

Good question. The meeting I went to was a sort of gathering of other bank chief economists. So it’s a really good forum for us to sort of share learnings and experience and what are the commonalities and what are some of the differences. It probably won’t be a surprise to hear that we certainly spent some time talking about policy settings and how they’re playing out and what different countries are seeing. It is interesting observing what, say, the Canadian economy is currently experiencing, where the tariffs are having a really significant impact on their economy - unsurprising given their trading relationships.

Other countries, though, similar to us were concerned about uncertainty in particular having a pretty dampening impact on demand and on spending. Actually, the impact has perhaps been a little bit less than my colleagues overseas were expecting and that’s been true here as well. We were worried certainly in May and we were looking again in August, but we really haven’t seen much sign of it. When we ask, actually, we don’t hear many firms telling us that they are putting pause on a project or not going ahead with hiring or what have you, because of uncertainty. There are other reasons you might be doing that, but policy uncertainty, international policy uncertainty, doesn’t seem to be one. So, that was quite interesting.

The other thing that we talked a little bit about, which if you’re an RBA watcher, you’ll have seen this over the last couple of years, was how central banks communicate with the community to help ourselves be understood - what we do, why we’re doing it, even what are our metrics and what are we measured on and mandated on. There are a few central banks around the world that are looking at different ways to communicate with the general public. So, talking about using scenarios that we were discussing earlier, for instance, trying to be more open and transparent with the information that goes out there. It was good to sort of share learnings on what’s worked and what hasn’t and where we might go from there.

The RBA over the last couple of years, we’ve made a number of changes to our external comms. The press conference is the most obvious one I think. But actually if you’re, say, a real aficionado and you read the papers, you’ll see some quite big differences in there too. So, that was another good conversation. But, yes, it was a good trip. It’s always good to cross paths and share learnings.

Thank you, Sarah, and great introduction and great insight and, again, courageous to come into this room after six hours, so good on you. It’s probably related - observation question - back to Basel. And I know it’s not a mandate but productivity, maybe just thoughts on it? Productivity is not just an Australian challenge. I believe it’s evident in other economies and possibly what the thoughts were in Basel on that? And you mentioned boxed in, growth of the non-market economy. We’re not alone in this, and Michele Bullock has said that it’s just part of a modern economy that these things have to happen. I know it’s not policy, but what would you do? What do you think is going to unlock it?

The second is a really, really tricky question, so I’ll start with the first. I think what’s interesting in the international comparison is that you’re absolutely right; a number of countries, advanced economies, are really seeing quite subdued productivity growth. Not too dissimilar really actually to the experience that we’ve had here over the last sort of 10 years or so. But the one exception to that is the US, where they’re seeing very strong productivity growth and especially if you look through the COVID volatility. So, there’s a lot going on through that period. Just sort of draw a straight line. They’re continuing to see very strong productivity growth. I think part of the answer to your question, your second question, is: well, what is it that’s happening there that isn’t happening in other economies and is there something that can spill over? I think, again to go back to AI, just looking at the trends in investment over there around data centres and other AI enabling capital, that’s really very, very profound. It’s very large and it’s growing very, very quickly now to be very large. So, could we see that here but just a little bit later down the track? It’s not atypical for the US to sort of lead and other countries to follow. We’ve seen that before too. That’s possibly one answer your question.

In terms of the non-market economy and the impact that that has on productivity - and I sort of mentioned this earlier too - one sort of word of caution I would say on this up front is it is true those sectors tend to have relatively low, if any, growth in measured productivity. But I use the word ‘measured’ quite deliberately because the way we measure them in the national accounts sense, so in the GDP sense, we sort of assume zero productivity. Because there isn’t a price, a market price, for these products. How do you put a price on a hip replacement if the public sector is providing it, for example? We tend to just measure their output as whatever the cost of the inputs is and there’s nothing in between. So, you get zero productivity by definition. That’s not to say advances are not happening. The medical sector I think, and healthcare, is a great example. Clearly survival rates for cancer are improving all the time. Hospital stays, when you have an operation, they’re getting shorter and shorter and people have much higher survival rates in general. That’s great. But we don’t measure that in the productivity numbers. So, just a word of caution on that non-market sector and I do think it’s warranted.

But setting aside all that, how do you tackle these things? Well, look, it’s really, really hard. I think the Productivity Roundtable that was held back in August, there were a number of factors that were highlighted, some of which some arms of government are trying to do something about. I know businesses are trying to do something about as well. It does seem when we talk to businesses that the skills shortage, or I would actually prefer to call it a skills mismatch, in the in the workforce does seem to be a perennial challenge that is only ever getting worse. That is just tracking up and up, the proportion of businesses that say they can’t get the right skills. It feels like there are maybe some wins that could be had through training and education and trying to match, better match, the skills that people come into the workforce with, with what firms actually want and need. And a bit of an education piece there.

I’ve already mentioned planning and other regulatory barriers that many state governments in particular are trying to tackle. And that’s really good. But any final point on productivity is that all of these things will take time. That is the lesson of history in this space. You don’t transform your productivity outlook overnight. So, in the context for us as the Reserve Bank and monetary policy, that’s why when we downgraded our productivity assumption we were quite clear that it was for our forecast horizon, which is sort of two, two and a half years. Any policy lever you pull today is unlikely to have much of an impact over that horizon. And that’s something the Productivity Commission has observed and others have observed about the past. So, we’ll keep looking at this. It would be great to be able to upgrade that assumption. I would really like that for the country, income growth and higher GDP and higher GDP per capita. Not everything, it’s not everything about a life, but it does matter. It is a way of having the income to provide for society to provide the services that it wants to provide to itself. It would be great to be back here in a couple of years upgrading that assumption. Let’s see. But that does seem to - at least it’s being talked about and that has to be a good first step.

You talked about productivity taking a long time. The big sort of debating point out in the community at the moment is housing. And a lot of the businesses around here are involved in housing either directly or tangentially. And that is being impacted by skill shortages and planning and a whole range of other things. I think part of the question is: is there a quick fix on housing or is that another two-year problem, two years to wait for a solution?

It does - unfortunately, I mean, the ultimate solution to bring down the cost of housing is supply. It’s a pretty basic economic outcome, unfortunately. Look, it does take time, particularly if you’re thinking about time to build medium and high-density housing. So, just from getting the approval to actually doing the building work and then that new stock coming into the market either available as rental accommodation or to be purchased by an owner occupier, it does take time. You can’t just build homes overnight, unfortunately. Whether or not it takes two years to see the full impact, that really does depend on how things play out, on what happens with approvals and then what happens with the time to build. What we can see in the data is that there has been a bit of a lift in approvals over the last year or so. So, it should mean more supply coming online in the future relative to what’s being completed today. So, that’s some good news. But, yes, the ultimate solution, unfortunately, is supply, and it does take a bit of time. We wouldn’t anticipate that we’ll see a sharp downward correction in rents or anything like that at the moment because the supply isn’t there relative to demand to generate that kind of outcome.

Okay. Last chance for any questions.

This is slightly off topic, if you’ll forgive me. I’m really interested in the bank’s views on cryptocurrency and how that’s going to play out in the Australian economy over time.

Yes, great question, and it’s certainly a topic of conversation, particularly stablecoins. I think what we’re really looking at at the moment - and we are doing some research into both CBDCs - we have a program of research into what a central bank digital currency might look like and what are the use cases for it, wholesale and retail. And then we’re also, much more recently now, looking at stablecoins, which are a big, big story for the last 12 months or so. If I think back actually to early 2024 they were hardly getting a mention and now you can’t have a conversation without them coming up. I think, again, we’re really interested in what the use cases are, the benefits to society, and then therefore what the demand for these kinds of currencies might be. They have grown really rapidly, particularly in the US, but they are still relatively small. You can grow very quickly off a small base. And what happens from here I think is really important. And whether or not people, individuals, but also businesses or financial institutions - what’s the use case for them that they can’t get from using just your bank account, for example. I think that’s really going to determine what happens to stable coins and how large they get and how influential they get in the financial system. But it’s certainly something that we’re watching very closely and there are clear linkages between stable coins in particular and the financial system that we’re actively exploring.

Any last ones?

Thanks for all the insight, Sarah. You’ve spoken a lot about a number of the insights around the high-level trends, if you like, on a national basis. I think what strikes me about the economic conditions at the moment is the magnitude of the difference between the states. And if I give you the two polls, from my perspective, Melbourne versus Southeast Queensland. We would say in what we would consider traditional base business in Melbourne incredibly depressed and challenging and really being held up by major infrastructure spending. Southeast Queensland obviously completely different to that, with almost record demand and an Olympics around the corner that’s going to just compound that further. So, would appreciate your insight on how you take that into account in your decision-making.

Yes, it’s a great point. We hear that from businesses sort of across the spectrum actually. You think you’d hear it a lot from construction. We do hear it a lot from construction firms, but actually we hear it in almost every conversation that we would have in Victoria, about how challenging it is down there. And we know that. And then, you know, Southeast Queensland are definitely the other end of the spectrum. It’s not entirely alone, though. West Australia, Perth and Adelaide, South Australia are also pretty strong in terms of their outcomes at the moment. And then everyone else, sort of somewhere in between.

So, we do factor it in. I think maybe what’s interesting to keep in mind is that it’s not actually that atypical for different parts of the country to be sort of running at different speeds. And the mining investment boom from the sort of late 2000s and through to the early mid-2010s is a good example. So, setting aside the GFC, which obviously put a bit of a pause in the middle, at that point we had very, very strong outcomes, strong growth in WA and in Queensland again. And then other parts of the economy were a bit softer. And then it turned around as that investment boom sort of came off. I first moved to Australia in 2016 and my first trip to Perth I think was 2017. And I remember thinking, gosh, this is a really quiet town. Doesn’t seem to be much going on in Perth in 2017. And I was talking to people, I was like, ‘Gosh! Is this just an unusually quiet period or something?’ They went, ‘No, no, no. It’s quiet because we’ve just come off this big investment boom. But it will come back because it’s mining and it will swing back.’ And then the opposite at that point in time was actually Victoria; Melbourne was absolutely flying through that sort of period in the run-up to COVID. So, it’s not atypical, but it’s just - it’s different sectors, different geographies at different times.

In terms of how we think about it in our decision-making and how it shows up in the data and things, really what we expect to see, and we do think this is happening at the moment, is that the economy or individuals really will adjust. So, for instance, on a recent trip to South Australia I had a few businesses telling me, ‘We’ve still got pretty good demand, but we’re actually seeing some competition from Victorian firms come into our market because they haven’t got much going on at home. And so they’re coming across the border, as it were, and competing with us. ‘I had to say back to these guys, ‘Well, I’m sure that’s a bit frustrating for you, but actually that’s exactly what I want to hear because that’s how the economy should adjust.’ We see that as well with people who are a bit more mobile. With jobs if you’re in a part of the country that’s a little bit soft in the jobs market, it’s not atypical for people to then move to other parts of the economy that are a bit stronger where there is more opportunities. And we’re seeing that as well. If we look at the interstate migration, it’s lifted into Queensland and relative to the past Victoria is looking a bit weaker.

Because the economy is doing the adjusting the way we would expect it to, and because we are setting policy on an aggregate basis, we do look at it and we do want to see what it looks like, but we really are concerned with how it sort of all shakes out at that top aggregated level. But we hear it all the time. We know it’s pretty tough down in Victoria in particular and there’s a lot of adjustment going through the economy there at the moment.

I know; I live there. I’ve got one final question, but where you’ve just gone with that question leads me to another question which is on business investment. And there just seems to be a lull in business in investment generally at the moment, with all the uncertainty going on. We had some conversations with members yesterday around attracting capital in as well to invest. So, access to capital as well. Just that whole investment question, investment appetite and ability to attract capital to invest. Where do you think they’re at in the cycle? Because all these things are cycles.

It would be interesting to hear around the table on your second question in terms of the risk appetite and whether access to capital is a constraint or not. We hear it sometimes, especially from SMEs or from startups; access to capital can be particularly challenging there. But we don’t hear it from all of the businesses that we talk to. So, interested to hear people’s experience around the table. In terms of the investment cycle itself, it is interesting tracking it and how it’s changing over time actually. So, we saw a bit of a lift, a bit of a run-up, immediately after COVID, and then in the recent past it’s been quite flat, over the last 12 or so months, and we think it’s going to be a bit flat through the rest of this year and through the next 12 or so months, and then perhaps lift a bit after that as the recovery in domestic demand feeds back through into decisions that businesses take.

But within that what’s fascinating is that investment on, we call it intellectual property - so that could be software, it could be intellectual property, other things like that, the intangibles if you like - that has actually grown consistently at a pretty fast pace and it now accounts for over 20 per cent of total business investment. And that’s from near zero not that long ago. So, that component of business investment hasn’t slowed down at all, and that’s been really motoring along. It’s the other components. So, that’s any buildings you might be putting up, any machinery and equipment that you might be purchasing; those are the bits where we’ve seen more of the softness. So, again, it would be good to hear from people around the table if that’s what you’re experiencing and what it is you’re spending on.

Thoughts on that, ability to attract capital for investment or where investment’s occurring?

I think from our perspective, the investments that we’re currently undertaking is how to unlock capacity. So, we understand the productivity challenge, both one for ourself but equally for our customers. So, thinking about how do we continue to invest behind what’s about to come. So, be it residential, because we expect it to respond and we look forward to the response in terms of commencement activity, but delivering the infrastructure for the Olympics but also energy transition. So, how are we thinking about the next five to 10 years and the capacity we need to be able to meet that market demand?

So, a good example, we have two electric arc furnaces in the Australian economy. One situated in Sydney, one situated in Laverton. We’re currently taking our Laverton plant up about 25 per cent. So, we’ll bring 250,000 additional tonnes to the domestic market to meet what we anticipate as the growing demand. So, I think from our perspective, we’re taking the long game. We’re having a good look at what the economy is going to do, how it is going to move and how we need to respond to do that to meet the demands of the customer. I probably will go back. I mean, there’s plenty of points which have been fascinating in terms we could spend a whole afternoon on some of these topics. So, highly relevant. Your comments around structural change - I guess one of the things, though, when we think about that investment case, we are very conscious around government policy setting with respect to the geopolitical regime that’s currently being experienced. So, in our case, what’s happening with tariffs?

What’s the likely response from Australia given what the US has done, what Europe is doing, and therefore the indirect impact from China? So, I think one of your comments was how are people seeing and how is it being experienced? The comment I would make - as the indirect consequence of trade settings - is that China is still exporting significant volume of product which is finding its way to the least path of resistance, which happens to be Australia. So, we are seeing domestic steel, we are seeing the fabrication industry - there’s a number of subsectors I think are experiencing the pressure; that will create structural changes. That will definitely flow through pricing, either positive or negative, but it will fundamentally change the Australian dynamic of manufacturing over the next decade. So, yes, full fair trade, absolutely. How to compete effectively, product quality standards, accreditation, but is it equal?

So, therefore, all of those factors. Your comment earlier was how are business, how do we think about the inflation dynamic, how are we thinking about pricing, how do we think about value? Those factors are all at the table in terms of when we’re contemplating what we do to meet the market and how to invest. But I reckon there’s another five years of significant structural change from the geopolitical, energy and sustainability. They would be my big three. So, energy, sustainability and trade policy regime in terms of the next phase of structural changes in the market. That is my perspective.

And it’s a lot, right? I think that was the comments on the question earlier on, how are we adapting to how much change is going on? As you said, even one of those things would be a big structural change for an economy to swallow. The fact that you’ve mentioned three, and I think others could probably add to that list, just tells you how much more complex the environment is. That makes our job challenging. But as you say, it makes your job challenging as well in terms of the decisions that you’re making.

It does go to the agility. So, I think speed of change today - I think particularly ourselves, you know, steel, typically we take long decisions. Takes a long time to change and move. I think the businesses that are going to be successful, how do they move a lot faster? How do they respond both up and down to those changes? Really pivotal. But equally, the policy setting regime needs to be similar to give confidence, take away uncertainty, allow people to invest with certainty around what is going to transpire, because then we can make faster decisions. And if we’re making faster decisions, I think structurally for the economy it’s going to be better outcome for everyone. I only can encourage the conversation. But they are definitely all the factors and we’ve just got to move through them quickly.

We’re certainly seeing data from members showing import competition is up in the past six months across parts of the economy. It’s just interesting to see that. Any other observations around investment? I think you nailed it. Okay. My Last question is: 2025 is coming to an end. What’s front of mind for you going into 2026? And the final bit of that question, what is giving you reason for optimism? Because it’s abysmal science, but it’s got to be full of optimists.

Yes, great question. I think as a central banker it is a little bit hard to not go to what happens to the labour market and inflation. And that’s certainly something we’re very, very focused on. Because we are very mindful of how much impact the policy decisions that our board makes have on everyone. And even a decision to not change the cash rate has an impact relative to whatever else you might have done. So, we are always very mindful of that and thinking about that. I think I am also inevitably going to say the international economy and the dynamics around the international economy - I think that it’s still not entirely clear how the policy changes that we have seen this year are going to fully play out to the conversation we were just having. And what that means for Australia; that’s certainly something that’s going to keep me up at night and thinking at night, at the very least.

To be optimistic, I think it’s probably to say that the economy this year and actually large parts of the global economy as well, have been more resilient than we were expecting. I think we, the collective central bank group, certainly economists more broadly. And I think that just plays to the adaptability and at least some agility to adjust and to take in our strides some of what has been playing out. I think that’s a pretty positive message that we can actually navigate our way through situations. We can always do better, certainly we can always do better in our jobs and we’re always looking at how we can do better. But, yes, certainly if I roll the clock back to April-May time, I don’t think I was expecting things to look as good today for the global economy as they do, and the Australian economy has sort of been a part of that story. So, maybe that resilience piece actually, I think, is something that maybe we take a bit for granted, but it’s an important feature of the system.

Keep getting up; that’s the thing.

Keep going to work.

Sarah, thank you for your time. You’ve been actually incredible given you just got off a plane. It’s been fantastic.