Transcript of Question & Answer Session On the Rail or Off to the Races? The Outlook for the Australian Economy

Hello everybody. Welcome. Please grab a seat and we can start the next session. Thank you for coming. I’m George Tharenou, UBS head of macro research for Australia and New Zealand. It’s my privilege today to moderate this panel on the Australian macro economic outlook with RBA Deputy Governor Andrew Hauser. The RBA has just released a detailed publication, you can see the title there, On the Rail or Off to the Races, with a parlance to the Melbourne Cup, and we’re discussing the outlook for the Australian economy today. I’ll host the discussion with Andrew and then moderate a Q&A session. As a friendly reminder for those who have registered, you’re able to either use the app on screen there or via the app and I’ll receive questions from the floor. Firstly to introduce our speaker, Andrew commenced as RBA Deputy Governor in February 2024. He’s the Deputy Chair of the RBA Monetary Policy Board as well as ex officio member of the RBA Governance Board. Obviously many would know Andrew previously worked at the Bank of England with a long and distinguished career since 1992 with a variety of senior positions, including most recently as executive director for markets. Going further back Andrew’s academic achievements include Masters degrees from the University of Oxford and London School of Economics. I’ll give some brief framing for today’s discussion before I hand to Andrew, and noting Andrew has been unwell today so appreciate him coming. What I plan to do is just look back and talk about the context of today’s discussion on the Australian economic outlook. I think the first thing I wanted to highlight is the RBA has had a monetary policy strategy that’s been different to peers. Globally we’ve seen central banks tighten more and ours less comparative to ease. When you think about the RBA’s assessment of the outlook inflation depends on the balance between supply and demand, this is something you’ve started to discuss a lot more, spare capacity output gaps and so the clients today I think in the room will be quite interested in your views to understand what is the outlook for the cash rate based on this spare capacity concept and what is the economic and market impacts of that.

Thank you, and thanks to all of you. As you say, I’m struggling with a bit of a bug. I hope I make it to 45 mins, but you are spared all my bad jokes about the Melbourne Cup. You can read them about later if you like. If you go back a year, we were in a challenging place. Many other central banks had begun cutting rates, some quite sharply, and we were under pressure to do so. People - I can’t remember if it included you, George, it might have done - were saying we were behind the curve, again some people said. Growth had been 0.1 in June 2024, so not quite recessionary but close, and as we got into the end of the year US administration came along that looked like it had its sights on our biggest trading partner and was determined to reorganise trading arrangements, and I think there was a view in the market that Australia was, you know, unlikely to avoid being quite centrally affected. Now, we didn’t agree with that view. We saw growth picking up as part - as a result of the tax cuts and public spending. We didn’t see the need to cut urgently because we hadn’t raised as far, and I set out in the speech at the end of ‘24 there were some good reasons to think that tariffs wouldn’t pass Australia by quite, but they might be less damaging to us than we thought. In the event the worst fears haven’t proved correct. I don’t want to declare success, that’s not our game. GDP has recovered quite slowly to about trend. We haven’t seen material effects on global trade flows so far from the tariffs. Pretty extraordinary in some ways. There are lots of reasons why that might have happened, and it may still happen. We haven’t seen the confidence effect in Australia on consumer and business confidence that some had expected, to be honest we had expected it to. Consumer confidence isn’t high, but it didn’t dip down as a result of the tariffs. Employment performance in Australia has been particularly strong. It’s part of our mandate, obviously, but if you plot, and there’s somewhere here - not sure I’m going to be able to manage this - but if you plot Australia there, employment population ratio on the left, you can see that every other comparable country has moved downwards, in some cases really quite sharply.

You see New Zealand there for example. Australia is that plateau, the blue one on the left. Underlying inflation has returned to the target range, just. I’m sure we’ll come back to that. We were able to cut rates three times, which is important actually because what I’ve done here is I’ve shown GDP growth in black, it’s our forecast, but the GDP growth profile in blue is what we estimate GDP would have been, or would be - sorry, there’s a difficult tense because this hasn’t happened yet, future perfect or something, future past - but that blue line suggests it’s a projection of what we thing GDP might be about to do had we not cut rates. So we were looking forward in terms of our rate cuts to filling in that gap for GDP that we saw coming but wasn’t coming immediately. But there’s been a consequence of that success, and if I try and find my chart, this our estimate of the output gap, the pressure on capacity, around different growth cycles. The zero line there showed when growth picked up in previous recoveries. The recovery we’re in started in September ‘24. What you can see is that the estimate of capacity pressures is higher around this recovery than it has been in any other in the past 40 years. You might say what the hell were we doing lowering rates in that situation. I’ll get ahead of you. The reason was quite straightforwardly that we did see this weakness in GDP growth coming. We saw the output gap coming in towards zero in the way described and we decided to start cutting rates pre-emptively in order to offset that future weakness in GDP growth. But it clearly shows the challenge. Some people might say, well, hang on a minute, this is just your lousy models, who the hells knows whether you’re right to an order of 10, and that might well be a fair challenge. So what I did is I did the same chart using the NAB survey. This isn’t ours, this isn’t our models, this isn’t clever equations. This is businesses in Australia saying how much capacity are we utilising. Actually they’re not identical charts, but they’re pretty close. Again the purple line shows that firms are reporting capacity pressures here are as high as they were at any other recovery in the last few decades. That’s our judgment. We’re in a position where capacity utilisation is high and that clearly creates some challenges for policy, as you say.

So I’m going to claim a little credit here having published a cycles analysis which came to similar conclusions to you, and I guess the take-away for investors here to think about is the RBA’s current assessment of that balance between supply and demand and trying to either quantitatively or qualitatively read through what are the implications. Obviously what people are most focused on is levels and changes. So we’ve talked about output gaps, growth had slowed, but the starting point for growth was above potential. Similarly, the unemployment rate has increased but the starting point was very tight. So when the RBA is making an assessment of the inflation outlook, how are you balancing this trade-off between the fact that the levels of some of these measures, like capacity utilisation or output gaps, are a bit tightish, or a bit tight, depending on your perspective verse the outlook which is the hope that somehow the cumulative spare capacity in the economy will be sufficient to get inflation back in target?

I think it’s worth saying why are we in this position. One is it’s a sign of success, and part of our objective is obviously to maintain full employment. So large margins of spare capacity equal lost jobs, equal empty factories, equal empty offices. Those are not good things for economics to want to have. It’s a function partly of the fact that GDP growth and demand growth didn’t go negative, it eased back slowly towards that low last year, but also importantly, it is because our assessment of supply capacity of the economy is pretty weak. This chart shows our estimate of potential output growth over the past and in the future the bars aren’t quite even. But whereas we were used in the past - I see Guy Debelle over there, when he was Deputy Governor he probably says it’s a direct measure of my success relative to him, but whereas we were used in the past to potential output growth of perhaps 2.5, 3 per cent, and some economic forecasts still I think see GDP going back to those sorts of numbers, our assessment is that potential supply growth probably fell to about 1.5 in the first half of that decade and will probably only rise to about 2 this period. If you think about where GDP growth is at the moment, it’s already at about 2, so we might already be at trend. So when you think about what does that mean for policy going forward, in the speech I talk about three tracks, extending my poor Melbourne Cup analogy. Track A is there are still worlds that you could imagine where rates are cut. I think there are. You have to believe one of three things, I think. The first option is you have to think maybe capacity isn’t as strong as those charts show, and that’s possible because it’s uncertain. The second is you might be pessimistic about growth, demand growth. And the third is you might believe, actually, capacity doesn’t have much of an effect on inflation anyway, it’s a flat Phillips curve, I don’t care too much about those charts. All three of those views are valid. They’re not completely crazy. But I think if you think about what data you need to see, well, the CPI number we’ve obviously seen come out is a challenge for that view. You would have to believe I think that most of it was one-offs or volatile, maybe margin recovery that was shortly going to unwind. You probably take a view about the labour market that it was weaker and looser than our central projection assumes, and unemployment is up, employment growth is coming down, wage price index has been falling a little on the year earlier in terms of growth. GDP you could be pessimistic about consumer confidence in Australia is still pretty weak. You could, of course, worry about the world. In fact if you listened to the last session perhaps you would come away pretty worried about the world, tariffs may still prove to be more of an effect. I like to remind people in the UK the day after Brexit broke we were in emergency mode at the Bank of England, the world was going to fail, nothing happened. Ten years on you might well say the UK is dealing with some of the longer-term consequences of that sort of fundamental change in trading arrangements. That scenario could still apply in the world economy. China may start selling us lots of very cheap goods and that may put downward pressure on inflation. I don’t think we’re not seeing too much of that yet, but it’s a clearly a possibility. And financial markets might reprice downwards. I think we’re paid to worry, as central bankers, we definitely do worry about that possibility. So I don’t think you have to be mad or a fanatic to think that future rate cuts could be coming.

More plausibly perhaps at the moment you might worry about how much remaining room there is given that picture of capacity pressures. You might think the economy is a little bit boxed in by our supply capacity and that’s my main theme in the speech really. The pick-up in the CPI was pretty broad based if you look at the categories. Financial conditions, I’d like to come back to this, some measures might look more accommodative than we thought a few months ago, and I can explain why more in a minute. GDP growth could easily be stronger. If you think about the fact that most people are still thinking we’re only at the early stages of this recovery, but if it’s true that we’re already at trend growth we can’t actually see any further pick-up in demand growth without seeing some inflationary pressure. That’s a judgment clearly. Labour market, I would explain how you could see it as being quite easy. You could also start to think well actually maybe the labour market is pretty tight. Look at real labour costs still growing at around 5 per cent, look at AENA, the broader national accounts measure of wages rather than WPI is growing pretty strongly. You look at recruitment difficulties, you look at layoffs which are turning down. There are a number of indicators that suggest that maybe the labour market is tighter than in that central case. Again coming back to the world economy, you can afford, I think, perhaps to be an optimist about the outlook given what’s happened over the past year. So you can take different views about the outlook for interest rates. I’m not sure we’re far, we’re close, so these are debates perhaps around adjustments at the margin rather than large adjustments. But the third scenario I do talk about in the speech is what I call off to the races, which is clearly if you’re against the rails with supply capacity what you need to be thinking about is how to grow that supply capacity. We do have an assumption in our forecasts that productivity growth picks up a little bit. Productivity growth usually is a bit pro-cyclical. We haven’t seen that yet in the data, mind you, but I hope we do. But really, you need to be thinking about investment in this economy, and private investment in particular. When you list the - I don’t want to go into sales mode too much, but when you list the potential aspects of Australia as a place for investing the list goes on and on. I say this as an outsider in a sense. I don’t think I’m biased. Minerals, old and new, the world-leading universities, the human capital which we all score very highly on, the plum position in the Asia Pacific we’ve just been hearing about, the huge domestic savings pool, the super fund industry, fourth in the world at the moment, fourth biggest at the moment, going to be second. Your UBS report that you’ve just published shows Australia has the second last median wealth per head of any country in the world except Luxemburg, which probably doesn’t deserve to be first. So that’s a stunning statistic, I think. One of the lowest public debt stocks in the G20, strong banks, proven institutions, a long track record of welcoming capital and labour. So if you’re thinking about the pre-determinants of a great investment proposition, Australia must be high up your list. So from a domestic perspective, just coming back to your question, which was some hours ago, I’ve forgotten what you said, the scope for increasing and strengthening the supply side in the economy is an important priority, I think. It’s not one that the central bank can do very much about. We can, I hope, create the pre-conditions and we say investment looks more attractive.

I’ll come back to some of the things you touched on, financial conditions and also foreign investors, and ideally could get a supply improvement that changes the outlook, but I guess in the nearer term clients and markets like numbers so I’m going to at least attempt to get you to give a few numbers, or at least views around them. So GDP potential growth rate, the RBA made quite a significant change in the prior SOMPs for forecast revision rounds thinking about, as you see on screen, around 2 per cent, and that’s close to your forecast. We have this outlook for growth which is a cyclical improvement to a pace of growth which is about potential, and there’s a question mark about the implications of what that means for assessments of spare capacity in the labour market and how quickly inflation will rise relative to target. So in the past the expectation had been that maybe over the last year or two NAIRU full employment levels were coming down, and similarly during the August SOMP the RBA’s assessment around this impact of lower potential growth rate didn’t have material inflation implications because demand was expected to be weaker. That started to change. We saw a cyclical improvement in growth and then the RBA still characterising the labour market as a bit tight, even though the unemployment rate’s gone up to 4.5 per cent. So where do you think NAIRU full employment and on the back of that neutral is going? Because there has been quite significant change in some of the forecasts and speeches the bank has made. For instance the … models that came out in August SOMP lowered it below 3 and now it’s back up above 3 in a more recent speech. Where do you see the outlook and balance there?

So your question is around NAIRU or the neutral?

No, both. Those two things are so interrelated.

I did a text search on our latest statement on monetary policy for the word NAIRU and luckily there were no hits at all. It’s a concept of dubious usefulness, to be absolutely honest. You can see what our projection for unemployment is in our forecasts. It’s just a shade under 4.5 per cent, and our projection is that inflation will settle just slightly above the mid-point on that basis. I think if you want to know what our view is about the most likely single outcome for unemployment rather than asking what our NAIRU assumption is, go and look that. You may conclude that is what you think we currently think the NAIRU is, but of course a NAIRU concept involves all sorts of other shocks being at equilibrium and they may not be. Our models are champing at the bit for a substantial higher NAIRU than that sort of number, but lo and behold we make judgments and we aim off those models, and I think that’s probably the right thing to do. There is a group in Australia that would argue that the NAIRU is 4, 3.5 some people would say, and we have been attempting in the last period to test how much capacity in the economy there is. Does the pick-up in inflation mean we’ve found that answer to the question or does it mean, as I said a moment ago, it’s going to unwind and in actual fact further capacity turns out to be there. We’ll find that out, I guess, over the coming period. So if you think I’ve answered your question on NAIRU you’re wrong. On the neutral rate of interest, this is another mug’s game, I would say, to be absolutely honest. It is possible to write down a neutral rate that is, what, a bit above 4. You take the long-term US bond rate, you say we’re a small open economy that largely borrows and lends on open markets so probably in the long run our neutral rate can’t be super different from that, and you would think we were on the easy side of that now. It’s fair to say a lot more people have become a lot braver on that view with inflation ticking up than they were a few months ago. I know you were arguing it’s slightly stronger. Numbers like 3, 2.5 that people bandy around, there is a huge range around this number. So I know you want numbers, but I’m not going to answer that question. We’ll feel our way. We’ll see how tight or loose policy is by judging the outcomes of the macro economy.

The interrelated play here is financial conditions, and the assessment of the policy stance being restrictive or not is no longer just about GDP output gaps, labour market output gaps but also trying to think about the new world as I talked about, the structural changes in the economy. We’re seemingly getting a pick-up in credit growth, asset prices, particularly in Australia, but it is happening globally, and a level of policy rates which would be deemed restrictive verses a nominal neutral cash rate. How do you think the RBA’s weighting these shifting structural changes in the economy?

So you’re right, again let me hypothesise a sort of hawkish view, which is to start with the view of the neutral rate as being around 4 or a little bit higher based on global interest rates and then you play into that historically low equity risk premium, you play into that historically low credit spreads, you play into that a banking system that’s incredibly well capitalised and raring to go, so the banking results coming out recently suggests that competition is picking up in the domestic market. It’s good news for consumers, I should say. Sometimes it’s not clear to me why we would criticise that, and that is true obviously particularly in the business sector. So there you go. There’s a really hawkish views that says you guys, not only are you easy on interest rates but you’re probably easy on broader financial conditions so you need to rebase what you’re thinking about policy. I think that’s one extreme of the view. On the other extreme we do look at household credit growth in particular. Although it’s picked up, if you normalise household credit by income measures it’s still trending downwards. It’s quite hard to look at the average household leverage ratio in Australia and conclude that it’s particularly high at the moment. That could sound complacent. We’re certainly keeping our eye closely on it and obviously competition in the mortgage market has heated up a great deal. But a number of the macro economic measures of the degree of leverage in the household, and to a degree the corporate sector, are not even screaming amber necessarily let alone red yet. So it is a balance picture, but clearly financial conditions have eased in the last few months and they’re clearly more close to neutral, let me just put it that way, than we thought they were a while ago.

A while ago previous RBA Governor Lowe even hypothesised a triple mandate, this idea of degree to which the policy settings take a read from conditions and thinking about the potential risk that could have for the outlook. For instance, if you were to have a period of leverage and that was to turn and asset prices decline there could be a financial stability implication, but also a real economic implication. I wonder if from your perspective is there some metrical threshold or framing in your thought process about the transmission mechanism changing here, that traditionally people talk about the cashflow channel and/or the currency as the cash rate moves, but is there a pace of growth in credit, is it the ratio to income, is it just outright house prices, is it global risk appetite that would lead you to have a material impact on your normal cash rate assessments around GDP, output gaps etc?

I wasn’t here when Phil was Governor, so I wasn’t part of that debate. When I look at our objectives as they’re stated now we are tasked with targeting inflation and employment, and obviously we have responsibilities for financial stability, but those tend to be discontinuous not linear events that come from time to time and cause you to have to reevaluate what the outlook for the economy is. Sadly in the UK we had quite a few of those events. You’ve had far fewer here. We haven’t got some third hidden goal that we’re not talking about. What you see is what you get in terms of our policy outlook. We are targeting inflation and we have an eye on employment.

I’m going to turn to inflation. In the September quarter there was a "material upside surprise" versus the RBA’s forecast, depending on how precise you are, but some around 60/70 basis points, and apart from COVID that was one of the largest upside misses in decades. What were the key drivers? Obviously you’ve given speeches around this, but getting a feel for your assessment of signal versus noise.

So as the Governor said, and we said in our statement, we definitely think that part of this pick-up is likely to be temporary. If you break down the index as you know - you can come at this from a bottom up or a top down perspective. I personally prefer to do it top down, but let’s do it bottom up to start with. A number of things driving it up, travel and food, for example, are things that we know to be volatile. This is the trimmed mean, obviously the headline was also affected by electricity rebates which we understand and by fuel as well which are also volatile. So you can identify, and there are a number of components that are likely - likely to be, not certain to be, one-offs or temporary. But there clearly are also some things, elements in market services and dwelling inflation, housing and dwelling inflation that might be suggesting to us that there’s some signal there. So there’s some signal, there’s some noise. If you look at our forecasts I think you can probably back out of our judgment on this which is very roughly one-third/two-thirds, one-third signal, two-thirds noise, look at where the end of our projection has gone which is just slightly above the mid-point, you see inflation coming back down in quarterly terms quite rapidly as that judgment of roughly two-thirds noise plays out. Those are judgments. Who knows, right? If you take what I think I call in the speech track B, the we’re stuck on the rail view and we’re at capacity now, then you will probably think this is evidence of the economy beginning to hit its speed limit. We don’t know. That’s why we held pat last week and we’ll watch the data as it comes in.

Do you think it would be fair to assess the RBA’s views are very dependent in the sense that the model assessments of spare capacity, whether it’s the unemployment gap, output gap etc, are heavily influenced by the outcomes of the inflation prints? So normally you think about these being quite structural, multi-decade, long-term, slow-moving assessments about things like potential growth rates, productivity, unit labour cost margins over a long period and you shouldn’t be changing these concepts, unemployment NAIRU, full employment, but suddenly we’ve had an inflation outcome that was materially different. So is it the case that the shifts of inflation outcomes versus forecasts could change your assessments of the spare capacity concepts going forward? Is this something … new world?

They could do. Look, you’d probably go pretty badly wrong in forecasting if you assume these concepts are unchangeable. We know there have been labour market reforms here and elsewhere over the decades which would affect the NAIRU by itself, immigration patterns may affect it as well. We talked about the neutral rate, and we know the neutral rate - we strongly believe the neutral rate moves around according to things like demographics and other longer-term trends, and people debate that all day long. Could they be moving rapidly or not at the moment who knows. It’s probably unlikely. We talked here about clear evidence that productivity growth has stepped downwards a bit has probably affected the concept of sustainable growth. None of us are in a world where we think these are constants and they have to change. I don’t know that we think we’re in a crux of some brand new paradigm, whether it’s a bad paradigm or a good paradigm. We could be. But no, we’re primarily looking at the data as it comes in.

I’ve got a question here about trade-offs, basically, and your thought about the policy reaction function, effectively between growth and inflation. There had been a concern like you talked about right at the start growth was very weak and policy was restrictive and there were some saying the RBA was behind the curve and they needed to cut rate more aggressively but now we’ve had inflation pick up. If there was to be let’s say over the next six and 12 months a bad mix, inflation is high, it gets stuck, we’ve got supply constraints going on, but growth is disappointing, is that a sufficient condition that the RBA can so-called look through the inflation and start to support growth again as a dovish view?

It’s a central bank’s nightmare when that happens. I guess my first response is I hope it doesn’t. It’s not our central projection. Our central projection is for inflation to be at or above the top of the target range for a while and then to come back towards just above the band, and for employment to keep growing, albeit at slower rates than we’ve seen in recent years, the reason for that being obvious. I hope that as public sector demand falls and market demand rises you have slightly different measure of productivity levels in those sectors, so you would expect as a composition effect for employment growth to slow. We don’t project it to go below zero. If we were faced with a situation of the kind that the questioner describes we would have to try and understand why it was. If we could identify an adverse supply shock, as indeed we did, or the RBA did, during COVID, then you would look through some of it and you would protect some of the employment and output costs that would come from tighter rates and tolerate a period of inflation that was higher for a period. If you thought that the cause was something else then you would obviously have to take a different - it’s a difficult question to answer. It’s not a situation that we particularly want to be in. It’s not the situation we think we are likely to be in at the moment. If we did get into it we would need to try and understand why before we could answer the question as to whether we look through it or not.

The same question in another way is the trade-off between inflation, unemployment, so the market expectations around November changed a lot leading into that meeting because inflation was higher, but then there was a wild card of the unemployment rate picking up to 4.5 per cent. Now the RBA’s core view is basically the unemployment rate is basically stable around these current levels but that trade-off between unemployment and inflation, as you mentioned, I had been on the hawkish side thinking the unemployment rate needed to rise, you needed to have more capacity . Historically trimmed mean inflation … returned to that 2.5 mid-point target with more like a … so where do you think the path of the outlook for the cash rate, or at least your thought process around the trade-offs are here, that at the moment the profile does have inflation holding high for a while but then comes back down through ‘27, but the unemployment rate stays steady. Does it potentially mean that we need to have a period of higher unemployment than previously expected to get that inflation back down?

No, that’s not our central case at the moment. You sound a bit like a gotcha journalist. You could try a different career perhaps, George. It’s not our expectation that that’s the situation we’re going to find ourselves in. Again it’s really just a variant of the previous question, in fact it’s almost exactly the same question, which is it’s not a world we want to be in and it’s not a world we expect to be in. I think the third point was we looked at the source of the shock before responding. Shall we move on?

Yes. Let’s talk global. That was one of the questions too as well, and the client’s is almost the same question I was going to ask you. How does the RBA think about the global backdrop? I guess the key thing here is we have several global central banks who are reducing their policy rate, and if you think about the world of real interest rates, most of the CPI rates in the major economies are around that 3 per cent level which is even higher above their targets versus Australia, we’re mid-point 2.5 and the others are more like 2. So how are you assessing - let’s say the Fed keeps cutting rates, what does that mean for Australia? There’s currency channels, financial market channels, there’s maybe even a hawkish argument which I’ve made which is if real rates are falling then the Fed’s been pre-emptive in putting too much weight on labour market verse inflation, it just underpins this global asset cycle and wealth story.

Well, we used to have a - our chief economist at Bank of England was a guy called Ben Broadbent. I don’t know how well-known that name is, but whenever the world economy came up or certainly the nominal side of the world economy at an MPC debate, he would say this is irrelevant because we have a floating exchange rate and independent monetary policy. So let’s just spend our time thinking about things that affect demand and supply in the Australian, or in their case the UK economy. The most - the hardest core answer to your question about what does an overseas interest rate or overseas inflation mean for Australia is nothing at all because we will look at the Australian conditions. I don’t think that’s a bad starting point actually. Clearly when you’re talking about the hegemon, the US, you have to wonder whether that’s going to affect global interest rates, and then you would need to ask, just as we were discussing a minute ago, why is the US cutting rates? We had an interesting debate this morning, I thought, about whether part of the purpose of cutting - the sole and only purpose of cutting rates would be to ensure that inflation remained on target or that there might be, as central bankers say, other factors bearing on the Fed’s decision. Now, if that were the case and an inflation risk premium began getting built into their interest rates that would have an impact on ours, and it would be an awkward impact because it would be global markets saying do you know what, we think the credibility of the Fed and maybe other central banks has fallen somewhat, we’re no longer as confident that inflation is going to be held to target. What is fascinating, and I might as you or someone in the room, is there’s no sign of that at all at the moment. I saw a survey the other day by another major international house that said 85 per cent of people in the market are worried about Fed independence, and 85 per cent of them are doing nothing about it in terms of their trading stance. That’s good news, I suppose, for the world economy, but it is an interesting tension, and I think the main thing we can do in terms of thinking about how we set policy is to look at the things that are relevant for the outlook for Australian inflation and try and get that right.

While economics is known as a dismal science, I’m going to try to be the opposite and say something positive, which is on my travel seeing global investors at UBS I’ve noticed a material shift, which I had on the opening slide, about the attitude of global investors towards Australia has become more constructive and part of that is the things you talked about, the long-term structural dynamics, about the natural endowment, public policy stance of debt levels and the fact we’ve managed to get through the cycle so to speak. Now, I’m trying to think about how the RBA’s reaction function is going to start to change with some of these factors, which is if we’re starting to see global investors turn more positive on Australia, capital starts coming into Australia, we’ve seen in the balance of payments data, you gave a speech on this more recently, I wrote a paper on it as well, net portfolio inflows are pushing up asset valuations in Australia so we’re getting spillover from that high level. The bit we’re sort of missing we’d like more of is the real FDI investment to improve productive capacity. How is that thinking coming through to the policy decisions? I guess it’s more medium-term, but it is something that investors need to think about more than just the noise of monthly inflation or labour market prints. What if there’s a material change that suddenly we’re a favoured destination globally?

It depends what the money is going into. You’ve sort of already answered your question. My hope would be, and I’m sure all of our hopes would be that that investment were being disproportionately channelled into increasing the productivity capacity of the Australian economy. That is what we need, as I’ve tried to set out earlier, and that the opportunities and returns to that kind of investment, given some of the backdrop we discussed earlier today and have been talking about, should be pretty strong actually. The challenge it seems to me in Australia is less the availability of finance. It’s more creating the assets that that investment could go into. It is interesting, perhaps striking, that so much of the large domestic savings institutions here send their money overseas. It’s obviously wise in terms of diversification, it’s wise in terms of reaching the fiduciary responsibilities for their members, but there is an enormous untapped potential in Australia for these investment flows, whether it comes domestically or internationally, for taking these raw assets of the economy and turning them into productive potential. That would be the best news scenario that would push supply up, inflation down for other things equal, it would actually allow us to have easier rates over time. That’s a medium-term scenario, I recognise, but it’s the one probably all of us in policy-making circles, and indeed market-making circles too should hope for in terms of Australia, that we ride the wave of this global change, as we have before, and benefit from it. An alternative world which someone once described to me as here we go, it’s Alan Bond all over again, which probably means more to you than it does to me, in which an excessive amount of money is ploughed into the existing asset stock, probably mainly property, pushing asset prices up above where they’re justified to be, would be much less comfortable. I don’t think we’re seeing much of that yet, do you in your discussions? Obviously there has been a pick-up in investor demand in the housing sector and that obviously reflects in part greater confidence about the outlook for the Australian economy. But I don’t yet see this kind of influx of dangerous fast money entering into the existing asset stock. We have to make sure, and this is a whole of policy-making environment challenge, that we do channel those resources into productive assets.

No way is that a question, George. You’ve just stated your view and put a question mark at the end. I think you’ve answered your own question.

Alright.

He’ll be cross with me later.

No, that’s okay. We talked a lot about policy, maybe something a bit different. The balance sheet has come up again in terms of thinking about the RBA’s policy stance. Maybe just, I guess, definitively come of a view is there any thought process about the interaction between quantitative tightening and the position of the monetary policy tool and/or change to the capitalisation of the bank or any implications for monetary policy?

I mean this is a larger part of my personal life than I would wish. I was a big part of the QE and QT program in the UK, and of course the UK set about selling the assets that it had accumulated during the QE phase. We had to do that, actually, because the average duration of the UK debt stock is very long. It’s a great benefit to the UK, but it does mean if you just sit on that stuff you’ll be sitting on there till doomsday. That was a big - I think that just key differential point is not always that well understood relative to other central banks. Japan was an average duration of three years or something. We had something closer to 10 or 15 which is just not viable. Clearly that sales program created discussion in the market. I think it’s the right thing to be done, it’s been pared back a little bit since. The strategy of the RBA is different. The duration is substantially shorter of the holdings, it is to allow them to run off passively and the RBA Monetary Policy Board recently discussed this and concluded that would remain the strategy here. I’m not sure there’s much evidence, I certainly don’t hear much chatter from people like you, that the RBA’s run-off program is harming the formation of medium and long-term interest rates in Australia. Tell me if you think it is.

No, I think it’s - yeah, I think it’s the case that it’s probably not materially impacting what most clients think about the impacts on markets having some knock-on impact on policy outlook. We’re coming up to time, so I’m going to ask the obvious question, which you won’t answer, the next move. I’ve got it on hold. In the SOMP the implied profile has a 25 basis point rate cut. You sort of talked about it in your comments. How do you see the market pricing? Is it a fair assessment of where you see the balance of risks?

I think the market - it think it happened rather awkwardly between when we cut the data for our forecasts and when we actually made our decision, had moved even a little bit further up. So if I looked at the market this morning it was something like a 20 basis point trough, so not quite one. As I say, my read, and tell me if this is wrong, maybe it took a little bit of a reach from the Board’s discussion, but actually most of that probably reached on its own front. As you know, on the basis of that one cut profile in the market path we’ve predicted inflation would slightly overshoot mid-point of the target. Draw your own conclusions from that. It’s just one line on a chart. As we’ve discussed quite a lot today, the uncertainties around that are the big thing. These enormous trends that are going on in the global and domestic economy. As my old boss used to say, the one thing you know about that forecast is that it’s wrong.

Moderator: Alright. That brings us to time. Please join me in thanking Andrew again.