Transcript of Question & Answer Session The RBA’s Dual Mandate – Inflation and Employment

In terms of your speech, Governor Bullock I love the speech the description of the labour market I think is still relatively tight. There is a bit of dichotomy with below trend growth. I am wondering if you could illuminate us in terms of the board’s feelings or even your own personal feelings about the trends in productivity and what monetary policy implications that may come from that?

Sorry, the last part of the question … monetary policy?

Implications may come from that. Thank you.

Thanks. Yes, I do subscribe, actually. So I think it’s probably no surprise for me to say that productivity over the last few years has not grown and certainly not grown as much as our assumptions. We have a productivity assumption in all of our forecasts. It’s fair to say that over the last few years we’ve been assuming around about a 1 per cent growth in productivity. It hasn’t eventuated. So in the lead-up to the August SMP (Statement on Monetary Policy) we’re going to be looking quite heavily at that assumption. And thinking about whether or not it’s appropriate. What it means for monetary policy isn’t necessarily straightforward. We have been observing slow growth in demand. And a lot of people have pointed to that as demonstrating that monetary policy is perhaps too restrictive. But the other possibility is that what it is reflecting is just really slow growth in supply. The economy can’t grow as fast, if it really is the fact, as it seems to be that productivity is not growing, then demand just can’t grow because the supply side of the economy can’t grow. So the implications for monetary policy depend very much on that gap between supply and demand. So one of the things I think we’ll be thinking about in our August forecast round is whether or not the gap is narrowing. If we do have to adjust our productivity assumptions, it mightn’t mean anything much for inflation because it might just be reflecting the fact that demand and supply have both been going quite slowly over time.

Thank you Governor Bullock, if you would like to appear on the morning podcast please let me know, thank you.

Governor, thank you for your speech. One of the concepts that is really important in that dual mandate is the NAIRU, so that level of unemployment that we economists get very excited about, it the balance where inflation is neither increasing nor decreasing. The Bank’s estimates have put that at being probably somewhere around 4.5 per cent. A lot of private economists have said, it might be as low as 4 per cent. But that difference is probably even small relative to from prior to pandemic it was more around 4, around 5, 5.5 per cent. There has been that decline over that time period. We can’t point to any labour market policy changes that have pushed that. Rather, it seems to have been keeping people employed manages to get a lower level of the NAIRU. In that sense, the policies through the pandemic in Australia that have kept people employed have contributed to that. Bringing to the other side of things with productivity and you’re going to the productivity roundtable obviously in a few week’s time, the one country in the world that has high productivity is America. And they actually point to changes in job matching, people through the pandemic losing their job, and going to a new, higher-productivity job as being the one is driving that high productivity. So as a society, you mentioned that the Reserve Bank Board takes productivity and the NAIRU as it’s given, but as a society how do you think we think about that balance that by keeping more people employed, we might end up actually having lower productivity growth, and how might you think about that discussion at the productivity roundtable in a few weeks.

Big question and I’m not sure we can answer it in a short space. A couple of comments. I actually asked Jay Powell why so much growth in productivity in the US, relative to every other country has got exactly the same issue as we have with growth in labour productivity. He put it down to just much more dynamism in the labour market, it might be due to the pandemic factors you spoke about. Much more broadly, the labour market in the US is possibly is a little bit more dynamic generally. We released a Bulletin today in which we’ve got an article in there which is looking at the question of whether - when the labour market was really tight, we brought in a lot of people from the labour market that hadn’t been employed before, possibly had less skills and it was asking the question whether or not that was a reason why we had low productivity growth. The article actually doesn’t find that is an impact. In fact, it suggests it helped productivity. So if I come back - so I think that is suggestive of the fact that the proposition you are putting, which is that if you can generate a strong enough economy to draw more people in, ultimately that will probably be good, not only for the NAIRU, although as you know we don’t rely solely on the NAIRU and there’s a big debate about that. But I think it does bode well for productivity if we can bring people in and train them, ultimately I think that probably does bode well for productivity. Rather than having a high unemployment rate and a lot of people possibly have something to contribute being kept out of the labour market. That’s a short answer to what is a large question, but I hope it gives some insight.

Thank you.

I ask that nobody else join the question queues. The queues are quite long. I’m not sure we’ll get through all of them.

I think we should ask the school students.

I’ll get the two students to ask the questions. I’ll alternate. I do ask that both the media and non-media line except for the students keep the questions very short.

Good afternoon, Governor. Thank again for a great speech, really helpful for me and other guys. We have our macro policy essay tomorrow. I was wondering like in the face of really being domestic uncertainty regarding productivity growth, what do you see the role of monetary policy moving forward to be? Is it shifting back towards a neutral rate of interest and possibly looking at further expansionary stances from there? And do you think as well there’s room for possible collaboration with fiscal policy to expand the effectiveness in reducing issues particularly with the growth in, say the care economy and the services sector, in trying to ameliorate the low productivity that we’ve seen which would be great for getting the economic growth back to the target range.

Ok. Excellent question. Thank you. So in terms of monetary policy and productivity, there’s nothing specific monetary policy can do. But personally, if monetary policy can deliver, low and stable inflation and full employment, that is the best thing you can do for encouraging productivity. Because if workers and businesses doesn’t have to be worrying about inflation, they can be thinking about ways to improve their productivity, ways they can work better and they’re not worried about those sorts of things. So I think as I said, there is a role for monetary policy in providing a stable macroeconomic environment. In terms of fiscal policy and monetary policy, obviously they are independent. The government has a lot it has to do with the fiscal policy. It has to meet demands for aged care, health, education. It needs to meet demands for infrastructure. It needs to do that in a way that also helps the economy maintain low and stable inflation. So that’s the way monetary policy and fiscal policy can work together. We can both do our own thing. But as I said, fiscal policy does have much broader responsibilities, and it needs to try and do that in a way that contributes to the stability of the economy as well.

Thank you very much, and if you’d be interested we have a productivity panel end of term 3 end around September. If you would like to join us please speak to my teacher. Thank you.

Hi, I don’t have a fancy or long question. But I was wondering why did the labour markets respond so well recently as opposed to the much more worse and possible outcomes?

I think it’s partly - I probably would say this, wouldn’t I – I think it’s partly that we tried to be careful in raising interest rates. We knew we had to raise them. They were very accommodative. We knew we had to raise them first to get rid of the accommodation in monetary policy and then get it restrictive. But we took a deliberate decision not to raise them as high as some other countries did. And some other countries did raise them much higher. And countries like Canada and New Zealand experienced much higher unemployment rates. Canada’s now is over 6, I think. It was a deliberate strategy. And in slowing the economy to try and make sure that we didn’t lose the gains that we had. And as we’ve said, we kept employment growing. The unemployment rate has risen a bit, there’s been more people looking for work than there were jobs created. But employment has still been growing. I think that’s probably the gist of the outcome.

Thank you so much.

We’ll go to the media over here.

Good afternoon Governor. In recent times we’ve seen Jay Powell put under extraordinary pressure by the US President, administration officials. Do you think this is just Trump theatre or do you think there could be some real consequences for the financial system and central bank independence?

Well, I would again … I would say, wouldn’t I, that I think central bank independence is very important. Certainly, what’s going on in the United States is challenging that. I’d have to say at the moment that the Fed is doing what it is supposed to be doing which is focusing on the economy, the employment. They’re not getting drawn into the debate. And so at this stage I would say that they’re preserving their independence by acting in a way they think is appropriate. I can’t speak to what goes through Mr Trump’s mind. I’m not sure anyone can. Obviously, I think as we all know, Jay Powell’s term is coming to an end. It’s going to be interesting to see what happens from here. But I would say that generally, the general principle around the world of central bank independence still remains a very firm guiding light.

Thanks, Governor.

Another one.

Thanks, Governor. You said the most recent employment data didn’t come as a shock to the Reserve Bank and it merely confirmed the trajectory in the Bank’s forecast. But one of the reasons why the majority on the Board elected to hold interest rates at your most recent meeting was a degree of uncertainty about how the economy was evolving. Do you think the Board’s decision may have been different had it had access to that unemployment data ahead of the last meeting?

No, I don’t believe so. I think the number - the monthly numbers pop up and down. In fact, if you go back a year, I think in July ‘24, the monthly number popped up from 4.4 … 4.0 to 4.2 and then it settled for 4.1 a bit. So the monthly numbers jump around. Our quarterly forecast was for the unemployment rate to drift up to 4.2 in the June quarter. It’s pretty much on mark. So we don’t think that the - you have to take a little bit of signal from monthly numbers. I wouldn’t over interpret every single monthly number, and as I have said it is pretty much in line with our forecast at this stage.

We take another one from the media and go over there.

Hi Governor. My question is that you’ve made a point in the speech about how unemployment averaged 4.2 per cent in the June quarter. Unemployment has two decimal points increased for four consecutive months, while the employment-to-population ratio has been easing since the start of the year. Is there a danger, the jobs market could deteriorate more quickly than the Bank anticipates?

So that’s one of the risks we highlight in our forecasts. We do highlight that that’s a possibility. The forward-looking indicators including vacancies, including layoff rates, including the information we’re getting from liaison, aren’t suggesting that anything is falling off a cliff any time soon. We are conscious. The unemployment rate has been drifting up, as I said. But we have been - we had been expecting that. I wouldn’t draw too much from second decimal points.

Can we make it quick, please. There’s lots of questions. Over here.

Having unwittingly paid $5.11 for my coffee out the front, did I participate in some sort of digital event, digital sort of inflation that I didn’t anticipate? In other words, do you think digital money is inherently inflationary, or do you have a different view of that? Thank you.

That’s an interesting question. I actually don’t really know. I wouldn’t say so. Does it make it easier to tap your card and not think about how much you’re spending, quite possibly. Certainly, I’ve heard people say that one good way of budgeting is to use cash for everything. But I wouldn’t say digital money in and of itself is inherently inflationary, because you’ve only got as much as you’ve got.

Over here.

Thanks for the speech, Governor. A month ago, the markets had July rate cut baked in. And then the meeting minutes released this week indicate the Board barely gave a second thought to surprising markets. Should the markets be more prepared in coming months for the RBA to be a bit unpredictable?

What the minutes, I think - hopefully pointed out, was the reasons why we decided to hold. And that surprising the markets was neither a reason for doing it or not doing it. It was an observation of the Board that the markets were expecting something else. I wouldn’t say that our job is to be unpredictable. Our job is to basically do we think, the Board thinks is the right thing to do for the economy. And the markets will interpret their own data, the data, in a certain way and they interpreted it slightly differently than we did at the time. I wouldn’t say we’re trying to be unpredictable and I wouldn’t say we’re looking to be unpredictable in the future. We’re just looking to do what is the right thing.

Hi Governor. This week the Bureau of Statistics put out an interesting announcement – they are going to be publishing a complete monthly snapshot of inflation from November. Which is going to prevent that high reliance on the quarterly CPI numbers, that will be a thing of the past. If that had come out this month would you have been able to cut interest rates?

First of all can I say, yay, ABS - very, very happy. It will bring us into line with most other advanced economies now with a monthly CPI. It wouldn’t have had implications, I don’t think, necessarily for the current decision. I just would caution, though, that we’ve only got data for some items since April ‘24. New monthly series is going to be transitional. The ABS are still going to be producing the quarterly data which has a very long history of seasonal adjustment and predictability to it. They’re still going to be producing that. We are still going to be looking at that. We’re not doing an immediate switch from off with the quarterly and on with the monthly. We’re going to be looking at both. There’s going to be a learning experience as we learn how to interpret the monthly data. And as we get more, and the seasonal adjustments get better, it will be better. Having said that, it’ll be great, I’ve made a number of points in the past that it is very difficult to interpret momentum in inflation when you only have four readings a year. This is going to be much more helpful for us.

Over the last decade headline CPI has averaged 2.78 per cent per annum and the RBA cash rate has averaged 1.84 per cent per annum. After including tax rates, real returns for low-risk investments have been substantially below zero. The consequence of this subsidisation of borrowers includes higher debt levels, lower savings, more speculative investment, greater financial instability and higher house prices. All of these are negative for productivity and are negative for the economic prosperity and welfare of Australians in the long term. Does any of this sort of this analysis form part of the RBA’s decision on the cash rate?

The Reserve Bank’s mandate is inflation and full employment. And what you’ve alluded to is asset price inflation. The sense in which asset price inflation might be relevant to monetary policy is if it has implications for financial stability. As you know, we do quite a lot of work on financial stability. We release a half-yearly report on financial stability. The bottom line though, is that it’s very difficult for a central bank to target asset prices. We do have to remain focused on inflation and unemployment. Asset price inflation, to the extent - and the thing that most people focus on in terms of asset price inflation is housing price inflation. That’s not something we can do anything about. To the extent that it is about rising debt levels and that’s driving it, then that’s a matter that something that the Prudential Regulation Authority can deal with it in its macroprudential measures, and to the extent that it’s due to a shortage of housing it’s up to the government to do something about. So I just I push back on the idea that somehow the Reserve Bank needs to take into account asset price inflation in setting monetary policy.

We’ll take the last question from the left. I’m really sorry to the journos that missed out. We won’t be able to finish the event in time if we keep everyone waiting.

First of all Governor, congratulations on successfully implementing so many aspects of the RBA review. Obviously been a big couple of years for you, a lot on your plate. My question relates to one of the key recommendations from the review. Since April in the Statement on the Conduct of Monetary Policy, it’s been a requirement that RBA Board members deliver public addresses. We’re getting on for August now. We haven’t had too many of those. So my question is, is twofold, I guess. Firstly, when do you think we might hear from some of the RBA Board members publicly beyond yourself and your Deputy? And, secondly, given you’re rightly concerned about front-running RBA Board decisions with commentary, should we expect RBA Board members to brief the media? Is that happening?

So we are in the process of implementing that recommendation. I think the words are speeches or public appearances. What we’re in the process of doing with the Board is working through what the various options for speeches and public appearances might look like, what the Board members might do at those sorts of speeches and public appearances. Again, individual Board members are in the same situation as I am. They’re not going to be able to speak for what the Board might do. They certainly will, I think, be able to explain the Board’s current decision. But they’re not going to be able to front-run just as I can’t. As you saw from the last meeting, six voted in favour of hold, three voted to lower. And there was active debate, but the Board decision was a majority decision which ultimately was the one that was made. So it’s very - you can’t go out ahead of time and say you definitely know what the decision is going to be.