Transcript of Question & Answer Session Reassessing Australian Financial Conditions

The first [question] is about what you were just referring to, the impacts on inflation of fuel prices. The question is, what do you think the inflationary impact would be if the fuel price crisis becomes a fuel shortage?

Well, that’s a case where at least for some, the amount of fuel that they would like to get isn’t available at any price. I think that’s particularly problematic if it comes to pass. Not only does it mean the conflict has extended, potentially getting even worse than currently, but it also means that rather than just a shift in the supply curve, we’re potentially going to get a shift, an adverse shift in demand. So that will add to weakness in the economy. At the same time, that means ultimately some less inflationary pressures down the track if demand is in fact shifting itself.

Thanks. A question asking if you have any thoughts on the most recent data prints, labour force, CPI?

Yeah, so last week we saw the labour force numbers come out and the unemployment rate shifted up a little in February. Employment grew though. Now, our forecasts were— had been back in February for a gradual increase in the unemployment rate on the back of an easing in the growth of demand. That easing in the growth of demand was underpinning our expectation of some easing in domestic inflation pressures down the track, at least the domestic ones, absent of the war. No one knows how long the conflict in the Middle East will last though, what energy prices will do, and the extent to which those price pressures risk leading to inflation pressures more broadly by the so-called second round effects. So what we want to avoid at the Bank is a rise in longer-term inflation expectations that comes from oil price increases and other commodity price increases seeping into all prices across the economy.

Thanks very much. A couple of audience questions here that are going to be dangerously close to no comment territory, but I’ll ask them anyway. We’ll see what we get. I’m going to do these in ascending order of how likely they are to be no comments. Would the RBA still need restrictive interest rates if government institutes some supply side reforms?

Well, that’s quite a hypothetical question. I’ll do my best to give it a shot. I think it depends a bit on the nature of those reforms, but it’s typical that supply-side reforms that enhance productivity, let’s say, down the track, they take some time to play out. And they normally take more time than is available in the horizon of which monetary policy works over the next two to three years. So while anything that enhances the supply capacity of the economy productivity growth is to be very welcome because that’s how we get real income growth, real wages growth. I’m not sure we have to see just what they were, whether or not they’d be relevant for monetary policy in the horizon over which monetary policy works.

Okay, and then the next one is, any thoughts on the threat to the Fed’s independence?

No, I think the reality is that independence is very critical for central banks globally and for the world. The world believes the Fed is critical. And any reduction in that independence ultimately will be reflected in financial market prices. And we saw some of that when various developments were occurring regarding some of the FOMC members, including Jay Powell. But look, I think that would be an undesirable thing to see, as most central bankers have said and would note and it is not clear yet whether or not that would come to pass.

Thanks. And let’s do at least one more. This is, this is a right in your wheelhouse. How is the RBA actually measure inflation expectations?

Well, we look at lots of measures. So in my area, quite focused on market measures. You can look at inflation swaps, you can look at other measures from real bonds that are paid inflation compensation. But we also need to recognise what matters is not just inflation expectations held by market participants, but inflation expectations of households, workers, and businesses. So we survey … We look at those surveys and take some information from them.

Okay, let’s try for one more. The RBA did not adjust rates that aggressively compared to other economies. That was obviously the last— the last hiking cycle. Has this narrative changed? I guess this is a question about the narrow path, so-called narrow path.

Yeah, so the Board intentionally wanted to bring inflation down in a convincing fashion, but to do so in a way where at least there’s the best chance of holding on to the gains in the labour market, which were outstanding gains post-pandemic here in Australia. So that was their strategy and approach. They’ve still said they would like to do that, but they’re very much focused on inflation given that it is above target, and I don’t think we’re at full employment yet.

I think there’s a few seconds left, so let’s squeeze this one in because it’s a natural question. Is the RBA willing to force recession to bring balance in the economy?

I don’t think that’s in the— you know, you go off what Michele had said earlier, that’s not the intention. Again, the intention is to try and hold on to those gains in the front where possible. So long as inflation is on a credible path down and inflation expectations don’t get out of hand, that wouldn’t be the expectation or the approach i would imagine.

Okay, great. Look, we’re, uh, we’re back on time, so I’m sure everyone wants to join the meeting. Thank you, Chris.