Interview Interview with Bloomberg TV

The Reserve Bank of Australia says the risk of inflation expectations drifting higher is, quote, elevated, warning that if they were to become unanchored, a sharp economic slowdown could be required to bring them back down. RBA Assistant Governor Sarah Hunter has been highlighting those risks today at the Bloomberg Forum for Investment Managers and she joins us now exclusively in the studio. Always great to chat with you. And we say, you know, your job is to worry, right? But how much more worrying are you doing these days given the broader environment?

Yeah, absolutely. It is our job to worry, so we do always pay attention to things like expectations and other things that might knock the economy on a short-term basis. But as we were discussing, I think it is because we’ve had a sequence of shocks over the last five, six years, really since COVID and we’re facing into another one, so that is part of what we’re thinking about. It’s another inflationary shock coming through the economy. We know that in particular when households see movements in fuel prices - so when you drive past a petrol station every day and you see the cost of diesel, it’s higher than it was pre-conflict. We know these are particularly salient, that they can have an impact on expectations. What we’re seeing at the moment is that short-term expectations - that’s what people think is going to happen to inflation over the next year or so, that they’re elevated. Not surprising given what’s happening. We’re paying particularly close attention to medium and long-term expectations because those are the kind of movements where that would suggest a bit more persistence and that risk materialising. We’re not seeing anything too worrying yet in that data, but we’re just conscious that it’s a heightened environment and so what we want to make sure, obviously, in terms of our policy lever and how we set policy, that we don’t have that elevation from short-term getting into medium and long-term. And that’s what we’re conscious of.

Right. Because I think even 2 weeks ago you were assessing, okay, second, second half or second, second quarter, I should say, of 2026, we would see maybe $100 US dollars a barrel for oil would start coming back down. Reopening of the Straits. Nothing’s really materialised since then and are you having to readjust those expectations.

In terms of what’s happening in the Middle East? Yes. So we’re not the experts on this. We don’t have a crystal ball and we’re certainly not geopolitical sort of commentators or analysts or anything like that. We use information we get from outside the bank and financial market pricing, all futures curves effectively for our oil price.

The inputs are kind of changing all the time.

The inputs are changing all the time so, yes, we’re having to monitor it every day and I’m sure like others, I wake up in the morning and I check my phone and wonder if something’s happened overnight. Yes, it’s still a very uncertain environment. We’re still finding out how it’s going to play out. The longer it goes on, obviously the longer prices remain elevated for oil and other products, the more that will come through into the local economy and will make that inflation outcome worse. I think like everybody, we would love to see some resolution in the not too distant future, but in the meantime we keep watching and waiting.

We know that inflation has been above what the RBA would be comfortable with even prior to this latest conflict. But are we closer now to that real fear that inflationary, the mindset, inflationary mindset is becoming more entrenched?

Well, that’s another way of talking about expectations drifting up and staying persistently high and that’s certainly something that we’re conscious of and looking at. I think also high inflation or higher inflation in and of itself is just not a good outcome for the economy. We know from empirically, if you look around the world, Higher inflation economies and businesses find it harder to invest, to make those types of decisions. For households, it’s really hard to budget. And that’s particularly true for those on the lowest incomes, the most vulnerable in our community. So I think, you know, getting inflation back down to target is a good outcome and part of that is making sure those inflation expectations remain anchored. And so that, I think, is the real sort of grounding point for the board’s decision last week and that the Governor talked about at the press conference as well.

Trimmed mean hasn’t been at around 2.5 per cent or even around that for almost 5 years now. Right. What do you think is driving that? We know the last five years have been pretty crazy in terms of macro events, but do you think there’s still grace for the RBA to try and meet that?

Well, I very much hope so. We’re very committed to getting inflation back down. We focus on underlying inflation because it gives us the best steer for what will happen to headline. But obviously, ultimately, we want to get headline back down. I very much hope so. I think it’s been interesting looking at the economy over the last, I guess, 18 months or so, because in trimmed mean inflation, underlying inflation was moderating through to the middle of last year, more or less. And then it came through more strongly than we were anticipating in the second half of last year. And we think part of that story is capacity constraints re-emerging. We’ve got a stronger pickup in domestic demand than we were expecting. Some of the fallout from tariffs that we were discussing a year ago perhaps wasn’t as severe as many people were expecting. So I think there’s quite a few factors that have lifted that underlying inflation in the months immediately prior to the conflict. And now we have this shock coming through that will add to it again, as I was talking about earlier on. So I think you’ve summed up why the Board are so committed to getting inflation back down. You’re taking the actions they feel are necessary to achieve that because we do have to do that. That’s the job and we have to keep hold of that as our north star. We think we can do it. Absolutely. And we have a lever to do it and let’s hope that conditions become perhaps a little bit more stable and we can get there over the next couple of years.

What do you see in terms of the risk of a lower potential growth rate and how that’s feeding into, I guess, the difficulty in being able to rein in prices too?

We revised our forecast for productivity growth back in August last year. And we think at the moment and this is sort of thinking over a two or so year horizon, so quite short term really in the productivity world, we think that they would probably see growth at the moment probably around about 0.7 per cent year on year and that’s lower than it has been historically. I mean, for us, what that means is just when we’re looking at the pace of growth in GDP, it just gives us a lower number, if you like, that we think about as what’s sustainable for the economy and when we say sustainable, we mean that that’s consistent with inflation remaining around our target. If we could see that productivity pace pick up a bit and that didn’t come through in inflationary pressures, that would be great. That would be a great outcome for the economy. It’s not a policy that we have really any control over. We don’t have the right levers. But if we can achieve that, that’s a good outcome for the country and we’d be very happy to see that but we do have to be mindful of where we are today in that sort of very short-term two-year horizon. And that’s our focus.

Treasurer Jim Chalmers was upstairs with you again defending the government’s budget that was delivered last week. In terms of the implications for the RBA and for your mandate, what do you see those as being? And, you know, as we were talking about earlier, your also kind of trying to work around the modelling and forecasting around that as well.

Yeah, absolutely and forecasting is always a challenge because there’s always things changing. I think in terms of the budget, we only got it on Tuesday when everyone else did, so we don’t get advance sight and we’re still working our way through what it all looks like and means. We are very conscious of and take into consideration all of the state budgets as well. And we’ve had some of those already, but we’ve got some still to come before our next forecasts are released in August. So we’re going to be putting all of that together to see what that looks like in terms of what’s happening to government demand. I’m also thinking about the tax side and how that might be changing to give us that part of that picture for aggregate demand overall in the economy and how that stacks up against our supply capacity. It’s very much looking through that aggregate lens and taking into account the states as well as the federal. The states actually are responsible for about half of total spending in the economy, for example, so we can’t ignore them, even if they perhaps don’t get quite as much attention across the country.

Everyone’s obviously trying to work out the implications of the tax changes pertaining to the property market. To be fair, sentiment at least had begun to cool even before this on account of the rate hike cycle. Are you worried about the risk of cooling the market too much?

Look, so we know that the housing market is and what happens in the housing market and to dwelling construction is actually one of the most responsive parts of the economy to monetary policy changes. We know when you increase the cash rate, as we have just over the last few meetings, that that will dampen down activity in that market. So we’re not surprised to see that response. And then, as you say, we’ve also got tax changes coming through as well. That’s always a risk. And if we see that outcome start to play out, then obviously the board will take that into consideration and be thinking about that in the context of future policy decisions. But as you can see in our latest forecast, we are expecting the pace of growth in dwelling construction activity to slow over the forecast horizon and that really is consistent with those increases in the cash rate that have come through already- so it’s not a surprise, but it’s something that we’ll be watching for sure.

The economy is expected to slow in the second half of the year. We haven’t had a technical recession since the pandemic. Are you confident that we can avoid that?

Oh, look, forecasting is tough. And then I would never say I’m confident on, on any particular outcome. But I think that what we’re seeing in terms of the lead indicators for activity and how we’re looking at the impact of the increase in oil price and how it flows through, let’s say our baseline forecast doesn’t have that outcome built into it and it wasn’t an outcome that we saw in the two alternative scenarios that we presented in the Statement on Monetary Policy as well. We know things could play out differently, rather obviously, in terms of how things play out in the Middle East. We have been running scenarios to consider alternatives. And in those two that we published, we don’t get that outcome either. But look, we are very alive that there are risks on all sides of the spectrum. Right now, is particularly challenging for central banks. These kind of supply shocks are really hard for us to navigate in terms of achieving our mandate. And so we’re focusing on what that means and then giving our best advice to the Board so they can make their decisions.

Wage growth at around three per cent. Does that look reasonable or starting to look a bit disconnected versus the other data points?

So, so weren’t surprised by the WPI print that we got last week. It was more or less in line with what we were expecting. There’s always sort of ons and offs underneath the surface. You can see in the forecast we do expect that WPI growth will remain around that sort of low three’s, around three per cent through the forecast horizon. And we’ll, we’ll see what plays through. That’s really connected to what we think is going to happen to the labour market over the forecast. And we, we do think that, you know, conditions will become a bit less tight in that market. And again, you can see that in the forecasts and it’s all connected with what we have, have happening to GDP growth. And we think that that’s going to be a little bit below trend over the next couple of years. But again, we’ll just have to wait and see. The baseline forecast has inflation getting back to 2.5 per cent at the end, but it’s built on a number of assumptions and judgments. And the one thing we’re, we’re always pretty confident of actually is that at least one of those assumptions or judgments won’t actually come true. So it is a constant sort of job of reevaluating and reassessing as you move through time.

I’m told I have to let you go, but do you miss being in the private sector at this point in time?

I’m honoured and privileged to do this job. It is very, very fulfilling and I have a fantastic team. So no, I can’t say that I won’t be doing anything else right now. Even when the job gets hard, I really appreciate that I’m able to do this and work with the team I have.

Well, appreciate you taking the time to speak to us as always. Tough times being a central banker at the moment. Sarah Hunter, Assistant Governor and Chief Economist at the RBA, joining us exclusively here in our studio