Fireside chat Fireside Chat at the Barrenjoey 4th Annual Australia Economics Forum

Okay, so welcome, Sarah. Brief introduction, as I said, Assistant Governor (Economic) at the RBA since January 2024. We know what she does in her day job, commonly referred to as the Chief Economist, and previously, of course, held very senior roles at Commonwealth Treasury, KPMG, and Oxford Economics. And I’ve been fortunate to know Sarah and be able to talk about the economy with her for a number of years.

We won’t say how many years.

We are really grateful to have you here today. As I said the last time, we’re hearing from the RBA post-CPI. I suspect there’s a room of people paying pretty close attention to what you have to say. You’re used to that, of course. Before we get into it, I do want to acknowledge that your team is no doubt busy preparing a set of forecasts and an SMP. We’re obviously not going to ask you to pre-empt those numbers, but we do want to understand, I guess, how you’re reading the economy at the moment, the frameworks you’re using, the judgments that you’re thinking about, and where those uncertainties might lie. I’m going to ask a range of questions and then we are going to have time for audience Q&A. So make sure that you think about your questions as we’re going through the panel. I have to start with yesterday. We talked about this. Obviously we got June and June quarter inflation trim mean came out at 0.8, below the market expectation. Is inflation tracking broadly how you thought? And perhaps more importantly, can you share any insights on the details within the CPI, things that you’re focused on?

Yeah, thanks, Jo. Thank you for having me here this morning. I’ll just add my acknowledgement of the traditional owners and custodians of the lands on which we’re all gathered today.

So, yes, it’s been interesting tracking the data. Obviously, we got the data yesterday. So I think the way we were thinking about the numbers yesterday was that we obviously got a downside surprise relative to our May forecast for headline inflation. That was really a story around fuel prices, prices at the pump, and then prices that came through travel, international and domestic flights in particular. So we were expecting that. That’s understood. Yeah, it looks like a big forecast miss. But I think if we roll the clock back to where we were in May, our headline forecast didn’t seem that out of line with most other people. So I think everyone’s been tracking down as we have.

In terms of the trimmed mean, it was a small undershoot on what we were expecting. I mean, that’s the right direction given where we are. We want inflation to come down. So that’s good. So it was around about a 0.1 miss on what we were expecting. The details within it, though, were pretty interesting. I mean, we’ve been talking for a number of years about really one of our key focuses is on those domestically driven categories, market services. New dwelling construction costs. Generally, what we saw in there was actually pretty much what we were expecting to see. There’s always ons and offs in the data. There’s always something that comes in a bit stronger, a bit weaker when you get into the absolute guts of the categories. But in an aggregate overall sense, there weren’t too many surprises there. As I say, the fuel and the fuel miss probably spilled over and had a bit of an impact on trimmed mean overall. Yes, apart from fuel, not too many surprises in the numbers. And you’re right, the team are very busy almost as we speak, cranking the handle and doing the thinking that will go into the numbers that get published in a couple of weeks.

Thank you. Must be very busy for you when you get CPI just as you’re trying to finalise those forecasts.

It can be a bit tricky. I mean, sometimes we have to do it and we get it on the Wednesday and the meeting will be the following Monday. So we’re turning it around in just very short time because, of course, we have to get the papers to the Board before the meeting. So it is a pretty speedy turnaround. This time we’ve got a bit more time. But it’s not a lot more time.

So, let’s pick up on something that you just talked about, which is where we were in May and where we are now, and what we’re seeing in terms of global oil prices and the global tensions. They’ve escalated again. It’s daily. We’re all back to watching it minute by minute. I think it’s fair to say the uncertainty about where oil will be at the end of the year, or even in one month’s time, is probably higher than it’s been at any point. What impacts are you seeing and how do you account for this uncertainty in how you think about the inflation outlook?

Yeah, it’s very tricky, isn’t it? I mean, everyone’s been saying this since the conflict broke out and we’ve been saying it too. It is hard. We don’t pretend to be experts in oil markets. We’re certainly not. I mean, in terms of our baseline forecasting assumption, we use the futures curve and we’ll be doing that this time. We did that in May. That curve at the moment, I have to confess, I haven’t checked it this morning, so don’t hold me to the latest, but that curve generally speaking, had been on a bit of a roller coaster just recently. It came down quite a lot on the MOU that was signed, stayed there for a while. It’s obviously bounced back up, come back down. Lots of volatility. Generally speaking, the curve seems to be still having some softening and a lower price at the end of the year and into ‘27. But let’s wait and see.

The way we think about it, I think coming through in two channels. One, we’re very focused on that pass-through of that oil shock into local prices. So obviously, the direct effect of that, and turns up when you fill up your car and whatever, but the indirect effects as well, how it’s coming through for businesses who use fuel in their production process, if you like, agriculture, for example. So what we’re thinking a lot about food prices, but also coming through global supply chains. So the cost of plastics, the cost of glass, other construction materials, and all the way through the supply chain and how that comes through in terms of imported prices and then into final prices here. What we’re seeing at the moment, I think, Jo, you guys have been doing a lot of work on this too, is really some pretty fast pass-through into construction costs. So we’re already seeing that impact there. That’s interesting to us because that’s also a sector that we know is pretty capacity constrained at the moment. Anyone that’s tried to find a tradie to do some work can probably empathise with this. There’s a lot of activity going on in that sector overall, and we’re going to come to that later. So we’re tracking that and thinking about pass-through and how it’s interacting with capacity constraints. And then the other sort of big channel that we’re thinking about locally is that uncertainty and that volatility and what that does, both in terms of firms’ pricing and their pricing decisions, but also activity. How might it be weighing on people’s decisions in terms of household spending, business investment plans, and really trying to think through that.

I gave a speech recently where I described this type of shock as really tricky for central banks because it just worsens the trade-off. Generally speaking, it puts upward pressure on inflation. And it puts downward pressure, it dampens activity, all other things equal, partly because you’ve got high prices to deal with, that inflationary impulse, but also because of that uncertainty channel. And this is pushing in opposite directions in terms of a mandate. And then we’ve got to think about where we started from as well, as the Governor was talking about on Tuesday. So there’s a lot to play in and interact, but clearly it’s pretty much our top uncertainty at the moment, I think for everyone else too.

Yeah, I think that’s right. And talking about firms passing on pricing power, my favourite example of this is Jono bought a coffee and the receipt had a fuel surcharge on it, which I shared with the Governor because I find that slightly terrifying. I want to extend this idea around firms’ pricing power and passing on the oil price. You obviously had the RDP on that, you spoke on it, the Governor’s title of her speech was also, you know, around these supply-side shocks coming one after another. You talked about how the Phillips Curve steepens, the pass-through is faster and greater. We’ve also obviously had the Fair Work Commission this year increasing wages on the 1st of July, also not just the award wage but also junior pay rates. We estimate about a 5 per cent increase in those award wages influences about a third of the nation’s wage bill. How are you thinking about that and the pass-through of that into market services, which you’ve just talked about as being important for inflation?

Yeah, no, it’s a really good question. I mean, just to pick up on that RDP and what we really found, and I guess to carry on a bit what I just said, the finding from that paper was that in times when capacity pressures are quite tight, so when, you know, you’ve got a positive output gap is how economists would describe that, and you’ve got a series of inflationary shocks. And so that paper was looking at the COVID era, clearly a period of inflationary shocks. What it found was that firms would reset their prices more frequently in that type of environment. And that’s pretty relevant for us at the moment because we think we have got a positive output gap. And clearly, this is another in a series of supply shocks. So that paper has been very helpful for us in thinking about, well, how might pass-through change in this kind of world where we are today. And then to take that forward, I mean, pass-through can be costs like oil prices, but yeah, all costs sort of sit within that.

So in terms of wages and thinking about market services, I mean, obviously we have the FWC decision as well. We’ll factor that into our wage forecasts and that will come through in the numbers in a couple of weeks. I think it is, though, it sort of goes back to us really trying to get a handle on where the economy is right now in terms of being capacity constrained, how much underlying inflationary pressure is there, and thinking about how inflation expectations – have they moved? Over what type of horizon have they moved? They have, again, been quite volatile given oil prices. They lifted a lot, short-term inflation expectations. They’ve come back down a bit now in the surveys as petrol prices have moved. We had an RDP out a couple of years ago, actually, that found that particular relationship. Petrol is a salient price, particularly for households. Unsurprising, we all drive past the petrol station every day, so you see the price. It’s up there in lights, quite literally. So, we know that that relationship is there, and so we’re thinking very closely about, well, what does that move in short-term expectations mean? How might that show up in all of the pricing decisions across the economy, wages, but other pricing decisions as well? And how does that then flow through into underlying inflation? So there’s, yeah, a lot to balance and think about, but you’re right that all of those factors matter. And then we obviously want to get inflation back down. And what we want to make sure is we don’t see higher expectations become embedded. That really is critical for a central bank. It is one of our north stars. We have to hang on to that. So, it’s very good to see that long-term expectations, as far as we measure them, don’t seem to have moved very much, and certainly haven’t moved outside the 2 per cent to 3 per cent band, which is good. We want to keep them there, and we want to make sure that that understanding is baked into decisions as well.

Great. So, I’d like to turn to the labour market. The Governor on Tuesday obviously talked about the unemployment rate’s a touch higher than you thought, moving in the right direction, I can say in a room like this probably, but she also acknowledged that the broader range of indicators actually aren’t necessarily following that unemployment rate. We would say that the labour market remains constrained. Last time you were with us, which I think was 2 years ago at the forum, you talked about the Beveridge curve. We use that all the time. Can you talk to us about how you’re thinking about the labour market’s resilience versus the vulnerability that it might face? And among all that range of broad indicators, are there sort of two or three that you’re watching most closely at the moment?

Yeah, it’s a good question. So, certainly on the unemployment rate, it has lifted a bit more than we were expecting in May, but not too much more. It’s obviously 4.4 per cent for the quarter. We thought it would be close to 4.2 per cent. So, we’re definitely paying close attention to that. I think we are seeing in the labour market, it does seem around employment at least, and you have to be really careful reading monthly numbers, numbers. They are very volatile and they do get revised for lots of reasons that can have nothing to do with underlying conditions. So I always tell people to just take it with at least a grain of salt. But if you look through that volatility, jobs growth actually over, say, the first half of the year, it’s held up not too badly. It’s certainly slower than it was a couple of years ago, but it, you know, it doesn’t look too, too bad. And if we look at the business surveys and things like that for hiring intentions, they have softened a bit. I mean, the labour market has eased. We can definitely observe that. But they haven’t dropped very, very sharply. So we’re not anticipating, we certainly weren’t anticipating in May that we’d see a really sharp slowdown in employment growth. And there’s nothing in the data at the moment that sort of suggests that we’re going to see otherwise.

In terms of the broad range of indicators, yes, I think I was trying to think when I was here a couple of years ago, I think we were just at that point starting to publish some of our full employment framework. And we’ve done a whole series of pieces, and I’ve done actually another speech on it since. Really what we’re trying to get across there is that the labour market is so multifaceted. There really are a wide range of indicators that you need to look at. The unemployment rate for sure, but underemployment, underutilisation rates, things like job vacancies. As you say, when the labour market is very tight, as it was, say, 3 years ago, 4 years ago even in ‘22-’23, vacancies was a much better indicator. You know, there’s always some churn in the labour market. There will always be some people moving from job to job, so unemployment never goes to zero, but things like vacancies at that time are very helpful. So we still track those for sure. And, you know, looking at some of the surveys and transitions through the labour market as well. So it’s a very rich, deep subject for economists, particularly if you’re a data nerd. In terms of indicators we pay particular attention to, I’d probably draw you to the full employment abacus that we publish in the SMP. For the economists and data nerds in the room, I will just say that the ABS’s modernisation of the Labour Force Survey that’s currently happening does mean that some of those indicators have been suspended just for the moment. They’re going to come back, don’t worry. We’re very pleased about that too. We did check with our colleagues at the ABS. But just right now, whilst that transition is happening for the next few months, they won’t be publishing them. So you’ll see we will make that clear as we can in the SMP, but just that health warning. But in general, that aside, I would point to that set of indicators and the framework behind it that tells you a bit about whether we think each of those is signalling a tighter market, a market imbalance, or a looser market. And as it has been for a while now, actually, it’s a bit of a mix, but it looks like on average there’s still a little bit of tightness. Some suggesting more tightness, some suggesting looseness, and we have a range, but if you take the average, it looks a little bit in the middle. So, some tightness remaining is what we think.

Great, thank you for that. Now, we can’t talk about the outlook without talking about housing. Always important, but particularly a focus for many people at the moment. We’ve had 3 shocks. I think people forget that sometimes. You know, rate hikes, global oil shock, and then, of course, the federal budget, both with proposed tax changes but also a sentiment hit coming off the back of that. House prices declining, new lending enquiries falling quite rapidly, turnover dropping. Jono and I often hear from investors a statement: the RBA will react to falling house prices. So, I just thought I’d ask you, you to respond to that, because we respond to that all the time, and, uh, it’d be great if you could respond, uh, to that statement that we often hear.

Yeah, I think the Governor got a similar question on Tuesday too, so I’ll probably put my own version of what she said out there. We don’t mechanically respond to falling house prices but the housing market is really, really important, and it’s clearly very emotive as well. I mean, everybody needs to live somewhere. Everybody in the room today, and they might be watching online, you will be a participant in this market. You may own your own home, you may rent it, maybe you have a mortgage, maybe you don’t, but you’re all – everyone’s in this market. So I understand it is a very emotive subject, and as it should be. It’s a fundamental basic human need. We all need a home to live in.

But no, we don’t just mechanically respond to what happens in the housing market. We think about its impact on the economy and therefore think about it from a monetary policy lens. I’d say through two very broad channels. The first is, what does movements in house prices mean for activity, and therefore, ultimately, the labour market and inflation, to bring it back to our mandate? And what we do know is that when house prices are growing relatively rapidly, that will create incentives for dwelling investment. So we’ll get more residential building construction activity, all other things equal. And we’ll also get various channels that get into consumption. You mentioned churn in the housing market, generally rising prices associated with higher levels of churn, so more buying and selling. And if you move house, you can maybe empathise with this having done it recently, quite often you’ll buy new furniture, put new carpets in, you know, paint on the walls or whatever it might be, new TV. And some of that activity shows up in consumption. So we have a churn effect, and we have a wealth effect as well. We do know that you can see empirically that there is a bit of a link between movements in household wealth, and housing wealth in particular, and consumer spending. And disentangling that from the churn effect is pretty tricky, but it’s all in there. And so the opposite applies then when the housing market is softening. And so we’re really – what we’re paying attention to is that activity channel and what it therefore means for the labour market and inflation. That’s the monetary policy response. So it is not mechanical.

The other way I would talk about it, and again, I know the Governor did talk to this on Tuesday as well, is we’re obviously very concerned about thinking about financial stability and what it might mean in terms of financial stability. At the moment, there are absolutely no signs in the system of any systemic stress. We know some people, this will be a bit tricky. Some people may, from the rate hikes, as you’ve said, it makes it a bit harder to pay a mortgage. We know that for some people this will be very difficult, particularly if it’s come at a time when their own personal circumstances have also become more challenging. That is hard. We do know that. We acknowledge that. And there are always people in that situation, it’s really tough for them. But in terms of a systemic overall position, it doesn’t look like households with a mortgage are systemically struggling to meet that bill at the moment. So, from a financial stability perspective, we’re not so concerned right now, but we’re always watching. That is part of the job. So, those two channels broadly are how we think about it in the context of monetary policy.

Great. And can I extend that a little bit on the household and sort of consumption? So, we know, you know, consumer sentiment, you know, very poor, as you said, on the initial spike in petrol prices, improved a little bit, but still low. Consumers are telling us that everything’s terrible, they’re doing it tough. But actually, when we look at the household spending indicator and also when we talk to the big four banks and the data, and you would have more insight on that than us, and obviously your business liaison, the consumer to date seems reasonably resilient. You go out to dinner on a Tuesday night in Sydney and it looks pretty resilient to me, right? So are you seeing signs that that consumer channel is slowing faster than you would expect given the rate hike cycle? Are you seeing a sentiment impact? Are you worried about that? That tip over of sentiment into decision-making?

I would say yes, the sentiment data, it fell very, very sharply, as you said, and some of the indicators to all-time lows just as the conflict broke out. It’s come back a little bit, but not all that much actually. So clearly consumers, households are really struggling right now – that the feeling and it’s real, and I don’t mean to diminish it at is there, I think – and in trying to explain it, we think that it’s partly a cost of living squeeze for sure. And some people really are very squeezed. We think that people don’t like high inflation. In fact, we did a survey just recently where that came back as the number one thing that people were really struggling with. They just don’t like high inflation. They don’t like a fast-moving cost of living environment. So that’s probably part of it. And I, you know, I don’t know this empirically. It’s very hard to measure it and test it. But all of that uncertainty and volatility, I think it’s quite tiring. I can personally empathise with that. And I think that’s coming through in these surveys as well. But yes, what does it mean for actual spending is what’s really critical for us in terms of our policy decision.

At the moment, in terms of what we can see, the data looks like it’s broadly tracking with what we expected, which would be consistent with, yes, the impact of the slowing economy, rate hikes starting to come through a little bit into cash flow channel in particular, but nothing that’s too much beyond that. So certainly that big drop in sentiment doesn’t seem to be yet coming into spending in the way that you might anticipate. We’ll keep looking at it, of course. Historically, it’s tended to be a contemporaneous relationship. So if it’s going to happen, it would be happening by now. But that doesn’t have to be true. So we’ll keep tracking it. But it is a bit of a puzzle as to that disconnect and understanding it. And so it’s something I think we’ll keep looking at, but I expect quite a few people over the years to come actually will do some research on.

Yeah, I agree with that. I want to change pace a little bit. Typically we talk about housing and the consumer and sometimes government spending, but really what we’re seeing at the moment is a rotation in growth away from the public sector, housing and the consumer and towards investment. Activity is at or near record highs across residential construction, warehouses, retail, wholesale trade. Jono made me a list – entertainment, recreation, accommodation. It’s pretty broad-based, and, and this is something that we haven’t really seen actually since the mining boom. Data centre approvals have exploded. It’s my favourite chart at the moment. We published on data centres earlier this week. We think business investment will make the highest contribution to growth since the mining boom over the next year or so. That’s been a material change probably since your May forecast because we’ve had the benefit of the national accounts. Can you talk us through not just data centres particularly, but just the investment cycle and how you’re thinking about that rotation of growth, the impact on the output gap that we’ve talked about and also employment?

Yeah, no, great question. There are some fantastic charts around at the moment that relate to the AI boom. All of them look exponential, which I have to say as an economist is A, not what you normally see and B, usually something to worry about, or at least think about. So it’s definitely something that we’re thinking about. Yeah, look, it’s been really interesting to track. I’ll say in the May forecast, what we thought we were going to get was effectively something of a pause. We didn’t expect another leg up. And then we got the March quarter data, which did have another leg up. And so that’s really the source of that sort of disconnect or that miss, if you like, in terms of the forecast. So we are tracking it. It is data centers in particular do seem to be coming through very, very rapidly. And now we’re starting to hear through our liaison program, I think others as well, about just the amount of activity and, you know, the want to get the work done really, really quickly by these guys. So we’ve been out on liaisons to centers under construction to go and talk to sectors and firms that are servicing that demand. And they’re saying that it’s almost they want it as quick as possible. Because they just need this capacity in place because it’s so valuable to them. So we’re definitely tracking it.

I guess a couple of points I’d make on data centers specifically. One is not too dissimilar in principle to the mining boom. A lot of the actual equipment that’s put inside the sheds is imported. So, you know, the servers, the wiring, even, you know, the racks and everything else is imported. So that lift in investment, we’ve seen it match pretty much one for one actually on the import side in the national accounts. And so that means it’s GDP neutral, broadly speaking. But to your right, someone’s got to be there to actually, A, build the shed in the first place, and that’s local activity, and B, install the stuff, also local activity. So that’s really where we’re more interested, I guess, from in terms of capacity constraints and thinking about the outlook. What we can see at the moment is that definitely demand for those particular trades that are needed to do that type of work, has lifted. It’s competing with other aspects of construction, which is interesting. And I do think we’re in a world where again, the pre-COVID sort of view of, well, maybe different construction workers that work on dwellings versus work on non-res construction versus work on big infrastructure, maybe they’re not so fungible. Actually, it feels like they’re more fungible than we all thought, and we’re just in a position now where that fungibility is being tested because the demand is there. So we’re certainly looking at that and what that might mean in terms of capacity constraints. And I think that the big thing we’re trying to get a handle on – I know you guys have done a lot of work on this, we are too – what is the pipeline? It’s actually pretty hard to track. I mean, this thing didn’t really exist even 18 months ago. The numbers were really, really small, a couple of billion a quarter. This is not to be getting excited about. And now we’re nearly tenfold higher in some cases. So yeah, trying to get the pipeline is definitely a focus for us. And we’ve recently even just stood up an entire team to try and help us do this internally because we do think it’s going to be important in the next couple of years.

Yeah, so we’ll wait for your analysis. We look forward to it.

It’s coming.

Maybe I’ll just be cheeky and take another shout out to the piece that we published on Monday afternoon. And we’ve actually got some follow-up work coming on this very issue. Conscious of time though, we want to make sure that we give the audience lots of time for Q&A. So get your questions ready. Perhaps I’ll throw a last question to you. Your speeches this year, which I did run through Claude, I’m not going to lie. Claude told me that it placed Australia in a global context with an arc that went from supply shocks are becoming more frequent, buffeting a small open economy. So I thought maybe my last question might be, it’s a complex, fast-moving global developments at the moment, but what are the things that you’re watching or worrying about most globally?

Yeah, not a bad summary that actually. I must admit I use AI to do something similar. It can be pretty good at pulling out key messages like that. So I mean, I think for me the global environment, there is that sense of one shock after another. And so I don’t know what the next shock will be. I don’t think anyone does. No one has that crystal ball, certainly not on the timing of it. But I think it’s more a sense that things are, at least at the moment, are changing relatively rapidly compared to what we had pre-COVID. And so one aspect of that is, well, what might the next shock be? And so thinking about where the sort of sources of uncertainty are, but also to thinking about what does it mean to be in a world where it is a more rapidly evolving and changing world? And as a fundamental: what does that mean for the economy? How does that change the behaviour of, frankly, everybody that’s in the room and everybody that’s in the country going out and doing their day-to-day jobs, running businesses, and what have you? What does it mean for us collectively to have to deal with more of these shocks? So, yes, one, on where they come from, but two, the fact that they’re more frequent. Does that change some of the fundamentals that we have understood or at least have observed and have built up over those pre-COVID years? And then how do we think about monetary policy in that?

Generally speaking, supply shocks in particular are really hard for central bankers because they, as I say, they tend to worsen our trade-off, all other things equal. And so that makes the policy decision trickier for the board. But what does that actually mean in practice and how do we navigate through that? I think we can, by the way. I don’t think that we’re helpless in all of this. Yes, we’re a small open economy. We have to be connected with the world. It’s very valuable to be so, in fact. But it does mean we have to face into these things. I think we can navigate through this. I think we can be clear on this. I think we’ve got the people in the Bank, people like yourselves and others, people right across the country, we’ll figure this out. I have every faith in that, in fact. But we’ve just got a bit more work to do to do that. So, thinking about those sorts of things, that’s top of my mind, and that’s what the team back at headquarters spend a lot of their time thinking about too.

Well, there’s a challenge for the room. We all need to be thinking about this and contributing to the policy debate here in Australia. So that’s a great segue to open up for questions. So we’re all in the room. Pop your hand up if you’ve got a question for Sarah.

Hi, thanks for those comments. You talked about inflation and inflation expectations. Inflation has been high and above target for roughly 4 or 5 years. Over that time, the cumulative miss has been something like 16 percentage points. So that’s the level of the price increase, price level that people have not anticipated and not been prepared for. You rightly get concerned about the impact that that has on inflation expectations and inflation becoming ingrained. And so that’s a critical thing for central banks globally. When you’re looking at that, what measures, what worries you about measures of inflation expectations and which measures of inflation expectations do you put most emphasis on?

Yeah, great question. Thanks for coming. So no, really, really good question. So I’d probably talk a little bit about Australia and then, you know, other colleagues overseas will be in slightly different positions in terms of the measures. So it is a really good question. So short-term expectations are very – we’ve had those for a while. They’re very present. But they do tend to move with actual inflation and maybe with a little bit on fuel prices and things. But that makes sense because you’re asking people, what do you think is going to happen over the next 12 months? And your single best predictor, especially if you’re not spending all day doing this stuff, is probably what has happened just recently. So does that tell me something about what people think fundamentally? Maybe not. But I do think some of our research, recent research has shown that that does matter in the context of decisions in the very near term. So that’s a reason to pay attention to those expectations.

But if I’m thinking about monetary policy transmission, thinking about people who might be deciding whether or not to buy a house and looking at the interest rate today, or a business that might be taking on an investment project, looking at their borrowing costs or whatever, I’m not sure short-term expectations are the most important thing. I think you do have to look a bit longer. Quite what that horizon is, I mean, we typically use 10 years as our long-term anchor, and we back it out from financial markets. I have to say, one of the two things that we’re very pleased to see happening, one, that the BOSS survey is now giving us business expectations over a longer horizon, although it’s very, very new. So we need a lot more of that history to know what the sort of averages are and to understand how that evolves. And we’re also hopefully going to start getting long-term household expectations from the Melbourne Institute survey. We’re working with them on that. That will be very helpful to plug that particular gap because we don’t really have anything for households over the long term at the moment.

But what is long-term and what matters for that decision that when you’re, you know, deciding whether or not to take on some credit and so think about monetary policy transmission? 12 months is too short, 10 years is quite long, so we also look in between. I don’t have a concrete answer for you, but I am pleased that we’re going to start filling some of the gaps that we have at the moment. And maybe in 5 years’ time, once we’ve filled those gaps and we’ve got a bit more data, we can be a bit more concrete on that. But it is a bit of a learning process. But one thing we do know from historical perspective is that if we start to see long-term expectations really moving and showing signs of de-anchoring, that is far too late. And we absolutely cannot let that happen. And the Board are pretty clear they cannot let that happen. They will not let that happen. So, that’s that sort of iron rod commitment that you heard from the Governor on Tuesday that you’ve heard repeatedly, I think, over the last couple of years. Yes, what you’ve said has happened, and we’ve got to get inflation back down. That’s really important. It’s really important for expectations. It’s also really important for the community. Living with it is hard. I think the consumer surveys tell us that really, really clearly, and that’s got to be part of this too. It’s actually a bad thing to live with. Expectations, you know, is an additional channel on top of that.

Thanks, Jo. Thanks, Sarah. I’m just interested in your thoughts on the interplay between industry structure, supply response, and pricing power, because we spend a lot of time talking to companies, and generally speaking, they’re very reluctant, even if they’re getting good returns, to invest in Australia, and it’s more than just about returns, it’s about uncertainty on labour regulations, tax changes, and so forth. And what they see is it’s a lot easier to preserve the money, improve cash flow, and have better pricing power. And I guess in your models, you would probably assume at some point capacity would be added in certain areas where returns are high and therefore diminish pricing power. But that, that hasn’t been happening.

Yeah, no, it’s a good question. I mean, it sort of gets to the heart of, you know, what causes a business to invest in a very general sense, looking across any country. And you’re right, it can actually be quite tricky in the Australian context to explain some of the trends in business investment. So we do see, for example, some response to borrowing costs, but it’s actually pretty small. We know that some sectors, really, their decision on when to invest and how much to invest can be driven by non-monetary policy factors. We saw that in the mining investment boom, actually, that was a very, very large boom, really driven by external conditions, in particular demand in China. So that was a very different driver. And then we, you know, we do hear again from businesses when we talk about, you know, would you invest capacity if you could, or what are the constraints that stop you? We do get a whole range, many of them you mentioned.

I would say that eventually you do see some investment either from new entrants, which is sort of what you’re talking about, entering into the markets, or from incumbents who choose to expand and grow their footprint because they can see the demand there. That does tend to happen. It can be a bit fits and starts. And as Joe mentioned, you know, investment, business investment in particular, sort of looks like it’s moving into an upswing at the moment. The data center is a big part of that. So understanding the timing can be a bit tricky, but usually in a very long-run sense, I think 5, 10 years, you will see business investment happening to meet that new demand because at some point the returns I guess, get high enough that people are willing to pull the trigger. But quite when and how we stack up internationally is a really good question. Lots and lots of broad topics. And some of those other, I think, factors that you mentioned definitely influence that, which means policy changes that are outside of a central bank can also have an impact on that as well. But we’re observers of that, and we’re really interested in what happens and why, rather than monetary policy being always the driving factor.

So just to follow up, because I mean the business investment we’re seeing now is somewhat misleading because the data centre investment is a new industry and it’s not addressing issues like, you know, availability of retail space where there’s virtually no retail space being added, housing supply, supply of building materials, a lot of those things. There is no investment in those areas and that must therefore impact the transmission mechanism when you have a shock to inflation.

So certainly construction, generally speaking, we’ve been saying it for a few years now, construction sector is definitely constrained. There’s a lot of pent-up demand in various aspects of construction. I think you’ve mentioned all of them actually, residential for sure. We can also see that spilling over, those capacity constraints and perhaps projects not getting off the ground in that non-res space. Infrastructure can be on a slightly different timeline, much of that related to government activity, and it tends to be on a longer timescale anyway, just given the nature of those projects. But we have had a burst of activity, particularly driven around transport, roads in Sydney is an obvious one, just recently. So yeah, the construction sector, we hear very clearly from that sector that it’s capacity constrained. We have seen pretty strong inflation out of that sector over the last 5 or 6 years. I mentioned earlier that residential construction costs, which is what shows up in the CPI directly, those have responded pretty quickly to that global supply shock. So clearly, there is a capacity bottleneck there, which will then have implications across the economy. So we’re certainly tracking that. But it’s how that sort of shakes out and equilibrates itself and how the market responds to that is the key question, and what are the levers, if you like, that can be pulled to relieve that. They’re many and varied, and many organisations, Productivity Commission and so on, have talked to that and flagged that, but it is a bit of a tricky situation at the moment for that particular sector.

Thanks, Sarah. Yesterday, after the June quarter inflation figures came out, we saw the market price in basically 0 per cent chance of an August interest rate hike. Do you think the traders were being a bit presumptuous based on those numbers?

Jo and I were joking before, surely no one’s going to ask me to speculate on the meeting. So thank you for proving us both wrong. Look, I’m not going to speculate. I’m not going to speculate on out on the meeting. I’ll say, you know, there are plenty of markets guys in the room, and there’s plenty more in this building doing their jobs. And look, they’ll interpret the data as they will. I mean, I’d go back to what I said at the start. It was certainly a touch softer than we thought, though some of those domestic components in there were actually pretty much what we expected to see. But the markets are pricing moves all the time. And in a world where you’ve got particularly something like the oil supply situation at the moment, it can definitely be I wake up in the morning, and I look at my phone, and things have moved quite a lot just in the short time I’ve been asleep. So there’s lots going on, but look, I’m not going to speculate.

And how much influence does the Fed we saw overnight have on your thinking, not just for August, but going forward?

Yeah, so I mean, so the Fed’s obviously in a global financial condition sense very important. The US is the center of the global financial economy, the financial system. So I’d say that, again, we’re a small open economy, so we are impacted by what’s happening in the global financial system and global financial conditions. The most obvious way that will show up is in the Aussie dollar, right? The currency will move in response to that. We’ve got a free-floating currency. We don’t intervene in it. You know, haven’t for a very long time. And so if we see changes from the Fed and indeed, you know, from other central banks, conditions more broadly globally, we’d expect them to show up in things like the Aussie dollar, in the global borrowing rates, which then come back through and have a bit of an influence on our local rates and so on. So it comes through into our thinking that way. So a bit like housing prices, it’s not a mechanical response that the Fed does X, so we have to do Y. It’s not that at all. But it’s how any change overseas, including from the Fed, has an impact on those global financial conditions and how they come into the local economy. That’s what we’re really focused on.

Hi, Sarah. Quick question, mildly controversial. You touched on Fair Work Commission pushing into inflation, um, AI construction pushing into inflation. We’ve got state and federal governments continuing to spend pushing into inflation, and we’ve got the lived experience of consumers you’re seeing through surveys not coping well. Three rate hikes, at what point does the CPI print stop being as relevant to your decision-making as to what’s actually happening? And how does the RBA think about reacting in an environment where the data is a little disconnected from the lived experience on the ground?

No, it’s a great question. Thank you. So I think I’ll try not to go back too technical because I think what you’re really hitting on is actually what people are so frustrated at at the moment. So I don’t think the CPI is disconnected really. I think it’s actually telling us exactly what people are telling us, which is that inflation is too high. The cost of living is going up faster than people want it to, than people are comfortable with. And we know actually, I mean, I said that there’s much, much more research for economists to do on this topic, but a new sort of emerging stream of research is actually all around the cognitive burden of people having to live with higher inflation. And it’s – burden is the right word. It makes it very tangible. Particularly if you’re on a low income, going to the shops for your weekly food shop and not knowing if you’ve got the money to pay for what you need to buy is a burden. And then if you get to the checkout and you can’t afford it and you’ve got to put something back and you’ve got to make a really hard choice, that is a real, you know, difficult decision to have to make. So I actually think the data, the CPI and the lived experience in that sense are exactly aligned. And I think that that’s why, you know, the Governor and other members of the Board have been so clear, we have to get inflation down. That is what we can do to help relieve some of that burden. And, you know, there are other challenges that we can’t do anything about. We certainly can’t do anything about the global environment. We have to learn to live with that, as I said earlier on. But what we can do is use our policy lever to bring inflation down. We know that when we do, you know, if we hike the cash rate, for some households that’s really, really challenging. It isn’t for everyone. It’s around about a third of people who own their own home with a mortgage. So, if you’re in that bucket, yes, we know that this is adding to your pressures, and it is a cost-of-living pressure for you in terms of what you have to spend your money on. And, you know, your pay is what it is, and suddenly this bill has gone up. But we also know that monetary policy gets into all of the cracks of the economy. It does get everywhere eventually. So, it gets into that cash flow channel very quickly. It can take a bit longer to come through in other places. It gets into the exchange rate. It gets into those business decisions we were talking about earlier, and that then comes through into activity and ultimately helps to bring down inflation when we’re tightening. But it gets everywhere, and that’s why it works. So, it’s tough, we know, and we know it’s tough for some households. But, yeah, I actually don’t think the data is telling me something different to the lived experience. I think, if anything, it’s reinforcing it and reinforcing for the Board, and I know it is front of mind for them on the job that they have to do. We’ve just got to get inflation down.

Thank you, Sarah. I just had a question about the housing market – how you’re thinking about it. What we’ve seen lately is obviously decline in house prices across the country, more recently in some of those smaller capital cities as well. Obviously monetary policy plays a role in that, and there’s a transmission from high interest rates into lower asset prices, as your household survey recently identified as one of those key questions. How much are you thinking about this monetary policy transmission as the driver of the downturn in house prices versus the other shocks that Jo has mentioned?

Yeah, I mean, I think we’ve said publicly in a few comms just recently that clearly the housing market is definitely softening, as you said. The data is doing what it’s doing. That softening started sort of around the start of this year. And then obviously we had the first of the cash rate hikes in February. So I think that part of it is explained by that. There’s clearly a few other factors going on as well. I mean, we’ve had some of those tax changes coming through and the markets, the Governor said on Tuesday, people are absorbing that and thinking about what that might mean around their decisions and what have you. And that’s probably added to it. And just generally though, sort of broader economic uncertainty at the moment, generally speaking. That usually pulls down on asset prices, and we think that that is probably part of what’s happening with housing as well. So a few different things are sort of coming together at the moment.

What really matters for us is, as we were talking about earlier, is what that means for activity and therefore inflation and the labour market. So it’s that sort of flow-through that we’re focusing on. But having said that, we do want to understand as much as we can in real time. What of that is monetary policy transmission versus those other factors? It is a bit tricky, and we’re learning more as we go. But we, you know, we think monetary policy is part of that, and we don’t have a reason, I suppose, at this stage to think that that transmission has shifted. And we’ve done work on transmission and whether or not it’s changed over a sort of longer period. We don’t have any evidence that it’s shifted materially over that longer period. But yeah, look, this is always happening in real time. So it’s certainly something we’re going to be paying attention to over the next few months and years.