Fireside Chat Fireside Chat at the Regional Australia Institute’s Regions Rising National Summit

Good afternoon, everyone. And hello to you, Sarah. I'm so pleased that you've been able to join us here today.

Oh, thank you for having me. It's a real pleasure to be here.

I have the, and have had the benefit, being on the Monetary Policy Board, to hear from you all the time. But today, just to make it really clear, I'm sitting here as a director of Regional Australia Institute. And for those that do know me know that I am a passionate regional Australian, and today I'm lucky to actually sit in a room of 400 equally passionate regional Australians. So as we do chat today, we might try and put a little bit of more of a slant as it pertains to regional Australia. Just before we do kick it off, for those that don't know you, Sarah, it might be worth just getting a little bit of an insight into your background and probably also around your career and how you now sit and have become, and sitting in one of the most important, and I'll say influential, roles within the central bank of Australia.

Yeah. Thank you, Marnie. It's a real pleasure to be here, and maybe to start off my story, I'm sure you can tell I'm from the UK originally, but I grew up in quite a rural part of the UK. To be precise, a small little island called the Isle of Man. It's about 80,000 people. It sits between sort of England, Scotland and Northern Ireland. So growing up in a somewhat isolated location with perhaps all the challenges, but the opportunities that come with living in a more regional, rural area, is actually, that was my childhood. I've obviously moved around quite a lot since then. I had to leave the Isle of Man to go off to university, which I did, and then became an economist, and have now lived all over the world. Ended up here in Australia about 10 years ago. I'm very proud to be a citizen now for five years, and Australia is very definitely home. Not withstanding my family still being on the Isle of Man. And I've worked in a number of roles, as an economist in the private sector, as well as the Federal Treasury, and then I joined the RBA at the start of 2024. So it's a real honour and a privilege to do my role, and to advise Marnie and the other Board members and to be involved in that really critical policy decision. And we'll get to that in a second, I know. And I'm very lucky to have a fantastic team that work with me and support me. So yeah, just I'm humbled to be doing the job and yeah, very pleased to be here and to be able to reconnect with some regional roots of my own.

And the Isle of Man, if you haven't been there, I encourage you to go there. It's lovely. We'll start at a higher level and then probably get a little more granular if we can. So, how would you describe the state of the Australian economy? Just a simple question.

Yeah. I'll try and keep it brief. Yeah, look, there's a lot going on at the moment. I don't have to tell anyone in this room that, I'm sure. There's lots of shifts and shocks that are occurring globally, I think we'll probably come back to some of those, but the conflict in the Middle East, the AI boom, that was the topic of the previous conversation. And there's a lot going on locally as well. We've obviously got inflation that's still above target, and that's definitely a concern for us, and the impact that that's having on the economy. And of course, earlier this year, the RBA, we increased the cash rate three times, and having that flow through. So it's a bit of a mixed picture. Households, household spending, retail spending, travel and tourism, things like that, seems to be holding up okay. I'm not going to say that it's great, that it's very, very strong. It's not, but it seems to be holding up okay in the face of everything I've just talked about. But it's certainly something that we're monitoring, and we're very conscious that for many members of the community, it's a tough time. We know that. We hear from those people. We are very cognizant of that. But if we look at that big picture, as you said, it does seem like the households are holding up all right. Business investment is actually picking up a bit, but partly that's an AI data centre story. But I think some of the other things that were just being mentioned around the renewables transition, and other aspects of business investments are actually showing some signs of strength, which is very good news for productivity into the medium long term, but it's a challenge for today because we've actually got to build stuff and get it done. And then, on the other side of things, we have the housing market, and obviously the housing market correction that's currently playing out. We know interest rates are part of that story. We don't think that's the whole story. But that's coming through and will put a bit of a dampener on momentum, on growth in the economy, particularly around residential construction and if your business is attached to that, the housing market itself and transactions through that market. So there's a real mixed picture at the moment. A lot for us all to navigate. Certainly making our job interesting, and I'm sure everybody in the room can relate to at least one, if not more of those factors.

Yeah, just thinking about it from a regional perspective, and we often sort of talk about the fact that regional Australia makes up 40 per cent of gross domestic product or GDP. A third of the population actually resides in regional Australia. But yet we talk a lot at a national aggregate level, especially sort of coming through from the RBA. And as we know, the lived economy can be very different when you're out in different regional areas, and not one regional area is the same as another one either. So what are the national averages within Australia telling us at the moment about what is happening out in regional Australia, and can you try and go to that next level for us?

Yeah, absolutely. And to be clear, we do often talk at the Bank, when you read what we're saying in the papers or you read a publication that we put out, we do often talk about national aggregates or national averages because we know interest rates affect everybody right across the country. No matter where you live and work, you'll be affected somehow. So that's why we have that focus. But we do spend a lot of time trying to understand what's happening right across the economy. We have our liaison program, for example, where we go out and we meet businesses right across the region. I take part in some of those meetings. It's a real honour to do that, actually, to really get that lived experience on the ground. It really helps me personally, but the Bank more broadly. It helps us understand what the numbers are telling us. It's particularly useful for getting ahead of the curve, actually, because you feel it first in your organizations. And if we can get that information from you right now, when it's at the tip of your fingers, that's ahead of any of the hard numbers that we might be getting from the ABS or anywhere else. So it's really important, and we do pay a lot of attention. And I think the two things that I wanted to call out that I can see some definite differences in regional areas, and in fact, they both came up in the earlier conversation. One was around housing, and what's happening in the housing market. And what we can see there in regional areas, generally speaking, regional housing markets, both rental markets, but more particularly, house prices in the established property market, they're holding up better than their city counterparts. So house prices in the regions have not declined as much on average as they have in the bigger cities, and that's generally true in every state compared to the respective state capital. So that's one aspect, and that just, I think, tells me and confirms what was just the conversation that was just happening about the availability of housing and how challenging that is in the regions. And the second aspect that I'm finding quite interesting in terms of the regions, again, it came up earlier on, is around the labour market, and the tightness of regional labour markets. The labour market across the whole country on average has been easing a bit over the last few years. We've had the unemployment rate rise a little bit. The pace of employment growth has softened a little bit. But in the regions, that increase in the unemployment rate has been, generally speaking, less than in the capital city. So the availability of labour in the regions is more challenging than it is in the cities. The numbers show us that, and that tells me something about the regions and how the economic performance and the fact that you're constrained more by that lack of labour, which is another really interesting observation, I think.

Yeah. And everyone, start thinking about questions you've got because we're going to make sure that we've got enough time to take questions from the floor. So don't be shy. You just referred to before around the Middle East, and that is the big unknown, isn't it, at the moment? So how is the Reserve Bank actually thinking about what we're seeing?

Yeah, absolutely. It is the big unknown. And again, thinking about this from a more regional perspective, the importance of fuel, and particularly diesel to the regional economy, we don't underestimate that. So the regions are, if anything, more exposed to this shock than people that live in the urban centres. Look, it's really tricky. We've obviously got now local prices for refined products, so petrol, diesel, things like that, tracking up now, over the last few weeks. The conflict hasn't reached a sustainable resolution. We are definitely concerned about, therefore, what that means for fuel prices and the flow of crude oil and then refined products through the global economy. We'll be looking at where the price is as we get a bit closer to our next forecast update, which we'll publish in November. But more generally, just looking where we are today, clearly prices have tracked up just recently. That is flowing into the local economy. That is what it means to be part of the global economy and be a small open economy within that. But it's certainly concerning in the context of what it costs, therefore, for your energy costs if you're running a business, what it means for households in terms of the cost of petrol that you're putting in your car, and therefore, what it ultimately means for inflation, which is what we're tracking and targeting. So it's pretty challenging, yeah.

Yeah, and you're touching on inflation there, which is the key thing that, of course, the Bank actually looks to, and we're seeing that at the moment, the risks are skewed to the upside around inflation. What are the downside risks as well?

Yeah. No, we did sort of talk about that in August, in the August publication that we put out, and then the Governor in the press conference, too. So we do think the risks to inflation right now are skewed to the upside. One of those is that Middle East conflict and the implications for oil prices, and as I say, they've tracked up just recently. Another that we're tracking very closely is more the global economy and inflation risk more broadly. The AI boom is being part of that. Anyone who's bought a new iPhone recently might have noticed that the price went up quite a bit. That's actually true for consumer electronics more generally, and that's directly related to the AI boom. The chips that are in all of our electronic products are in high demand right now. Their price is going up as a result, and that's coming through. So it's one smallish channel. It certainly doesn't move an aggregate needle, but it's just to give you an example of that global environment potentially being more inflationary. And closer to home, as just was being discussed, we're also paying pretty close attention to the economy's capacity, productive capacity. So what's happening with productivity in particular. Productivity growth has been pretty weak over the last few years compared to historical average. And for us at the bank, what that really means is that the pace the economy can grow before it generates inflationary pressure is lower now than it was in the past. And so we're looking at that very closely. If we could lift that pace up a bit, then we could have stronger growth without generating inflationary pressure. That's not a policy lever that we have, but it matters very much for how we think about inflation and interest rates.

I think you're leading me onto the next question because you touched on productivity there. So, in the latest Statement on Monetary Policy, we saw there that the productivity outlook had been revised down. Why is productivity so important?

Yeah, look, it's pretty critical. I probably don't have to say this to this audience, but a couple of stylised, well, one stylised fact I really, really like, going on a long, long history. Go back to 1901, so 120 something years ago. A loaf of bread at that time, the average worker would have to work for about 18 minutes to be able to afford a loaf of bread in Australia. Now, that number is more like four minutes. So that's a near five-fold increase in living standards. So the other 16 minutes that you work, you can then spend that money on everything else, and you can still buy your loaf of bread. That's why productivity matters. It lifts people's living standards. It makes all of our lives better off. That's why economists get so excited about it. And by doing that, that lifting living standards just means that we as a country, as a community, can decide what services that we provide, who we provide them to. We all can afford to purchase more goods and services. It's not the be-all and end-all. I don't want to suggest that. But it is, I do think, pretty important, and hopefully that sort of stylised fact shows it. So that's why economists get quite concerned about it. At the Bank in particular for us, we're interested in it, as I said, because it does matter in terms of how we think about what's driving inflation today and how we think about what's the pace of growth that the economy can sustain over time without generating inflationary pressure. We need a benchmark for that, and that's where we come into it. But I think more broadly, it's just this question of how can we increase living standards for everybody over time. To do that, you really do need productivity growth. There's no substitute for it.

That's interesting because every time anyone refers to productivity, they refer to AI. And it seems like this AI is going to be the solver of our productivity issue. But we know that it's not. So how does the bank think about AI and how it contributes to that, but what else do we think about when we're talking about productivity?

Yeah. AI is an interesting one. I have to say, I'm probably ultimately an AI optimist in that, I think that it will add to productivity. It will make us more productive. There were some really great examples on the previous panel of different processes that maybe the AI could automate some of it, and so the person that's having to do that job today, they don't have to do it anymore. They can go and do something that's hopefully more fulfilling for them as well as being more productive in terms of the amount of output. So I do think that ultimately we'll get there. But I'm not sure I think that it's going to solve all the problems. I think some of the challenges that were mentioned, actually Bank research done by some of my colleagues at the Bank, in a very academic way, has found that they are a challenge around productivity. We've found, for example, that dynamism through the economy has fallen in recent years, so over the last five, 10, 15 years, and that at least partly explains some of the slowdown in productivity growth. We've found that dynamism through the labour markets of people moving to different firms and taking what they've learnt in one job and taking it into another one, that sort of churn of the labour market has fallen over the last 10, 20 years, and that we think has probably caused some of the slowdown in productivity growth. And we hear from businesses quite a lot, in fact all the time, through our liaison program around regulation and the challenge of navigating regulation and changing regulations, actually, that the speed of change is a real challenge. You just get used to one set, and then it changes, and then you have to get used to another set. So there's an awful lot of different small things that add up to a big challenge. If there was one silver bullet, I think we would've probably found it by now, and we haven't. But yeah, they all sort of come together and give you an aggregate picture. So it's a challenge. Maybe AI is something of a solution, but probably not the whole solution.

Get ready with your questions because I'm running out of questions that I have. You spoke previously, Sarah, around the world becoming more shock-prone, and as a regional Australia, we're used to things, dealing with natural disasters and those type of things, disruptions to the supply chain, things like that. But what are the shocks that you think we should be worrying about over the next five years? Potential shocks, sorry. I know you don't have a crystal ball.

Don't have a crystal ball. Can I say regional areas generally, I find it actually quite inspiring how you guys cope with shocks and shifts and uncertainty. You generally do it really, really well. So, a weather event comes through, you figure it out. If you're in the agriculture business, obviously you're beholden to the weather gods year to year. You work your way through that. You guys are almost the poster child for resilience, and I think that potentially other parts of the country have got a lot to learn. There are a lot of things that I'm certainly thinking about. In the very near term, we talked about oil and the Middle East. That's obviously still top of my list. Very much looking at the AI boom globally, what that means, and thinking about how it's coming through in some financial markets around interest rate moves that we've seen recently. Also thinking more broadly around geopolitics, and how that might play through, and colleagues in the Bank have talked about that quite a lot. But if I also sort of put on top of that, I think there's some more longer-term structural shifts, climate change, for example, that are also now certainly having an impact the way that we haven't seen them before, and you only have to look at the weather patterns and the summer they've had in the northern hemisphere this year to see that sort of potentially playing out. So, there's a lot. In fact, a lot of things keep me up at night in this regard. I think the main thing that I'm sort of realising and working with my team on is this idea that there's just going to be more uncertainty. Perhaps there's more of these shocks coming through over the next few years than we've experienced over the last, say, 15-odd years, so post GFC through to COVID. We're all going to have to get a bit more uncomfortable with uncertainty and a bit more resilient to these shocks because that's what the environment is now. And as I said, perhaps there's something for all of us to learn from regional areas who've been dealing with these kind of things for decades already. And maybe that's a conversation we can pick up with the audience.

I'm just wondering, if the Australian Parliament were to introduce fiscal constraints on the federal government's budget, along the lines of what happens in Germany, say, how would that assist the RBA meet its mandate of low inflation and full employment?

Yeah. So the way we think about inflation and demand in the economy, we really do look at an aggregate picture. And so what we mean by that is we add up, if you like, all of the components of demand. So public demand is one of that, government spending is one part of that, and we add up all those components of private demand that I mentioned earlier on. We look at the, we call it aggregate demand, but the sum of all of those things, and we then take a view on where we think that is relative to the economy's supply capacity. And if you've got demand sitting above supply capacity, then you'll get inflationary pressure, and we use interest rates then to bring it down, to rebalance, and vice versa. So, it really does depend on the state of the position in the cycle and what else is happening across the economy as to what all of this means for inflation. As my colleague Andrew Hauser in an interview last week actually said, we really don't discriminate or consider different components of demand particularly differently. The reason for that actually is the economy is an incredible thing. It tends to move, economists call it resources, but if you like people, capital, other things, tends to move those resources that are needed to produce output to where they're most in demand. So we did some work a few years ago where we found that we had people moving from, for example, the hospitality sector, into aspects of health and social care. There was stronger demand for jobs in health and social care than there was in hospitality, and so we had that movement of people. Over the last 12 months or so, actually, the big growth in terms of the labour market by sector has been construction. I'm not surprised by that because there's an awful lot of construction activity going on. We're trying to build a lot of things. And so there's strong demand in that sector, and it's drawing people in, some that are new to the workforce, some that maybe are coming from other parts of the economy. So we really do consider the aggregate, and that's why we focus on the aggregate. We take the government spending decisions as given, and so if they look different, then we would factor them in as they change over time. But we don't really take too much of a view as to what the government should or shouldn't be doing. We're really just concerned with what they do do and then how that comes together with that overall picture.

My question is just around your views on, with all the growth in productivity, how do we maintain the economic benefit of that growth in the regional communities in the long term?

Yeah, it's a great question. And so just thinking about how does growth manifest through into, say, people's wages and to what they take home, and therefore what might stay in the region where they live. So if we look over the very long term, so you have decades and decades, not year to year, generally speaking, what we've found, at least in the past, is that wages growth and productivity growth, so labour productivity growth in particular, they have tracked together pretty closely. That's real wages growth, sorry, I should clarify. So those benefits do eventually typically accrue to the worker. In terms of thinking about the economy more broadly and how to take advantage of different comparative advantage and things like that, there are questions there around how do you enable growth in different parts of the country. That's not something that the Bank has a lever over, but I think some of the earlier conversations spoke to that. That's interesting and important, and that's important in the context of how does Australia take full advantage of where the global economy is going to and those structural shifts and shocks that I was just talking about. How do we best position ourselves for that? I think that's part of the answer to your question. And I also think it's, at least for the Bank, it's about understanding how those things might play out. What are the regions that might be benefiting, and why? And what does that look like? And we're certainly doing quite a lot of thinking now around not just AI in the context of productivity, but so what does that mean for, say, data centre investment? Where is that investment likely to take place? What does that mean for the power grid and where that investment might need to take place? And how do you connect the data centres that need the power with the grid, and where does the actual electricity production happen? So we're thinking about all of those types of issues, but I think it's the manifestation of all of that that will then tell you where growth is going to be strongest, where it's going to be relatively perhaps not as strong, but it can still be positive. You don't have to be going backwards. You may just not be growing as fast as another region. And then thinking about how it comes through into labour. So, a lot of different factors, but I think some of the other conversations spoke to how we can at least take advantage of some of the advantages that we have.

Question's around, I suppose, policy and how it all interlinks at a big level. So at the moment, there seems to be a real focus on efficiency, and you mentioned the resilience of rural communities as one of the things you were talking about. Just wondering, how do we overcome that? Because the focus on efficiency tends to mean less thinking that resilience is good for the economy, and efficiency is the way, and neoliberal, I suppose, policy work has really brought that home. But generally, that favors incumbencies in cities, when regions that work to make sure they're resilient and can handle shock tend to have resources moved away from them, and sort of favours incumbencies of the cities. How do we actually overcome this challenge of efficiency is king?

Yeah, look, it's another really big question. Good question. And it's not really in the Bank's purview, but I do know that colleagues in the Federal Treasury, for example, and in some of state treasuries as well, that we have good relationships and connections with, they're thinking about these types of questions all the time. And despite being a macroeconomist, I would agree it's not all about just generating the fastest GDP growth, that the economy, that the country in general, does need to think about multiple different factors that are important, one of which might be resiliency and maybe there's a trade-off there. So, I do know that it's certainly on the minds of government colleagues. I also think, actually, when I talk to businesses and other organisations right across the country, in the cities, in the regions, it's on their minds, too. It's very rare for me to have a conversation with someone where when they talk about even productivity and efficiency, they're only actually thinking about it through that one narrow lens that you talk about, that, "I just want to absolutely maximise output given what I know today." Almost every organisation I talk to, they want to talk about productivity, but they also want to understand the environment and the different shocks and how shock-prone we might be now compared to before. And in having those conversations, it's pretty clear everyone's thinking about, "Well, what if something different happens to what I currently expect? How do I best position myself for that, as well as being mindful of where we're going today?" So, I actually think most if not all business owners and government colleagues are thinking about the trade-off and the balance between these things. It's not easy, I'm not going to pretend that it is. But it does strike me as something that's in the conversation, even if the language that's used around it is not quite the same in every type of conversation.

With the impending possible interest rate rises and changes to some of those fiscal measures, are there any vulnerabilities from an industry perspective that the Reserve Bank is seeing that will be different to what we're already seeing? For example, the construction sector we already know is quite vulnerable at the moment, but are you starting to see any signs of any other industries that we're going to see vulnerabilities that we can start working to support those industries with?

Yeah, thanks. That's a great question, and actually incredibly well-timed because we will be putting out, just a couple of weeks, just after the next board meeting, actually, a biannual Financial Stability Review, which speaks to this precise point, both in terms of households, but also in terms of businesses. In terms of what we're seeing in the data at the moment, so we know always there are some households and some businesses that are going through difficult periods. And that can often be from no fault of their own. If it's a household, maybe someone's come down with ill health or something along those lines, that makes things really tricky financially. For businesses, it can be another idiosyncratic-type shock that just happens and hits the business, and it's just really hard, and we know that, and really feel for people in that position. What we're looking at, I think goes to your question, and where we focus on is more evidence or signs of systemic stress, so in multiple businesses in the same sector or in the same region that might be really squeezed. At the moment, I have to say we're not seeing signs of any particular sector that looks particularly squeezed. Some sectors do tend to, and you called out construction, do tend to have higher rates of closures, for example, than others. But are those rates moving right now? They don't look to be. So we can't see anything at the moment. And on the household side of things, to go back to the averages, the average household, actually, with a mortgage, for example, looks pretty well-placed as well. They've built up pretty good buffers, quite a fair way ahead in terms of extra payments into offset and redraw accounts, things like that, that we track. So, we're not seeing any signs of it yet. We are always monitoring it, as are my colleagues in Financial Stability Department, that is their job. And we'll continue to monitor it, but yeah, just at the moment, it looks like where we are now, we're well-placed, but we don't take that for granted.

And I'm sorry, I'm going to have to call it to a close there. Like I said, we're sitting between everyone and lunch, and that half an hour went very quickly. I hope it didn't – it went as quickly for you guys as well. So, thank you, Sarah. Thanks so much for joining us today. We really do appreciate that, and I'll see you in a couple of weeks.

Yeah. Thank you.