Podcast Interview on The Pay Off with Sylvia Jeffreys, 9Now Podcast

I’m Sylvia Jeffries. Well, we are one week out from the RBA’s next interest rate decision. So, what is the Bank watching and could rates go higher again? Well, RBA chief economist Sarah Hunter joins us today to explain what’s happening with inflation, house prices, and household finances, and to bust some of Australia’s biggest economic myths. Sarah, welcome to The Pay Off.

Thank you for having me.

Great to have you here. You are in high demand at the moment, so I’m very grateful that you would carve some time out for us today. First up, as Chief Economist and Assistant Governor at the Reserve Bank of Australia, can you explain exactly what your role is, what it entails?

Yes, that it’s quite a long job title, isn’t it? So, I like to think about my role as being in sort of two parts. One part of it is advising the (Monetary Policy) Board on economic conditions, the outlook for the economy and what that might mean for monetary policy and that’s obviously what they have to decide what to do with the cash rate. I have a fantastic team that I work with that really help me with that and we gather all sorts of data, information, we do modelling, we have our liaison programme, which is really important. That’s where we actually go out and interview around about 900 interviews a year right across the country, talking to businesses in all different sectors, community organisations, not-for-profits, whole wide range, and to get information from them on what’s happening. I actually really enjoy those interviews myself because I get a real feel for what it’s like on the ground in a real sense, as well as looking at numbers and charts, which economists love to do.

And so, we put all of that together and we give them advice on what’s happening right now in the economy, what we think is going to happen tomorrow and then that’s what they use to help them decide what to do with interest rates.

So that’s one part of the job that me and my team do. And then the other part of my job is really helping the Governor actually run the Bank and make decisions over what we do to run the Bank. So, for example, right now, we’re, I think like all businesses and organisations, grappling with AI and how might we bring AI into the Bank. How can it help us in our day-to-day jobs? What do we need to do to get the most out of it? How might we have to change how we work? Those sorts of questions and other questions about, yeah, just running the place.

So, it’s a real mix of a job and I really enjoy it. It’s an honour and a privilege to be doing it.

So, if we look at, you know, as an example, the last meeting in August where the RBA decided to leave the cash rate on hold, what was the key data that you presented at that meeting to figure out that decision?

Yes, so there’s lots of different data actually that would go into each meeting. So, we’re looking at I’d say things in maybe four broad buckets, if you like. What’s happening overseas? So, we want to understand the global economy, what’s happening around inflation trends around the world, and what’s happening with demand, particularly in countries where we export a lot of our products too. So, China’s always really important, but other countries in Asia and around the world. That’s one bucket.

The second bucket is what’s happening to activity in the economy. So, demand like consumer spending, business investment, those sorts of dwelling investments over house building. What’s happening in those sectors and how that’s all coming together.

The third bucket, which is one part of our mandate, is the labour market. So, what’s happening to employment growth? How many people want to find a job and haven’t got one at the moment? That’s the number of people unemployed, the unemployment rate, and those types of things.

And then the fourth bucket, the other half of our mandate, of course, inflation. So, what’s happening to prices right across the economy, and how’s that all sort of coming together in that inflation rate? So, we put all of that together. And for the last meeting, we also updated our forecasts of what we think is going to happen over the next couple of years or so. We write that up into what we call board papers, or we publish them on our website as well, actually, when it’s a forecast update. It’s called the Statement of Monetary Policy. It’s got quite a grand name, but that’s basically what it is, what’s happening in the economy now and what we think is going to happen.

The board get those papers on a Friday. They have them for the weekend to have a look at and then the meeting is Monday and Tuesday and then the decision gets announced at 2.30pm on a Tuesday afternoon. Exactly. And so, then the Governor stands up and explains it.

And we’re all glued to the TV for the following press conference as a week ago.

What inspired you to pursue a career in economics in the first place?

I’ve been an economist my whole professional life. So, I’ve been doing it for quite a few years now. And I think a few things I think probably came together. I’ve always liked numbers and what stories numbers will tell you and particularly what they tell you about people and the way we live our lives, like why might you decide to buy a cup of coffee or not, or why are you doing the job that you’re doing and not another job and how do people make those decisions.

But then also when I was growing up in the UK, so I was born in the 80s, and then going through into the 90s, there was a lot of change in the UK economy. And particularly in the early 90s, the UK, not too dissimilar to Australia actually, had a high inflation rate, but then went into recession and actually high interest rates were part of that. And I can remember that period of time, I can remember it because I remember the high inflation actually, funny, funny little things like the price of bread, because it was my job to go and get bread on a Saturday, so, I remember that and the price going up quite quickly.

But then also for my family, unfortunately, it was a pretty tricky time. My parents actually ended up separating and so that, you know, obviously very clearly remember that. So, I sort of had this experience in my own life that was very tied to the economy and then was really quite interested in it anyway and eventually picked it up at school and then carried on to university and yeah, the rest is history, really.

Have you discovered as a ‘Brit’ in Australia, or who’s now an Australian citizen, have you discovered any particular quirks about the Australian economy?

Yes, I think there are a number of quirks about the country here, but I think the one that probably strikes most people when they come here and they live here for a while is housing and how much we all talk about housing and the housing market.

You get a lot about the housing market in British newspapers and on British media too, but it’s heightened over here. So that definitely took some getting used to. Like the auction clearance rates being reported on a Monday morning. I’d never known anything like that before.

We’re an odd bunch for so many different reasons, but that is definitely one of the standouts. Okay, so let’s talk about some of the myths that are around in the economy at the moment, because it’s such a changing time in the Australian economy. There’s so much shifting beneath our feet as we record this episode today. And therefore, there’s a lot of commentary out there. And of course, with that comes a lot of vested interests as well. So, it can be very hard to know who to trust, whose opinions to take on board, who’s to perhaps leave aside.

I want to get to the bottom of some of the most common myths that are getting around and perhaps some of the most common sentiments that we hear as well. So, first up, we often hear that lifting interest rates is a blunt instrument that punishes only the 30% of Australians who hold a mortgage. What do you say to that?

We get asked this question a lot too and it’s an important question. And there is, as with any sort of these sort of narratives, there is some truth to that. So, I’ll start with the truth and then I’ll explain a bit more about interest rates and why we use them to help bring down inflation at the moment.

So, it is true that one of the channels through which interest rates have an impact on the economy is what economists call the cash flow channel. The way that you know you and me would see that at home in our budgets is if you’ve got a mortgage and we put interest rates up, your minimum payment goes up and you might have to pay more out of your monthly budget to that. But as you said, that’s only around about a third or just under a third of people are owner occupiers with a mortgage.

The rest of the people living in in Australia usually will fall into one of two other buckets. They’ll either be renters, which case they don’t typically they won’t have a mortgage, so they won’t be paying that so they won’t see that direct impact of interest rates. Or they they’ll own their own home but without a mortgage, and they might be older people who’ve paid off their mortgage they bought a long time ago, took a mortgage on, paid it off, and now they own their outright and so that blunt instrument is reference is usually to the fact that obviously these different groups get impacted quite differently by interest rates when we change them. So, if they’re going up, it’s not great if you’ve got a mortgage.

If you’re a renter, there’s probably no real direct impact. You might have a bit of money at the bank, but if you don’t have that, then you maybe don’t see much of an impact either way. And if you own your own home outright, that group, it’s not atypical for people in that group to also have maybe a bit of money that they hold at the bank or to have some money invested in and they get interest payments from it. And so, they would actually benefit from higher rates. And so that’s what we mean by this blunt instrument.

But the thing is that one channel, that’s only one of the ways that an interest rate change will impact the economy. And that’s actually why we use interest rates, because they get into everywhere, they get into all the nooks and crannies, and they really eventually they’ll have an impact on all parts of the economy. So, there’s that cash flow channel is one channel, but then we’ve also got the impact on the exchange rate. So, if we put interest rates up, that will make the Aussie dollar usually makes it a bit more valuable, all other things equal.

And so that means that imports are a bit cheaper, overseas travel might be a bit cheaper, and so that has an impact on whether or not you choose to holiday here at home, or if you choose to holiday, say, in Bali or further afield. It also has an impact, I’m sure we’ll get to it later on, on the housing market. And so generally speaking, higher interest rates there will also work to slow things down a bit. They’ll put some downward pressure on house prices; they’ll dampen down construction activity in that sector.

And also sort of separate to that cash flow channel, they also sort of change the incentives that everybody has on whether or not to spend or save. So, if you’ve got your mortgage, you’ve got your minimum payment, but you can you most people also have like an offset account or a redraw account and you can choose to put a bit more in or not. Higher interest rates, what we tend to find is people will choose to put in a bit more, which makes complete sense - you want to pay the mortgage off sooner; you don’t want to pay more interest. And so that if you’re going to do that, then you’ll be spending a bit less. It might encourage other people just to save more at the bank or for businesses if they’re thinking about whether or not to take on an investment project, if they have to borrow money for that and the cost of that borrowing’s gone up, then then maybe they’ll choose not to do it and that dampens down activity as well.

So, it’s all of these different channels. That’s why interest rates work, because they go everywhere. But yeah, we know that that first channel, that cash flow channel, it is a blunt tool. And it’s really tricky. And we know some people, especially if you’re a first-time buyer and you’ve stretch yourself a bit to get on the ladder in the first place, and then interest rates go up. That’s really tough. We know. Really tough.

Every dollar is tight for a lot of households at the moment. So, if we look at the fact that, you know, by raising interest rates, you’re trying to restrict cash flow to some parts of the economy, right, to bring down inflation. Inflation is still above target. So why did the RBA decide to keep the cash rate on hold at the last meeting in in August? What was the delicate balance you were trying to achieve at that meeting?

That’s a really great question. And obviously, you know, we were saying just before it’s about three weeks out to the next meeting. So, the board meets every eight weeks or so, roughly and so, they they’re always going to come back and ask this question again.

But I think there were a few factors that the board were weighing up. So, on the you know, why is inflation you know above target high at the moment and we’re all feeling that as the cost-of-living squeeze? I think a few factors there. There’s the conflict in the Middle East and what it’s done to oil prices, if you filled your car up recently, you’re probably noticing that. And that’s going to have an impact indirectly as well, because we, you know, we have to truck goods around the economy. So, food has to go from farmers to the shops, and that requires diesel-powered trucks to do it and channels like that. So, there’s that channel.

We also think that there’s some domestic capacity constraints, more presence in some sectors rather than others. So, if you’ve tried to get a tradie particularly in say Brisbane or in Perth or Adelaide recently, you might have found it’s a bit hard work if that’s where you live, because they’re in hot demand there. And so that’s what we mean by capacity pressures. That’s a specific example, but just generally across the economy, it’s still a bit tight, and so those capacity pressures are manifesting as inflation. So, we know we know that that’s happening, but on the other side of it, what we can also see is that growth has slowed down a bit.

We actually got some data a couple of weeks ago, national accounts last week, sorry, that showed that growth had slowed down in the first half of this year. We were expecting that. That’s actually what we want. We want to take some of that pressure out of the system. So that’s happening.

We know obviously the housing market’s now in gone into a bit of a cyclical downturn and that’s going to dampen activity into the future. And so the board is sort of weighing these things up and they’re weighing up you know whether or not to change the cash rate and at the August meeting if they needed to hike it or not.

The only final thing I’d say about the August meeting, the board were pretty clear that even though they didn’t hike the cash rate, they are still very concerned about inflation.

And we think that the risk to inflation is skewed to the upside, all those things I was just talking about. And if you know if those risks do manifest, then I think the board have been clear that they’ll have that they will definitely be considering whether or not they have to hike the cash rate. So, we’ll see what happens. And obviously we want to get inflation back down. It’s really important. For me it’s just a really strong motivator.

Inflation’s just hard to live with, particularly if you’re on a low income. That’s what the cost-of-living squeeze is. We want and need to get it out of the economy and that’s what the board are focused on.

What do you say to the notion that high interest rates stoke inflation? True or false?

It’s a really good question because it seems like it should be true, right? Because if you charted inflation and interest rates, just put them on a chart, you’d see them both sort of when one is high, the other is generally high, and when one is low, the other is generally low. So, it looks like interest rates might cause inflation. Actually, it tends to be the other way around. So, what happens in practice is that some you know, shock will come in and will impact inflation, say the oil shock.

And that will come through and we’ll see it and we’ll see it ahead of time. We know, gosh, if all prices globally have gone up, they’re going to get into petrol prices at the pump, they’ll eventually get into our food prices, into you know, other prices across the economy. And so, to counteract that, the board, the RBA might decide to raise interest rates because we want to get on top of the problem. We don’t want to let it run away with itself. So actually, it’s more the inflation happens and then we respond with higher interest rates.

But I know if you just look at it as a picture, it looks like the two go together and maybe interest rates even cause the high inflation. They genuinely don’t. They are the solution to it just takes them time to work. So normally by the time they’re working, inflation’s coming down. And then to get ahead to make sure we don’t get to deflation, which we also don’t like, we might well be cutting rates. So, it looks like they’re contemporaneous, but actually inflation is first and then interest rates go.

You you’ve mentioned the oil shock, and it feels as though we’ve been in a pattern of shock after shock after shock since COVID. Are shocks becoming the new norm?

Yeah, it’s quite exhausting, isn’t it? You wake up in the morning, and you wonder what you’re going to read about. What’s happened. I mean, potentially, yes. I mean, I if I think about the years between the financial crisis and COVID, actually there was stuff was going on and you know, it was plenty to do, but it was sort of relatively calm globally, as well as here in Australia.

And it just feels like we’ve now moved into a phase where actually it’s just not going to be as calm, and there’s a lot of new things coming at us and different types of shock that we haven’t had to deal with for a while.

So, you know, we talked about oil, and you know, perhaps older listeners might remember the 70s and the 80s when oil was last moving around a lot. Maybe we’re back in that type of world because we’ve had the Ukraine conflict and now the Middle East. We’ve got some big shifts happening in the sort of geopolitics sphere, different countries sort of changing their relationships with the world, and that just increased uncertainty and you need to respond to that. COVID, obviously. Let’s hope we don’t have another one of those in our lifetime. I’m quite happy for one pandemic. So, there’s just a lot that’s coming at us and it sort of feels like it’s moving quite quickly. And then new technologies as well like AI are creating opportunities but also challenges. So, it does feel like the next few years we’ve probably got to learn all of us how to get a bit more comfortable with uncertainty. That’s really tough, I know. But I but I hope that maybe it will calm down a bit.

That would certainly make our job a bit easier. I think it would make everyone’s lives a bit easier. So, I do hope that’s true. But I’m preparing for it not to be true.

Okay, this next one I think might be a bit of a pet peeve for you. And it’s probably more of a language problem than an opinion problem. But what do you say when you see a headline that reads high inflation is leading to a higher cost of living?

Do you know it is a language one. And I do think at times economists we have all these technical terms that we all use and we know what they mean and we learn about them at university. And then we forget that most people, fair enough too, don’t want to be in the weeds on this stuff. And I absolutely agree.

Like I was saying, before my husband’s a computer scientist. He has lots of technical language that doesn’t mean an awful lot to me. So, I get it. For me, these are kind of one and the same thing, actually - inflation and cost of living. Like when economists say, inflation is high, you know, that’s actually more or less the same as you know, anyone else saying the cost of living’s going up really quickly. They’re actually the same, and so when I’m thinking about what we’re doing and what and the problem we’re trying to solve, it’s actually that cost of living squeeze problem. That the fact that everyone can remember … for me, it’s the price of milk. I remember milk being a dollar a litre. It wasn’t that long ago. And it’s not a dollar a litre anymore. And, you know, it takes you time and you have got to adjust to that. And you go to the shops, and it just costs more than you think it will, and it’s frustrating and it’s a burden.

And for some people, they’ve got to make some really hard choices about what they spend and they’re not quite sure what you know what the basket’s going to come to and things. So, for me they’re actually one and the same thing. That’s the problem we’re trying to solve. And I think maybe the less economists use technical language that makes sense to them and the more we put it into language that makes sense for everybody else, I think that’s actually good for our profession.

When mortgage rates go up, is it natural for rents to follow?

Another great, great question. It might seem like it is, but actually it’s not. So, we did some research on this because we wanted to understand actually what was really driving rents. It’s a pretty important part of inflation and how we measure inflation in the economy.

And so, what actually what happens in rental markets, they’re really just a product of, in local markets, demand in that market and supply. And when I say local, I mean really, really local. Like we’re here today in North Sydney, that would be one local rental market, you know, St. Leonards is up the road would be another one, and so on. And so, it’s really the balance of demand and supply in that market. And so, what happens to interest rates impacts the landlord potentially, because they might have a mortgage on the property that they own. But because most of our landlords only own one property, some might own a couple, there’s very few landlords in the country that own lots and lots of properties.

So, if you’re an individual landlord, you own one property in one rental market, you might want to put the rent up when your interest rate goes up if you’ve got a mortgage. But you’re competing with all the other properties that are available, and so, it’s demand and supply, it’s the local market that will equilibrate rent.

So, rents move as a result of one of those few things. If rents are tracking up, it’s usually because demand growth is stronger than supply growth. And that’s actually what we’ve had in the last few years. It’s been really tricky for renters, I know, rents have risen quite a lot actually. But it’s not because of interest rates. Interest rates in that time have gone up, they went down a little bit, and now they’ve gone up again. But rents have generally been rising. So, it’s not a one-for-one relationship, despite appearances.

A lot of people in the media at the moment are pointing to the government’s tax changes. I know you can’t speak politically to things, but they’re sort of blaming those changes for a rapid rise in rents in the last few months. What would we put it down to at the moment, you know, that the drastic increase in rents that we’ve seen over the last few months?

That’s a good question. It does come back to that balance of demand and supply. And I think particularly in the construction sector, and many people in the sector, we talk to lots of people in construction just to really get a handle on what’s going on there, and it’s just really tricky to get enough supply built.

So, people in the sector will often talk about getting planning approvals through, and a number of the state governments actually are trying to do something about that now, but you know, that it’s taking time for that to happen. And up until now, it’s just been hard. So, it can take months and months to get approval for a project. They’re also grappling with shortages of labourers. Yeah. So, you know, electricians, plumbers, brickies, all the all the trades. Yeah, all that stuff is just really hard. So, if you might want to get a project off the ground, but you haven’t got the labour to do it. And we’ve also seen you know rise in the cost of materials as well. So, oil is part of that recently, but earlier on through COVID, we had almost all commodities, you know, timber, concrete, all these prices were going up a lot, and a lot of construction activity happening right across the economy, not just in housing construction.

So, all those things come together have made the cost of building relatively high. And so getting new supply off the ground is tough. And in the meantime, demands just kept on growing because population growth has kept on.

And so these two things have come together and rents have gone up as a result. So mostly in recent times, it is really a story about that. The tax changes and everything else that’s happening in the housing market right now, that’s going to impact supply into the future. So that will start having an impact on approvals, but then it takes time for actual house houses to be built and to come into the market.

That takes me to immigration, which is obviously a red-hot political issue at the moment. Do migrants add to inflationary pressures?

Yes, good question. We get that one a lot as well. And of course, Australia’s got a relatively high level of migration compared to other countries. So that’s been his true historically almost all the way through. So, when we’ve looked at this issue in the past, because you imagine we’d be interested in it as well, what we’ve generally found actually is migrants in a very broad sense and over sort of a one, two, three, five year horizon, yeah, they add to demand.

So, when you come over here, you need somewhere to live, which I’ll come back to in a second, but you’d also be buying food, you’d be going out to eat and all that sort of stuff. So, you add to demand in the economy. But many migrants, particularly if they come on a working visa, rather obviously, also add to supply. So, they get a job and then they’re expanding our capacity. So broadly speaking, those two things are actually generally net off after you know a couple of years. Where you can see a bit of an impact is in the rental market because we don’t get extra supply of homes as we were just talking about straight away. But many migrants when they first move here will be renters rather than buyers. So, you can get localized rental market impacts. And actually, where we saw that most strikingly was in inner Sydney and inner Melbourne with the students through COVID. So, when the students weren’t coming in, when we had the borders closed and lockdowns and things, rents in those parts of the country actually fell quite sharply because demand fell back.

And then when the students came back, when we reopened, the rents sort of lifted back up and came up quite sharply. So that’s a really nice example from recent history of how they can have an impact on prices and inflation. But in a broad sense, over sort of you know a couple of years actually they tend to not have too much of an inflationary impact.

When Michelle Bullock, the RBA governor, gets up and does her press conference after the cash rate meeting, everyone’s at pains to try to read between the lines and connect the dots with the messages that she sends in her explanation of the Bank’s decisions. Often there’s a lot of discussion after those meetings about government spending and the role it is playing in inflation. To what extent is government spending to blame for inflation and therefore high interest rates?

Great question. So, we tend to think about government spending as being part of the whole economy. So, we’re very conscious that we’re not elected. Government policy and government decisions are not ours to make. You know, we’ll get to vote at the ballot box and then the government implements policy as it sees fit and things. So, we don’t comment on the specifics of policy, but what we do think about is what’s happening to overall total government spending? That’s the federal and the states together. What’s also happening to taxation on the other side? And how does that come through and have an impact on demand effectively in the economy? But we’re considering that as one component of many components of demand.

So, demand includes government, but it’s also consumers, what we all spend as households, businesses, what they’re investing, that housing construction we were just talking about and what our exports and what we’re importing as well. And we look at that whole total and think about that, and that’s GDP, think about that relative to how much we think the economy can produce sustainably. So, what’s our capacity? And it’s the balance of those two things. And so, what we think right now, that aggregate demand, so the sum of all those things together, we think that aggregate demand is actually running a bit above where aggregate supply or sustainable capacity is and that’s what’s creating those inflationary pressures.

So, government’s part of that aggregate demand, but it’s just one component. And we do just take it as it is, feed it in, feed it through, look at all the other components, and then that’s the sort of balancing act that we’re doing at the other end of it.

Let’s talk housing, Australia’s favourite subject. Okay, let’s begin with the slowdown that is happening in the market right now. What is your assessment of how significant that slowdown has been so far?

That’s a great question. As I said earlier, we definitely pay attention to the housing market because it’s one of the key channels that monetary policy has an impact. So, we need to understand it.

But I will say house prices are not our target. We don’t have a number in mind and we’re not trying to hit a particular point there. But in terms of what we’re seeing so far, so it’s certainly true that the downturn has been relatively rapid in the last few months compared to historical downturns. And we’ve had a few. I think that’s probably an important point to start with, in fact.

The housing market has been through downturns before. I think it will probably go through future downturns as well after this one’s played out. And I don’t think there’s any fundamental reason to think that we won’t find a floor, find the bottom of this downturn and then prices will start coming back up because not least because of that sort of undersupply housing we were just talking about earlier. That’s eventually that will sort of kick and we’ll have prices will start to track back up again. But right now, yeah, price is obviously tracking down. It’s relatively rapid compared to other downturns, but it’s not, it’s certainly not outside the bounds of what we’ve seen before. It’s not the most rapid, for example. And it’s got a few different drivers at the moment. So, we know interest rates, higher interest rates from earlier in the year are part of the story and we expected that. It’s kind of what we’re trying to do, right? We’re trying to slow things down a bit.

We know that you know, confidence in took a real hit around the Middle East crisis. And so, you know, for consumers, it hit an all-time low, some of the measures. It’s come back a bit, but it’s not come back all the way. We think that’s probably playing a bit of a role. And the tax changes have had a bit of an impact as well. So, a whole bunch of things coming together. Quite where it bottoms out, we’ll see. It’s really hard to forecast housing the housing market. It’s really tricky to try and get it right.

But yeah, I think it will hit a bottom, as I said. That’s what we expect, that it will hit a bottom and then it’ll start tracking back up. And any final thing I’d say is that house prices, generally speaking, have grown really quite rapidly in recent years. So, if we roll the clock back to pre-COVID, the average price today is just under 50% higher than it was in late 2019, early 2020. That’s a lot. And the downturn so far has been around three percent.

So, we’ve gained a lot and we’ve it’s a little bit of a pullback now. So just keeping that context in mind. But look I know it’s tricky, it’s tricky if you just bought a house, this is not what you want. It’s tricky for other people too. So, we’ll see, we’ll see how it plays out.

Would you say that the downturn is a positive for younger generations who are feeling that inequity?

I think it it’ll really depend how it all plays out and how you know people who might be looking to buy now, at what point they do that, what happened what it means for rents and you supply and things, it’s actually going to be pretty tricky to play it out.

I think this really plays to another version actually, if you like, of how monetary policy and interest rates have different impacts on different households. I think this is an example of this as well. So, it’s quite hard actually. It really does depend on your specific circumstances today and how you’re experiencing what’s going on. So, it could well for some first home buyers it could well enable them to get into the market with a lower price and that’ll be really good for them. But for others, it’s perhaps you know, the timing’s not going to be right or it’s just not going to be possible. So, I think we’ll just we just have to wait and see how it all plays out really.

It is of course widely expected that there will be another interest rate rise this year. I know you can’t give us any intel on that, that would get us into a lot of trouble. However, is there any evidence or data to suggest that one more interest rate rise would push households into distress?

That’s a good question. Definitely not more than my job’s worth to comment on that. But you’re right, it’s one of the things actually that we do track and pay very close attention to. So, one of our other sort of roles in the economy at the RBA is setting interest rates is one, but we’re responsible for financial stability, systemic financial stability. So, making sure that across the whole of the financial system that it’s stable, that there’s not signs of distress and if there were signs of distress then we would do something about that.

And so, because mortgages are such an important part of banks and their lending book, we pay close attention to households and whether or not there are signs of distress. And I have to say at the moment there aren’t any systemic signs of distress. So, we’ve estimated, for instance, that the proportion of households in negative equity today is actually lower than it was pre-COVID because of that big run-up in house prices that we’d seen prior to this current downturn.

If we look at households and how far ahead they are on their mortgage payments. So, if you’re paying into your rent your offset or redraw account, we can sort of see what that distribution looks like. And just over 40% of households are actually two years ahead on their mortgage, two or more years ahead. So, they’ve banked up a lot of repayments. So, if something happens with your income, you can start using that obviously to repay. So that gives you a buffer.

So, we really don’t see many signs of that systemic financial stress. That’s not to say that some people aren’t struggling. We know individuals will be. Some people maybe ill health or they’ve had a change in their work and things, and that makes it really hard, and we know that’s happening, and that’s tough for those individuals. But we’re looking across the whole economy, if you like, the whole system, and we don’t see any signs just yet.

You mentioned employment data earlier on in the conversation and how that factors into the cash rate decisions at the RBA meetings. What does the current data tell you about the number of people in full-time employment?

Yeah, it’s a good question. So, the labour market actually through the last few years has been one of the sort of bright spots of the economy. We’ve had actually pretty strong employment growth coming out of COVID and through the last couple of years. Slowed a bit recently towards back half back half of last year and into to this year, but still it’s still pretty robust.

And so, we’ve actually got, you know, relatively large number of people that are in full-time work. And actually, for me personally as a woman, one of the real success stories of the economy is women in work. So, economists call it the participation rate, but the proportion of women that are either in work or want to be in work and are looking for a job, that’s at near record highs. And that’s been tracking up structurally. So, more and more women able to get a job and then stay in work. That’s also come, by the way, with an increase in part-time work. And so, I really like that actually women are able to balance work and home and seem to be able to do that and stay in the workforce after they’ve had kids and things like that. I really hope that for most of those people it’s a choice and it’s satisfying and that the job is what you want it to be, but you’re able to balance it with home. That’s been a real success that we’ve been able to generate the jobs for that. So, it’s something to, you know, perhaps to celebrate really.

But actually the labour market’s been pretty resilient over the last few years and that’s a good thing. It means people have got jobs and have got an income to go with that.

Has that increase in female participation in the workforce had a positive effect on productivity?

That’s a tricky one because they’re sort of a bit separate actually. Normally we’d think about productivity as benefiting everybody or manifesting itself, I suppose, in everyone that’s got a job, and that would be women, men, or whatever. Productivity recently has actually been a bit of a challenge for the economy. We’re not alone in that, by the way, actually, many countries have had that challenge. The US has done really well, but they’re kind of the exception and the question for economists actually is why are they the exception, like, what are they getting right that the rest of us aren’t. But yes, productivity’s been a bit tricky and it’s really important.

I was actually looking up some stats to try and maybe just give an example of why it’s so important.

And I like this one as a number’s person. In 1901, I know a 120 something years ago; to buy a loaf of bread, the average worker had to work for eighteen minutes. So, it cost you eighteen minutes’ worth of work to buy a loaf of bread. That figure today is four minutes. So that’s productivity. That’s what it is. And that’s why it’s important actually, why economists get so excited about it. Because isn’t it great that we’ve managed to bring that number down by almost five times? And that means that for the remaining 14 minutes, you’re earning money and you’re able to buy something else. And that’s an improvement in your standard of living. So that’s why we care about productivity.

But just recently, productivity growth’s been very weak. In fact, in the last five years, it’s basically been flat and been sort of zero. And so, we’re not getting those same gains that we were before.

That’s why the government are really, you know, focused on it, state and federal. Economists are talking about it all the time. It’s really because it’s the engine of growth in living standards, of improving living standards, and that’s why we care. So, it’s sort of a bit separate but related to the labour market and it, you know, if we could work out if there were some easy wins in that space, that’d be really great. Tackling some of those construction sector challenges, for example, would be really great.

You mentioned earlier also the forecast that you presented that covers off the next two years. So, before we wrap up, what would perhaps be a couple of the key headlines or takeaways from that forecast that you could share with our audience today to give us a little look into the crystal ball?

I wish the crystal ball was clear. I’m afraid it’s not. I mean, one of the things we talked about earlier, one of things that keeps me up a bit at night, is all the things that could come at us and all the shocks and things and trying to think about how they all play through. And there are a lot at the moment that we haven’t fully factored into the forecast because we don’t quite know how they’re going to play out.

So, everything I’m going to say you have to take with a bit of a pinch of salt, maybe a bucket of salt. But what we think is going to happen, I think two things I’d say. One; we think and hope that inflation’s going to ease, that cost-of-living squeeze is going to slow down. And what we really want is to get to a point where it disappears into the background, so you just don’t have to think about it. That’s what we’re aiming for. And we think that you know, we’ve put three cash rate hikes through already, that that’s helping to slow things down, and that’s what we hope is going to happen over the next couple of years. But the other main takeaway I’d say is that we can see lots of reasons why inflation might be a bit higher than what we currently think. And so that’s why we’re concerned and we’re still really focused on inflation. And it might be the case that the board feel that they have to, you know, raise the cash rate again to slow the economy down just a bit more to really tackle those pressures. So, you know, the forecasts have us getting back to target so, inflation disappearing into the background, but we’ve got to wait and see and a few things we’ve got to play out right if you like for that to happen. So, it’s a bit tricky at the moment. We’ll see how we go over the next few months.

I was hoping it would just be prosperity for all.

I wish, sorry, economics is the dismal subject. So, you know, we rarely have a good news story, but hopefully it’s a good news story about inflation over the next couple of years.

So, you’ve made economics very interesting for us today, Sarah. So, thank you so much for joining us and for giving us some of your time. Appreciate it.