Interview Interview on 60 Minutes

Sarah, thank you. It is a nice reminder sitting in front of you that humans make these decisions. They’re brutal calls you’re having to make every day. Do you let yourself feel the emotion when it’s coming?

Oh, definitely. I can’t not have empathy for the people that are being really impacted by what’s going on at the moment, whether that’s people who have got a mortgage and their mortgage interest rates are going up so they see their payments going up, we know that that’s really, really tough and that’s hard to deal with. And we’re also really aware of the people who are really grappling with inflation or the cost of living, that’s what most people call it.

And that’s showing up for those people everywhere - rents, food, petrol, you know, wherever you go to the shops, out and about. We know that it’s a really tough time for everyone right now, and that’s why we’re doing what we’re doing. We want to solve this problem. We know that higher interest rates will bring inflation down, but it’s just really tough in this sort of period of time trying to get there.

Will they bring it down? How’s it looking right now?

Well, look, it’s tricky at the moment because we’ve obviously got this external shock coming through from overseas, the oil shock. I’m sure everyone who’s going to fill their car up at the petrol station is noticing that. We’re starting to see it also coming through into some other prices as well. The cost of doing a renovation on your home, I’ve noticed that if you’ve got a builder in, he’s saying, I’m going to have to put my prices up a bit because my material costs have gone up. So we’ve got this shock coming in from overseas, which is really difficult, that’s nothing to do with us here in Australia.

Nothing to do with the people who are wearing the pain of it either?

No, but we do know we also have a challenge around the domestic economy as well, and it’s just at the moment we have got a bit too much demand, relative to what we can sustainably supply where inflation is low and stable within our mandate, and so we’ve got to try and tackle that problem as well. We’ve got to make sure inflation doesn’t become embedded, the thing that’s coming in from overseas, and we’ve really got to try and tackle that domestic challenge too.

I know it’s really tricky though and really hard for people because you see what’s going on overseas, it’s nothing to do with you, it’s nothing to do with us. We can’t stop that, but what can do, and we must do, is make sure it doesn’t become embedded. We don’t want to live with high inflation for a long time. We want to get it out of the system.

So we’re still talking about inflation being high. Haven’t we done enough?

It’s tricky. It is hard. Unfortunately, not quite yet. Obviously, the Board have put through four rate hikes this year to keep on tackling the challenge. So not quite yet, but we I do think, and we do know from history and from looking at other countries too, high higher interest rates, higher rates will work. They do get through the system, they do bring inflation down, but it does take a bit of time, and that’s the challenge at the moment. We’re just stuck where we are today. We’re just looking and need a bit more time. But the rates do work. Higher rates do work.

On that note, what do you say to the people, the Australians out there who are struggling, They’re looking at now losing and selling their homes because they can’t keep up with mortgage repayments.

Well, it’s really, really tough, and we do know that there will be people in that type of position. That can happen when inflation is not high, actually. Things can happen to people. You might be suffering from ill health or not able to keep up with your repayments and have to sell your property in that type of situation.

So we know some people are struggling for sure, but we also know the higher interest rates will work, but also actually, most people with a mortgage have come into where we are today in a pretty solid position. So they’ve built up some buffers, they might have some savings in their offset account that can help them match against those higher repayments that they’re now facing. And what we’re seeing, or what we’re not seeing across the whole sort of economy is systemically lots of people in the type of position you’re talking about.

I know there are some people in that position at the moment, and I do feel for them because it is really hard, and that is a tough decision to make. But we don’t have everybody in that position at the moment, and that’s, that’s a good thing, even if we have some.

I appreciate your job’s numbers, but numbers are still people. Sarah, we’ve spoken to one, her name’s Vanessa, one more mortgage rate hike, two definitely, her house goes. It’s going to happen. Why is it always on people like that to suffer?

Oh, and it is hard. Higher interest rates definitely impact different households in different ways. And if you’re carrying a mortgage in particular, you see that very quickly and very directly.

So the cash rate goes up and maybe within a week or two it’s already been passed through by your bank and you’re paying those higher repayments. But it’s also true actually that interest rates impact everyone across the whole economy, no matter whether you’ve got a mortgage or not. And actually, that’s one of the things that makes them really effective at tackling inflation, is that they get everywhere. They get into the price of the goods that we have to import from overseas, and everyone’s facing that.

High rates might encourage people to save a bit more and spend a bit less. That’s not necessarily because they’re challenged by high rates, but they are choosing it. It also dampens down some spending by firms as well. They may choose not to take on a project because of the higher cost of repayments on the loan.

So it does go everywhere, but we know it has these distributional impacts, and that is really, really tricky. It does weigh on us here. It does weigh on the Board, but we’ve got to get inflation out for the good of everybody. That’s really what we’re trying to do.

Is it seriously the only tool available to break inflation?

Yeah, it’s a good question. So there’s a sort of a long history to it. So part of the answer to that is what I was just saying, because it’s got so many different channels into the economy, because it gets everywhere, that makes it pretty effective at bringing down inflation. It’s also true that over a long history we’ve actually tried a few different options. So in some countries in the 1970s they tried price controls, for instance. Here in Australia we tried a wage freeze in the early 1980s. We’ve also tried targeting credit growth, money supply growth.

What we learned through that sort of journey, none of those were particularly effective. They didn’t really work. They didn’t get sustainable low inflation over time. What we found did work, and we found it here and in many other countries, is interest rates. And that’s why central banks all over the world use this tool to control inflation. The challenge is, it’s not painless, unfortunately, and we know some people are feeling pain at the moment, and there’s no painless tool, but this tool does work, and that’s why we use it.

It is painful. It’s like a sledgehammer, isn’t it? And isn’t the problem with that that it’s smashing people who are least able to cop that heat?

It’s tricky, and there’s always going to be some people who are struggling a bit. And as you say, one more hike really does make it really, really hard. We know those people are out there, and I do empathise with them. It’s really, really difficult to swallow. But I also know that there are many people who don’t have a mortgage, who may never own their own home, actually, who are long-time renters. For them, they’re quite often on lower incomes. For them, high inflation is really, really difficult to deal with. And they see it, and we’re all seeing and feeling it in absolutely everything that we’re buying.

So you’ve got your mortgage, but everything that you’re buying has gone up in value a lot in the last few years. Petrol, food, if you’re eating out, clothes, going to see the footy - all of these things have got more expensive. And that’s a challenge for everybody to deal with, no matter whether you’ve got a mortgage. And getting that out of the system is really, really important, and that’s what we’re really trying to do, to make it better for everyone.

I appreciate the difficult situation you’re in. I truly, truly do. I mentioned Vanessa, who’s thinking she’s about to lose her home. If inflation isn’t coming down, but we’ve already been raising interest rates, how many Vanessas is it going to take? 10, 100, 1,000, 100,000 becoming collateral damage?

Yeah, I know. That is a really hard situation, and I really, really empathise with her and her position. I would say that it has actually been working. We have actually brought inflation down over the last few years. We’re not there yet, and it’s lifted up a bit recently. Partly that’s kind of that oil shock we were just talking about earlier. Partly there are some domestic factors in that as well. As I said, we’ve still got a situation where demand is sitting a bit above what we can sustain at least supply, but we have managed to bring down inflation over the last few years. We’ve managed to do that and not see a really big increase in the unemployment rate. That’s really great. That’s a sign that interest rates are working. It’s not pain-free, it’s not costless, but the cost of it is less using interest rates than it would be using other tools. But it is hard because there is a cost, and ultimately someone, parts of the economy, have to carry it. And that’s a really difficult thing to live with, I know, and it is difficult and weighs on our minds as much as anyone else.

What I can see happening is people starting to get a little bit more clued in about other factors. You mentioned overseas. Another that is constantly talked about right now is government spending. So, please, what is the benefit of continuing to slug everyday households and Australians when seemingly state and federal governments can splurge however, basically?

Yeah, look, government spending is definitely part of the picture. So we take quite a lot of time to understand what governments are planning to do. You mentioned state and federal, and it is important that it’s both because they both have a role to play. So we look at state budgets, announcements and things, and that’s what we factor into our forecasts.

And government spending is part of demand, and it’s that imbalance between demand and supply that we’re really trying to tackle right now. But what I would also say is that we are an independent central bank. We’re unelected. It’s really not our place to tell the country, politicians, individuals, anyone, what governments should or shouldn’t spend money on, how much they should or shouldn’t be spending.

That’s a conversation the country should have. We all get to have our say at the ballot box eventually when elections roll around, but it’s really not the place for the central bank to say, I don’t think, because, like, you know, we’re not here making those decisions. It’s not what we’ve been asked to do, and it really is a conversation that should happen in the country through elections and through political discussion and debate. So as a central banker, that’s something I can say out of -

Is that right? The RBA can’t pull governments aside and go, “hey, your spending, more so than household spending, is making our job really difficult right now?”

I mean, I think hopefully we’ve been pretty clear on the government’s role in contributing to demand and then what total demand means in terms of inflation outcomes right now. Well, yeah, look, independence, it sort of cuts both ways, if you like. So we’re independent, we take our decisions independent of government, and that’s what the Board do. But I also think it’s important then that we don’t provide advice or commentary going back in the other direction. That independence does need to be maintained in both directions.

So as I say, there’s a good debate that can happen in the public domain about this. It is happening, and it will potentially come up as we get closer to various state and federal elections. But that’s the forum where it should happen. It shouldn’t be for the central bank to tell the country what it should and shouldn’t spend money on.

Finances and the economy, your thinking on better than most, so I have to put this to you though. When we see statistics that say household spending is flattened by the recent measure. And then you compare that to one analysis described the federal government - its government spending excluding COVID is at the highest level in 40 years. That’s not fair, is it?

Look, I think it’s just a question of what do we all collectively want government to do and not do, what level of spending do we all individually think is right, and we can then have our opinion on that. As I said, when the election rolls around, we’ve got your local MP, at the federal and state level, and voice your opinion that way.

It’s just not for us as central bankers to, uh, to tell the country what it should and shouldn’t be doing when it comes to fiscal policy. Our job is monetary policy, and that’s what we focus on and we spend our time on.

And I totally respect that. I get where you’re coming from. Can I put it to you this way, is government spending making the job easier or harder?

Look, government spending is part of demand. It’s contributing to demand. And right now, we’re going - and before we had the conflict in the Middle East erupting, we thought we were in a situation where we had demand sitting above, or out of balance, if you like, with what we could sustainably supply.

And so what the Board is trying to do with those interest rate rises is to just bring demand back down, if you like, so that it rebalances with supply. And once we do that, then inflation will be trending - will get back to that lower stable level that we’re targeting, which is our mandate, so that everyone can just forget about it. I’d actually love it if the country could forget about it.

That would be wonderful.

Wouldn’t it just? And that’s what we’re aiming to do. That’s what we’re here to do. So that’s how it sort of comes in for us and how we think about it. And that’s the position we think we’re currently in, we still have that imbalance. That’s what we’re you know we’re really trying to tackle and make sure inflation doesn’t - we want it to go away and be in the background and not be a topic of conversation.

That’s our role in this, and it’s for government politicians and others to decide what they do or don’t spend money on, what they do or don’t do with tax settings, and all of those sorts of things.

When will the pain end?

It’s a really difficult time. I would love to be able to say to everyone very soon that it will be over really quickly. I look, I’m sure everyone who drives a car has noticed over the last few weeks that oil prices have gone up a lot, so petrol prices, diesel prices have gone up. That’s starting to come through in our data. We’re seeing it starting to get a bit more embedded into some of those supply chains. I mentioned the construction costs. We think that there’s a bit more of that to come, unfortunately, because it’ll take a bit of time to get through the system.

So it’s going to get worse before it gets better.

Yeah, we’ve got a little bit longer to go before it starts to get better. But we do, as I said at the start, we do know that interest rates work. They do work to bring down inflation. That’s what we’re working to do. We’ve seen it before, we’re confident it will happen again. But we have got this shock that we’re now facing into that’s on top of all the other shocks that we’ve had. And I think that’s just what’s really hard for everyone, is we’ve had one thing after another over the last few years. It just feels like it’s not ending. I really hope that we have got through the shocks, and that I would love in a few months to be able to say, look, definitely – see it, it’s coming out, light at the end of the tunnel. Let’s hope that’s the world that we’re in, but right now we’ve got this other shock that we’ve got to deal with, and we’ve got to tackle what’s going on domestically as well.

Is that what you’re hoping for? A few months? Can you say that people need to brace for months, years?

Months is, you know, months could be longer or shorter. It really does depend on how it all plays out. I certainly don’t have a crystal ball to say what’s going to happen to oil prices, for example. They’re in the Middle East. I don’t think anyone knows the outcome there.

But what I do know is that we will keep working really hard to understand what’s going on, to give the Board the advice it needs so that it can set interest rates to bring inflation back down. As I said earlier, to get it out of people’s minds, that people will just go back to not worrying about it, not thinking about it. That’s what I want. That’s what the Board wants. And that’s really what we’re working to do. But we’ve got a bit of time yet, unfortunately, before we get there.

Can people hope for an early Christmas present?

I’m not going to front run what the Board might or might not do with interest rates. All I do know is that they are committed to tackling inflation and getting inflation down. They understand very well the challenge and all of the earlier conversation about how this is impacting people and how people are really stretched and finding it so difficult. They’re absolutely committed to that. They also understand the other side of the mandate, that we have to make sure that we’re targeting full employment. So we’re not looking to drive the economy into a recession or anything like that. But we have got to get inflation out of the system, and that’s really important right now. When everyone talks to me about cost of living and how difficult it is to cope with all the prices going up, all my economist mind goes to: “that’s inflation and that’s our job to get that out of the system.”

Do you risk going too far?

Things will play out the way they’ll play out. We’re conscious of that. We do know, as I said, getting inflation down and having higher interest rates does mean slowing demand down, as we talked about earlier. We’re not trying to slow it down by a lot. We don’t want to generate a recession. We’ll be watching very, very closely for that. We don’t see any signs of that yet in any of the data that we track. When we talk to businesses through our liaison program, they’re not telling us that that’s what they’re experiencing either. Generally what they say is that, yeah, it’s pretty tough conditions out there, particularly in the consumption retail space, but it’s not a recession yet. What they’re saying, we’re not seeing in any of our numbers either, but we’re really mindful of it, watching for it. It’s not what the Board is trying to do and it’s not the outcome

I saw a note from the chief economist at the Commonwealth Bank, the country’s biggest bank, saying one more interest rate, it risks tipping the economy over the edge. Is that incorrect?

Well, look, it’s his particular view. But we’re monitoring it and we’re very attuned to the impact of interest rates. So, you know, I’m very lucky here. I have a fantastic team. We do a lot of really good work on this. One of the things that we spend a lot of our time looking to understand and continually update our view on is how are interest rates actually flowing through the economy? Are we in that kind of situation that you just described? It’s certainly not our baseline forecast. It’s certainly not what we’ve seen so far or what we can see in the immediate leading indicators for the economy. But look, we’ll be keeping a really close eye on it. It’s not what we’re trying to achieve. We’re not trying to achieve a sharp stop or a really big downturn or anything like that. And if we saw signs of that, we’d be advising the Board and we’d be sort of thinking about why that had happened. But it’s not what we’re trying to do right now.

Absolutely. We are seeing a slump in the housing market, a significant one. What’s that a sign of in terms of the stress in the economy?

So the housing market is actually one of the domestic channels where interest rates have an impact. We know that rising interest rates will dampen down transactions, so the number of people buying and selling homes, and it will dampen down prices. And that’s what we’ve seen. We also know there’s other things going on around housing. Some of those tax changes that we have in the May budget are flowing through as well, and we can see them having an impact.

In some sense, what we see happening in the housing market is what we were looking to do. We were looking to slow things down a little bit, and the housing market is one of those ways. What we’re not seeing yet, though, to come back to what we were talking about earlier, is that slowdown in the housing market, that correction in house prices that’s playing through, we’re not seeing that create financial stress systemically across the system.

So if you own your own home, probably the value of it’s tracked down a bit over the last few months, but we’re not seeing signs of lots of people having to sell their home because that’s putting them into financial stress. We’re not seeing signs of lots and lots of people systemically not able to keep up with their mortgage repayments. So it’s tough, it is tough and tricky, and we know, you know, because it’s your home, it matters, right? It’s where you live, it’s where you have your family, where your kids might be growing up. These are really important features, but we’re not seeing really bad outcomes yet. But, you know, we’ll be monitoring it and making sure that we don’t go there.

I know you have to look at numbers like that, and I really do appreciate that, but I can tell you, sitting in front of one, Vanessa, it’s so distressing. You don’t want to see that happen to anyone.

No, absolutely not. And it is really hard hearing that story. We receive letters and phone calls from other people in similar types of situations. You can’t help but be moved by that. I do really empathise with her in her position. It’s not what we’re trying to do. We’re not trying to put people out of their homes. We’re not trying to put people out of their jobs or anything like that. It’s a tough situation when you know that the solution to the problem is higher interest rates. We know it works. It’s worked in the past. We see it working in other countries. It’s working here today. But it is really difficult hearing those stories, and it certainly weighs on my mind, and I know it weighs on the Board’s minds.

Does that really weigh on you when your head hits the pillow? Because there’s a war overseas, there is government spending, and then you’ve got this one tool, one weapon, blunt instrument. It’s the only thing you can do, and you know that’s going to affect people. Is that right?

Oh, look, those kind of stories, like I say, part of the liaison program, we hear from community organisations, and those kind of stories of what their clients are dealing with every day. And so, yes, you can’t not be affected. I know that’s part of what is playing out there. But I also hear stories from people who don’t have a mortgage, so renters, who are really struggling to find a place, who are going to the supermarket and wondering if they can afford to get enough food to feed themselves as well as their kids, or it’s just the kids that night. It’s hard not to be affected by that side too. And so there’s this balance that we’re trying to achieve here. We know high interest rates are doing the job. It’s not pain-free, absolutely not. And Vanessa and others are really, you know, right at the forefront of that. But we also know that it works and we have to get inflation out of the system. We don’t want to go back to a high inflation environment, it is hard for everyone to deal with. For those people I’m talking about, the long-term renters, it’s hard. For people in Vanessa’s situation, hard for businesses, everybody. We have to get it out, and this tool does work, but it’s not pain-free. And I don’t think you could do my job or work at the Bank and not be aware of that. We are very aware, even though we’re doing what we can.

I asked you a lot of challenging questions. I really, really truly appreciate it. Is there anything else you want to add there?

No, look, thank you. I just thank you for the opportunity and just to say we know it’s tough, but we also know that it works. And I really do hope that, maybe in a few years’ time we’re all looking back on this and it’s done and it’s gone and we’re not talking about inflation and cost of living anymore because it’s gone. That is what I would like, is that we’re in the background because we’re not having to worry about inflation anymore.

Well, that’s nice to hear you say that. That’s certainly the hope, isn’t it? Is that realistic?

Oh, look, that’s what we’re here to working towards. We’ve been in that situation before, you know, for a long period of time pre-COVID, and we’re working really hard to get back there again, as are my colleagues around the world everywhere. It is top of mind for central bankers everywhere.