Speech Interview with ABC’s Business Editor Michael Janda

First to the question every borrower I speak to is asking: is there any chance at all of interest rate cuts in 2026 given what the Reserve Bank Governor said before Christmas and the inflation figures we saw yesterday?

Let me start just by reminding you, perhaps where we’ve come to from here. We never raised interest rates as far as other countries during the spike in inflation after covid, and we were able to cut interest rates three times through the course of last year. We did that as inflation came down and we were able to get more comfortable about the risks to our objectives. It’s true as you say that in the December meeting, which you were at Michael, the Governor said that in light of the most recent inflation data, which, as you know, had picked up above the top of our two to three per cent target range, that the likelihood, at least in the near term, of further rate cuts was probably very low. That’s still true, I think, if I’m honest with you. And I know that won’t be the message that everyone watching this would want to hear, but our objective, our priority, is to ensure that inflation remains on target. I think we all remember the pain and the difficulty, and many of us are still working that through, of that persistent high period of inflation over the last few years. And it’s our job to ensure that doesn’t happen again. You mentioned the inflation data that came out yesterday and maybe we’ll talk about that. It ticked down. That was helpful. But it was largely as we had expected, and we, as you know, will be waiting for the quarterly inflation in about two or three weeks time before we take a view on where we think inflation is today. But inflation above 3%, let’s be clear, is too high. We’re charged to keep inflation between two to three per cent and it’s currently above that.

What would it say about the economy if the Reserve Bank was forced to cut interest rates again this year?

What would it say about the economy? Well there are a number of possible scenarios in which that might happen. There would be a scenario in which demand weakened, let’s say there’s a global shock, or let’s say that the labour market loosens sharply. In those circumstances, that would be us cutting rates into weakness. That would be an unwelcome outcome. There’s another scenario that some people in the financial markets talk about and should be given some weight, that actually we are able, at some point, not in the near term necessarily, but through the course of 2026 to ease rates further, because the supply capacity of the economy turns out to be greater than we currently think it is. So demand growth has recovered pretty much as we had expected through the course of 2025, but it also looks from the inflation data and from a number of other metrics that probably we’re banging up against the constraints of the supply side of the economy. But that judgment might be wrong, and some people, clearly, some people I know, who report on the ABC have said that they’re more optimistic about the supply capacity of the economy. If that’s true, then if the economy would be able to grow more rapidly without inflation rising. And it’s possible, in that scenario, that actually, we were cutting rates against strength rather than weakness. I’d love that to be an outcome. It’s not currently our central case.

There’s a 1/3 probability of a rate rise priced in for February, and roughly two rate rises priced in by the end of the year.

A bit less I think, but yes.

Do you think financial markets are perhaps jumping the gun a bit?

Well, the reality is, of course, if you’re trading in financial markets, I know you speak to these people a lot Michael, you have to make a forecast. You have to take a judgment. It’s true, as you say, that markets are not placing 100% weight on a rate increase in February. I think they are looking at the economic data, and they’re forming a judgment. Of course, around that one third you will have people who think it’s much more likely that we’re going to raise rates in February, and you’ll have people who think there’s no chance in hell. You pay money and you take your choice. I’m not going to comment on whether a third is a sensible estimate of the outcome. It’s what financial markets have assumed.

Now at the Reserve Bank’s December meeting, the Board expressed concern that some of the recent inflation uptick over the second half of last year may be persistent. Did the November consumer price data that was out yesterday do anything to alleviate or perhaps aggravate those concerns?

I think the honest truth Michael is that there wasn’t a lot of news in the data yesterday for us. As you know, inflation on that measure came down. That is obviously welcome. That partly reflected the Black Friday discounts in consumer durables, market services inflation was also a bit weaker. But new dwellings and rental inflation, the costs of housing, have picked up, and that’s obviously been the story through 2025 and probably will remain so into 2026. But most of those numbers were broadly in line with our expectations. Now it is another important point. We’re not targeting inflation today. We’re trying to target inflation in a year or two years time, and in judging the outlook for inflation, we don’t just take account of current inflation, not least because that number at the moment, as you know, is a brand new monthly series that we’re all still trying to work out how to parse and how to understand but also because the outlook for inflation depends not just on the inflation number today, but on the pace of demand, on conditions in the labour market, on global conditions, which I’m sure we’ll talk about, and five or six other variables. We put all of those things into our assessment, which we’ll do again in February, before we judge where inflation is going.

So what’s your current view on those trends for inflation, that longer term trend? Is it in line with what the RBA had been expecting?

Our most recent forecast for inflation was put out in November. We will do another one in February. I can’t pre-empt where that will go at the moment, we’ve still got another inflation read to come. We’ve got another read on the labour market, so there’s data still to come in on that. But if I go back to November, and remind you our outlook for inflation was that it would be above 3% for a period of time, at the end of 2025 and into the first part of 2026 before coming back gradually to sit just above the two and a half percent target, under an assumption that interest rates would fall. Now, as we’ve been discussing, the likelihood of another interest rate cut on the basis of current data, isn’t very high so we’ll have to factor that judgment into the forecast. We’ll have to factor all the other judgments into it as well. I think our current view is that the inflation in the fourth quarter of this year, December quarter of 2025 rather, is probably likely to come out just a tiny bit higher in an underlying sense, than that number that we had in November, but we don’t have that third reading yet from the end of January for December, and as I say, we haven’t made the judgment about the underlying path of the economy more broadly.

Is there anything in particular that the Reserve Bank will be looking for in that December quarter inflation number, which comes out the week before your next meeting?

Well, it’s an interesting question: ‘why has inflation picked up’? A number of possible theories for that. One might be that there are some one-off discounts. We saw that actually in the housing market that are coming off as demand recovers. You may have seen some of that on the high street as well. A one-off pick up in the price level will push inflation up for a period, but it won’t push inflation up further out. That might be quite a benign story. The less benign story, and one that we don’t yet have a clear sense of, is that actually what we’re seeing is a pickup in core inflation, because capacity pressures in the economy are growing. And if you ask businesses, for example, you know ‘don’t believe the models’, go and ask the businesses through the NAB survey or elsewhere … what’s their capacity utilization look like? It’s pretty high at the moment. I did a speech about this in November. It’s actually unusually high for this point in the cycle. So firms are operating at reasonably high capacity. That’s a good thing. It means that there aren’t loads of spare resources, people out of work, lying around. That companies are working at capacity. But it does also mean that there may be less scope to expand production without inflation also picking up. If that were to be the scenario behind the pickup in inflation, that actually we’re bumping against the bumpers, we could be seeking a less optimistic profile from interest rates. At the moment, we don’t know which of those scenarios is more likely, and that will be a dominant discussion for the board in February.

Some analysts believe the Reserve Bank might have a threshold of how high inflation could be for that December quarter before needing to raise rates. Do you?

How rude can I be on the ABC? I don’t know. But we are not targeting Q4 2025 inflation. It’s actually impossible to do that because it’s already in the past. But you can’t even target inflation a quarter out. You’re targeting the whole time inflation every year to two years, and that informs making a judgment. Of course, it’s the case that if that number in Q4 were spectacularly high or spectacularly low, we’d have to ask ourselves what was driving that. And that might be an important part of our overall judgment. But we don’t have a rule that says if its 0.9 we hold, and if it’s one, we raise, or point seven we cut. We take a view about the whole economy.

Do you think there are some unique risks for monetary policy in Australia, given very high housing values and household debt levels that create extreme sensitivity to interest rate moves?

Well, it’s certainly true, and obviously, as you know, I come from the UK, where, historically, we share that feature of the mortgage market, that Australia also has as the dominant role of variable rate mortgages. That obviously means that interest rate decisions by us feed through very quickly into people’s servicing costs of mortgages. But there are many other transmission channels for policy as well. That isn’t the only channel that operates. It obviously means that there’s a lot of interest in our decisions, a lot of headlines, a lot of commentary, including the interview we’re doing today, but I’m not sure that it necessarily means that taking the economy as a whole, Australia was more or less sensitive to interest rates, because they work through so many other channels. The exchange rate, through business pricing, through monetary and credit growth. I could go into a long and boring list. All of those channels operate in Australia, just as they operate elsewhere. We are conscious of the issue of household debt, although, as you know, household leverage actually, if you take a net view, assets minus liabilities, is actually in quite a good place in Australia relative to past cycles. Households spent much of the covid period rebuilding their balance sheets. And although their liabilities are somewhat higher than other countries on aggregate, this is an aggregate point, their assets are also quite large as well.

Because house prices are so high.

Well, house prices obviously represent the balance between supply and demand for housing, and there are a whole series of reasons in Australia why those are relatively high. It’s not a new problem, as I know you’ve spoken on in the past. I’ve listened to your podcast last year on exactly this issue. And the structural challenges of the housing market are beyond my brief, and they’re beyond the brief of the RBA, but they’re obviously very important. We do think about the potential financial stability risks of the kind of issues you describe. We publish a twice-yearly financial stability review. We don’t believe in the current environment that those are posing this to the financial system or to the household sector as a whole. As you know, APRA, the regulatory agency, did introduce some new rules, which I think actually were a good idea. I saw you did a piece in which you had this fantastic program, said it was like banning eight foot people from the pub. I’m not sure that’s actually quite right. What APRA were trying to do there was not saying that they were worried about the stock of debt today. They wanted to send a message to the banks that we don’t want to see the kind of excessive lending that some previous cycles have seen. So instead, what you might call using slightly fancy financial markets terminology, an out of the money option, which said, this shouldn’t bind today, this constraint. But it might bind in the future, if you’re lending to investors and other people in the household sector and it picks up too much. It’s a guardrail, which is how some people sometimes call it. It’s actually not a new idea. It was used in the UK. It’s used elsewhere, and although I know people who are slightly skeptical about it. I’m actually a fan of that idea, and I think it can work.

Are you at all concerned that previous periods of abnormally low interest rates in the lead up to covid and during covid may have created a false sense of household wealth and financial wellbeing?

I think this is an interesting question. In the UK, and I don’t know about in Australia, it was quite common when interest rates were zero for people to lease cars. For example, you could get a 0% loan for your car. And so every week, you would wake up and your neighbour would have a new Porsche or a new Mercedes funded on a 0% loan. You might say, why not? In every other respect that might not be a Porsche or a Mercedes household. Those sorts of adjustments I think are through now. People … I’m sure I did it. Perhaps you did too. You extrapolate forward, what if interest rates were at zero forever? But that was a sign of how weak our economies were, not how strong they were. And in actual fact, although I know the adjustment from that has been painful as people come to terms with the reality of interest rates that are not zero, it’s a sign that the economy has strengthened rather than weakened. There is a very interesting question: why is consumer confidence so low? It’s low in Australia. It’s low in other countries, as well. With inflation back near target and unemployment as low as it is, you might have expected the consumer confidence to be, you know, rather stronger than it actually is. And I’d say that is a legacy of this persistent period of high inflation, and it will take time for that to work through.

Now, both you and the RBA Governor Michele Bullock have expressed concerns that the Australian economy, and you’ve repeated them today, may be running close to capacity, and that that could reduce the scope for lower interest rates. Is that, though, a sign of success for the central bank that you’ve brought inflation at least closer to target, without creating what economists would call a negative output gap, or, in other words, a recession like New Zealand or Canada have had?

You could call it success. I think if you look actually at the scorecard for 2025: the pick up in growth led by the private sector; employment as a ratio of population as high as anywhere really in the developed world; the world economy not having fallen into such a catastrophically weak outcome as some of us have expected; inflation back closer to target; interest rates down … You could well have said, if you’d offered that to me at the end of 2024 as the outcome for the end of 2025, I would have grabbed it. Whether looking forward, that outcome will remain the case, I’m less sure.

And another risk that both you and the Governor have repeatedly cited is international developments and the uncertainty in the global economy, which is very elevated and has been over 2025. It clearly hasn’t got any better with recent US, actions in Venezuela, talk about Greenland, concerns about what’s happening in Europe with Ukraine and Russia. Just how concerned are you and how difficult does it make it for a central bank to set policy, given this global uncertainty?

Uncertainty is hard to measure, but to the extent that you can, most of those measures got to spectacularly high historical levels in 2025 and although they’ve come off, they’re not where they were. It’s clear, isn’t it, that if you look at the geopolitical, geoeconomic situation, 2026 is going to be as challenging as 2025. What I think is interesting though, about the world outlook in 2025 and I think there’s some follow through to 2026 as well, is that those forecasts that some of us had of the extremely bad outcomes following Liberation Day in April simply haven’t yet come to pass. The tariffs were smaller. They were narrower in scope. We didn’t get the retaliation from many countries that we’d expected. The Chinese and other exporters have proved very effective at avoiding or going around some of the tariffs, and there’s been stimulus in many countries. But interestingly, as well, you’ve had this extraordinary tech cycle, which maybe hasn’t been such a big story in Australia. But I was meeting with East Asian central bankers recently, and data centers are great news if you’re in Korea or Vietnam or Taiwan, because you produce the memory chips, you produce the servers, you produce all of the things that go into those data centers that power this AI revolution. So there’s been this extraordinary parallelism, between exceptional policy uncertainty, which, as you say, has continued to 2026 but a surprisingly benign economic outcome and a financial market outcome as well. And I think Venezuela is an interesting example of that continued sort of duality. Clearly, what’s happened has created a whole bunch of new geopolitical questions that you and others you see, and I’m sure are better at answering than I am, but it also offers the prospect, doesn’t it, if Venezuela has the largest proven oil reserves in the world, manages to mobilize more of that output in the world economy, that oil prices might come down, and that would mean cheaper petrol at the pumps for every Australian. Now, none of that is crystallized yet. If you look at the oil price, Venezuela actually has done almost nothing so far, because people are so uncertain about what will happen. But this good news, bad news, kind of approach to the world, I think, is probably likely to be a key theme for 2026 just as much as it was for 2025.

And do you have any sense of which side the ledger we’ll end 2026 on, the good or the bad?

I mean, I think, I hope it’s good, but I’m paid to worry about that is the honest truth. The governor, as I think she talked about in the past, has a mug which her predecessor gave her, which is called glass half full. Before I came here, I was given as a leaving present for the Bank of England, the opposite mug, which is glass half empty. So you have a kind of good cop bad cop routine in that respect. I think you definitely can tell a story where the globe bounces through a number of these shocks in 2026. The stimulus packages that many countries are going through with likely further easing in the US, the apparent resilience of supply chains to the tariffs drive growth forward, and the most optimistic views about the transformation of technology and AI turn out to be true. That’s the good outcome, and I’d love it if that was the case. The bad outcome would obviously be that some of these potential geopolitical flash points, including in Asia, crystallize and become real. That people lose confidence in what are obviously exceptionally high valuations for technology stocks and others, and that the financial market pricing, which is certainly extreme, adjusts downwards. Australia won’t escape some of the consequences if that happens, and we need to be ready for it. What I can say about monetary policy in Australia is we’re ready to deal with both outcomes.

Andrew Hauser, thank you very much for your time.

Thank you.