Fireside chat Fireside Chat at the Australia’s Economic Outlook Summit

Andrew Hauser, thanks for your time.

Thank you, thanks for that introduction.

That was good. Can I just say, Andrew Hauser, it’s not only a central banker with an enormous intelligence and clearly an international experience having been with the Bank of England, but anybody who’s ever spoken to Andrew would know he has one of the most enormous curiosities of any person I’ve ever met. He constantly has a notebook. I’m surprised he doesn’t have it up here with him now. Because he is constantly scribbling in that notebook, making observations. These are observations not just about our economy, but I sense also about behaviour. Now, before I start, the Prime Minister, of course, was here. He said he wouldn’t give you any advice to the Reserve Bank about interest rate movements because you are an independent body. But I’ll just try at least anyway. Is there any advice you’d like to give the Prime Minister and the government about its spending or its budget that you just handed down?

No.

Okay, that’s going to be the case.

Is that the best it gets, Ross?

That’s about as good as it gets. Yeah, one-word answers. So I want to ask you the second question. The Reserve Bank famously cut interest rates 3 times. This year it’s increased interest rates 3 times. Would have been the nation better served had you simply not moved interest rates at all during that long period of time?

Well, you might say that with hindsight. Let me remind you what 2025 looked like. We had very slow growth coming into the year and inflation was moving down fairly consistently into the target band. We also, from what I still call the spring, I know I have to call the autumn of that year, had the Liberation Day and the tariff changes in the world economy that everyone felt including us, will probably lead to a slowdown in global growth. And those things combined led us to conclude, on the basis of our forecasts and indeed those forecasts were similar to most other forecasters as well, that there was room to loosen interest rates a little, uh, to support employment and to ensure that inflation still came down to target. So we still thought we were restrictive during that period. And for the first six months of that year it looked right.

Inflation then picked up again. I’d say there were three reasons for that. One was obviously the forecast that Liberation Day would stop the global economy dead turned out to be dead wrong. The global economy proved to be highly resilient. The second was I think we all learned that the supply capacity of the economy and I’m sure we’ll come back to that was a little bit weaker than we thought. So as demand began to recover, it put more pressure on spare capacity than we’d expected. And the third was that in addition to our interest rate decisions, financial conditions are determined by bank lending and by ability to borrow on international markets for those who can. And those conditions were all very easy. So those three things taken together were learnings. It’s true, they were learnings. And as inflation began to pick up again, and it was clear it did during the second half of the year, markets began to move ahead of us actually and expected us to tighten rates, and we did so.

Can you tell me therefore that is central bank forecasting and even setting of interest rates, is it more of an art as compared with being a science? Because economics is of course a science, but the reality is there seems to be an art form to setting interest rates to achieve the outcomes, because Treasury economists of all sorts, central banks are famously wrong with their forecasts.

I’d say science helps because building models helps you, it ensures you take account of history and it ensures you think hard about the economic relationships that drive. So we take seriously building models, but there’s no compensation for judgment. That’s what you pay central bankers to do, I think, is to look at the data, to take models as an input, but to form a judgment about where the economy is going and to tell that narrative to the public alongside their decisions. And as you know, that’s what Michele does in the press conference. I don’t know, I call it an art. It’s probably better things you could do with your life than looking at economists trying to draw up. But nonetheless it’s judgment is key. We had a debate actually the other day as to whether you could replace the monetary policy board with an AI machine, and maybe one day, but at the moment I doubt that that would be satisfactory. It would always be looking backwards. It would always be saying what’s happened in the past. Our job is to look forward and form judgments. So if you call that art, I’ll call that art.

Okay, so politicians famously say the ‘central bank is independent, central bank independence is absolutely sacrosanct, we can’t challenge that independence, you make your own decisions.’ But the reality is it’s something of a contract between government and certainly the community and the central bank itself. If you get things really wrong for a long period of time, there’s going to be little patience for the job you do.

Contract between the people and the central bank I think is a good way to put it. It’s intermediated through government. Government can give central banks independence, it can also take it away, and I think that’s appropriate. Central banks have a lot of power and we’re unelected, and it’s important that we’re accountable and transparent for what we do, explain ourselves, and frankly, you know, do things like this, be held to account for it as well. There’s no free lunch in this world. We have to explain ourselves and be held to account for it.

But we talked about central bankers being scientists and economists. Historically, those people are not very good communicators. They don’t explain themselves very well. They make mistakes in communication.

Yes, the press officer of the Bank of England, notoriously, when I joined in the early ‘90s, had one job, and that was to keep the Bank of England out of the press. There was a mystique around central banking which I don’t think it was very helpful back then. You couldn’t dream of it happening now. We’ve had to learn how to communicate. We’re probably still learning. The spectre of a central banker with his tie on a TikTok video is not one that I think we need to welcome too quickly. But we do have to reach new audiences and we do have to explain ourselves.

Okay, so the Governor herself has been, you know, really quite good at trying to get down with the people, as it were, you know, talking about, you know, sort of Taylor Swift tickets and the price of those. It’s kind of one way of being able to communicate. But again, you’ve got to be relatively careful with that communication as well, because really in Australia, people are invested because of the level of home ownership, because of the amount of mortgage finance that people have. And there is a certain, I would at least say there is a certain, shall I say, um, uh, sort of literacy about finances, about interest rates, about the job that the Reserve Bank does here that maybe there is not, or maybe not as much importance is put on it in other parts of the world?

Well, the fact that most mortgages are linked to our cash rate does make it a very important variable, but it’s a very important variable in all countries actually. And you’re quite right, we have to take very seriously, the fact that every decision we make affects every person in the country. That’s a heavy load.

Tell me about aggregate demand, because aggregate demand is the demand for everything in our economy. It doesn’t matter whether it’s data centres, or it doesn’t matter whether it’s government, or whether it’s the consumer spending. That is one of the keys that you monitor in regards to, a) the trajectory of our economy and therefore perhaps even the inflationary pressures that are coming inside our economy. Would you agree with that?

Yes.

Good.

That’s excellent. Where’s this leading?

Well, I’m just saying, I’m just simply saying, if there is disproportionate spending in any of those sectors, it is going to influence your decisions.

Oh, I can see where you’re going with this. Yes. Yes. Okay. We look at aggregates. We add everything up and we look at how that relates to the supply side of the economy, and that affects aggregate inflation. We don’t target part of the economy, we target the whole economy.

That’s right. So it is aggregate demand that you look at. But if something is disproportionate in any area, it’s not as though you suddenly move interest rates according to that particular area, be it the government, big data centres.

Exactly, total. And those areas interact with each other. I mean, if government gets bigger, then there’ll be implications for households. If companies invest, that will have an impact on interest rates, or broader private sector interest rates in the economy. So those elements of the economy, all interact with each other. That’s why we do study the economy as a whole. It’s a funny concept. It’s a very abstract thing, the aggregate economy. You can’t go and see it anywhere. Maybe you see it on a spreadsheet, but you don’t see it anywhere else.

Okay, so can I ask you about -

You’re leading me very carefully to some sort of trap.

No, no, no, I wouldn’t do that. I’d never think about doing that to you.

You’d never do that?

Can I just ask you Can I just ask you, why therefore is it that the Reserve Bank and our Treasury inside the budget

Oh, you are leading me there.

Yeah, well, I have led you in it. Why is it that somehow your forecast for economy going forward, the Reserve Bank seems more pessimistic about the growth forecasts for our economy in the next year or so, and the Treasury seems more optimistic? What is your modelling, for example?

You’ve never done a forecast yourself, Ross.

Yeah, that’s right.

Have you though?

No, I haven’t done one specifically, but that’s your point, I think.

Look, on unemployment and inflation, our forecasts are within a whisker of each other. I saw your piece on Sky TV where you were comparing them. It was great TV, Ross. Some, some hours of charts of numbers. I saw your fellow, fellow presenters looking fascinated. Yes. Our forecast of growth is a bit weaker than the Treasury’s. It’s not substantially weaker, if I’m terribly honest. Our views on the export sector, on inflation, and unemployment are pretty much the same. They do have slightly stronger years forecasts for output in the second and third year. And that, we probably think there’s probably a bit more pressure on capacity than they do. But then, you know, look, in the scheme of things, and I use your own comment back to you, it’s an art more than a science, those differences aren’t terribly large.

Okay, so then can I go to the other aspect of this, and that is the Reserve Bank, the Governor, you have talked about this before, almost seems to have a speed limit. It can’t grow at its long-term average growth rate 3.2, 3.3 per cent, going back over 30 or 40 years, without now creating inflation.. And so I’m wondering, where is that speed limit, do you sense, beyond which the economy starts to produce inflation?

And so everybody knows this is a sort of unknown thing, but we reckon it’s around two per cent a year. As you say, if you go back, 2.5 per cent the previous decade, three per cent the previous decade, it’s coming down. I would say, and the Prime Minister made this point, I think he’s dead right, two per cent actually at the moment, actually economy grew on an annual basis 2.5 per cent the first quarter. Is pretty good going. There aren’t many economies growing more rapidly than that right now, but the two per cent sustainable rate of growth is the speed limit. And maybe I’ll take a minute, if I can, to just break that down a bit. You can break the two per cent down into the rate of growth of the population and the rate of productivity growth. Population, you know, you can pay money and take your choice. Let’s call it 1.25 per cent a year. We think productivity growth is about 0.75 per cent a year underlying on average. So that’s where you get two per cent. Three-quarters of a percent is quite a lot lower than it has been in the past.

Break that down further and you can break it into the capital devoted to people. So how much am I investing for my people? The answer to that is not very positive for Australia or many other countries. In recent years, investment’s been quite weak. It’s picked up recently, it has been quite weak. So companies haven’t provided a great deal of capital for their people to work for. And then you have something called total factor productivity growth, which is a mouthful, which is everything else. And that is a function, we’ve done some research on this, of things like business dynamism, your distance to the technology frontier, and competition. And on all three of those measures, Australia over its long history has done really well. You know, it has world-leading companies. We heard from some of them earlier, it’s competing in some of the most, you know, challenging markets in the world. And its business dynamism in response to shocks over decades in the past has been very strong. And that’s why Australia is one of the richest countries in the world, a point that is worth reminding.

I go abroad quite a lot and I talk to central bankers in other countries and they would kill for our problems, to be absolutely honest. But look, that isn’t as high a number as we’ve had in the past. And so if you think about how would I increase it in the future? Well, I could increase the number of people in the economy. That’s a political issue in terms of immigration. Won’t go there. You could increase the investment in capital per person. That’s on businesses. And then you have things like this business dynamism, competition, distance to the technology frontier, where it is, I think, as the Prime Minister I thought rightly said, a combination of government and business. And I will give you a reflection. I hope this doesn’t sound too sort of pompous, coming from a pom. It is interesting that whether you’re on the left or right of politics in Australia, people seem to think that government is both the problem and the solution. And in a very large to a degree, that’s of course true, set the climate, set the conditions, but industry and business is where it really comes about. I’ve spent quite a lot of time recently trying to come up to speed with AI. I see, you know, I think you’re a photo of you.

That’s right, you did, with me as a Carlton supporter, when in fact I’m a Richmond supporter, which wasn’t very helpful, I’ve got to say.

A lot of those things are not necessarily in government’s gift. They’re actually for industry to pursue. And so it is a combination of things. It’s not a short-term challenge to build that productivity growth rate back up to where you want it to be. It takes years. And that’s the challenge not just for Australia but for France, for Germany, the UK, pretty much every country in the developed world outside of the US. The UK right now, I mean, I’m definitely an upgrade trade coming to Australia for five years, is growing much less rapidly than we are and has a much lower growth potential.

Okay, so I want to go to productivity because that’s often seen to be the one issue that holds the Reserve Bank back from not raising interest rates further into the future. If productivity were better, we wouldn’t have such high interest rates, or you could bring them down. Or we wouldn’t generate the inflation if the economy grew. All of that is the conversation. But then Australia has largely turned itself into a service-style economy where many of the jobs created, so in other words, the output per labour unit is lower. So there’s not the output for the nation by those service-type economies. Healthcare workers, they might work very hard, but the reality is from an economic from a pure point of view, they don’t create a lot of productivity. So does that mean that the measurement has to change, or does it mean that the nation has to change to make certain it puts more priority onto those productive jobs?

We’re not only a service-based economy, of course. We had BHP up here earlier and some of our biggest national earnings come from commodity exports, as you know. It’s a fallacy to think that services is necessarily low productivity. Business services, for example, globally have relatively high productivity growth rates. So, you know, and the development process for countries is that you move away from manufacturing. And obviously Australia has done that. So it’s not as simple as saying services low productivity, manufacturing high. And there are measurement challenges. You know, you think about AI, for example, what’s the product, what’s the price? Harder to measure that than it is if you’re putting a car out the door or something. But the choice of the public sector split is a public choice. It’s a choice for the Australian people, and there’s a mechanism for determining that through the ballot box. And, you know, very lively political discussion here on those points a lot, which is great, but it’s not for central banks to second-guess that point. It’s simply for central banks to take as an assumption our best guess about where productivity is growing and set interest rates courteously.

You just mentioned that you have a five-year term here in Australia. You’re about halfway through that term right now. So what I’m wondering is, A) what you would hope for the rest of this term, and B) is there a sense you may stay, or is it that you head straight back to the safe, safe comfort of the Bank of England?

Well, I’m not on secondment from the Bank of England. I don’t think that Jim Chalmers would have been very pleased.

No, that’s right. I do understand that.

Nor would you, Ross, I think. Had to leave the old lady to come here. Look, I’m massively enjoying my time in Australia. It’s a big and important job, and I love it. I love living here. I love finding out about Australia’s history. I’ve travelled very widely around the country, seen the industry and the people all the way around the place, and that’s been absolutely fantastic. And while I’ve been ranting on about that, I’ve forgotten the original point.

Okay, so my point of it was well, I’m just wondering where, I’m just wondering where the future goes because you famously worked for Mark Carney when he was the Governor of the Bank of England, and he of course has gone on to become the Prime Minister of Canada, and of course he’s been celebrated in his fights with Donald Trump. Then you’ve also had another famous central banker, Mario Draghi, who was the former president of the European Central Bank, who himself then became the Prime Minister of Italy. What I’m wondering is whether there is a sense that central bankers make good politicians.

That was a long question. Firstly, Mark is a Canadian and Mario is an Italian, so they are Prime Ministers of their respective countries.

The UK could do with a Prime Minister at the moment, just thinking about it, whether that’s in your future.

This has gone a bit off the rails, guys. Do central bankers make good politicians in general, with those two notable exceptions? I’d say unambiguously no. So central bankers are technocrats, right? You mentioned earlier we were great communicators. Thanks for that. Um, uh, uh, central bankers, I hope people would want them to be solid, stable, rigorous, totally above conflict or, you know, political bias, and dry, to be honest, and thinking about these abstract concepts of the aggregate economy, which are not things that, you know, you talk about down the pub. And funnily enough, those sets of strengths don’t necessarily make you men or women of the people, particularly, or people who are necessarily going to be at the forefront of politics. That doesn’t mean that we, as we were saying earlier, that we shouldn’t see ourselves as accountable. We are accountable to the public and we should be out there explaining ourselves. But I’m not, I’m not quite sure that you’re going to see an army of central bankers being politicians. I’m not sure we’ve got what it takes.

And Kevin Walsh, the new chair of the Federal Reserve, is he a politician or an independent central banker?

Oh, he’s an independent central banker. Actually, Kevin was at the Bank of England for a period. He’s quite close to Mark Carney and did something that the Bank called the Walsh Report while he was between roles. I got to know him a bit, and I think he’ll be a very strong head of the Federal Reserve, independent of Donald Trump.

Well, you know, that will be a test, won’t it? There’s a system in the Fed, right? And he is one vote amongst, you know, several on that, on that Board. And every voice, every person has a voice. And as chair, he’s obviously somewhat, you know, more important than some of the other members, but he still only has one vote. And so I am confident. I think we’re all confident. We have to be that he will be an independent head of the Federal Reserve. And it’s widely said, of course, as I think you know, that, you know, Kevin was for much of his career known as a hawk and as someone who favoured higher interest rates. That’s a bit simplistic, but nonetheless, we’ll see, won’t we? There’s a history of politicians appointing people as Governors and then thinking, ah, I can’t get rid of them. As I was telling you before, uh, central bank Governors, it’s almost impossible to sack them. They can go mad, they can commit treason, that’s about it. Otherwise you’re done. Uh, and the Italian Central Bank Governor, as I was telling you before, had an infinite term, and it was impossible for successive prime ministers to get rid of him. I think in the end they had to drive him out in a box or something. So, um, it’s a big decision by any politician being serious to make someone in this unelected role, technocratic role with power over the whole country, to put them into that role and say, there you go, I trust you, we trust you to do the right thing. And I’m sure Kevin will take that very seriously.

The sad part is you don’t have an infinite role. You might be gone in two and a half years. But I do always enjoy chatting to you, Andrew Hauser

Many thanks. Thanks, Ross.