Interview Interview with Andrew Hauser, Deputy Governor, on ABC 7.30

Andrew Hauser, welcome to 730.

Thank you

Let's start with interest rates. The European Central Bank is expected to raise rates this week. There's widespread expectation that the US will do the same. No sign of a material slowdown here in Australia. Is a rate hike at the end of the month, inevitable.

Well, as you say, Sarah, actually the economy in Australia in many ways is doing quite well. We've got growth roughly at trend. We have unemployment near historic lows, employment growth driven by the market sector, and real household incomes are growing pretty strongly. So there's a lot to like about the Australian economy, but we have one big problem and that's inflation. Inflation is too high, and that's why we raise interest rates three times at the beginning of this year. And the question now, frankly, for us is have we done enough or is more needed? There are three things we're worried about on the upside. One is the Middle East-Just

Explain upside.

I'm sorry. There are three risks we think that might mean inflation is going up, not down. One is the Middle East and the ongoing crisis there. One is a really unexpected global boom driven by AI, and one is the weakness of the supply potential of the Australian economy.

So what does that mean? The next inflation figures come out the day after the RBA meeting ends. Do you need to wait for that data or do you already know what it's going to say?

No, we certainly don't know what it's going to say. We've had an inflation number actually a couple of weeks ago and it was a little stronger than we'd expected and in the market expected. And the growth numbers that came out last week were also a bit stronger. So both of those are going to be in the mix. Clearly house prices are falling. Consumers are very unhappy, frankly. Consumer confidence is low. We had some surveys out today on the corporate sector as well. So there is a balanced picture in terms of the outlook, but we are very focused on those upside risks to inflation.

But is there anything that's going to emerge between now and then that would alter, would change Australia following the suite that I just described of the European Central Bank, the American Federal Reserve?

When I began central banking, months went by with nothing happening. I'd love to say to you that there will be nothing happening between now and when we meet, but the history of the last 12 or 18 months is that almost certainly something will. I think the important thing that will happen.

But is that something that could make you decide not to raise rates? Because it does seem to look inevitable from this point.

Well, the word inevitable is yours, very cleverly done, but it wasn't my word. We'll debate that as a Board and I could tell you today what I think I might want to do, but there's nine people voting on it. So you'd be mad to take my advice. I don't know what those events could be and what effects they might have. The most important thing though, to be honest, is our thinking and our debate on the Board. And that I wouldn't take for granted. We have a genuine spread of people and views about the economy on the Board and we have a real debate. And if it were inevitable, you wouldn't need us there, you could replace us with an AI bot might happen one day, but I'm not sure what's happening at the moment.

Just on the question of the economy, you say the economy is doing well in lots of ways. Obviously it doesn't feel like that to people. How do you explain that discrepancy between the numbers that you look at and how people are feeling, which is obviously under pressure, stressed, and very worried about their household budgets?

Well, absolutely. And sorry, I meant to say on a number of macroeconomic measures, it looks like it's doing well, but as you say, consumer confidence is weak. I think a big part of that is a memory of the fact that the price level in the economy has risen by 10, 15, 20 per cent higher than it should have done. When people go to the supermarket every week, they look at the price of the goods they're buying, they compare them to where they were a few years ago and they say, "Hell, what's going on here?" That is a very lasting and pervasive issue that is a function of the pickup in inflation after COVID and will take years for us fully to resolve.

Let me talk to you about housing. I know that house prices are not part of your inflation calculation, but how do falling house prices interact with inflation?

Well, as you say, there is an adjustment going on in the housing market at the moment and prices have fallen a bit. They're probably -

Does the bank welcome the government's intervention aimed at lowering prices?

Well, it's not the exact job actually to welcome it. That's a decision made by a democratically elected government that we take as a given, to be honest. I would put the current moves in context for three reasons. Firstly, house prices are still three per cent higher than they were a year ago and nearly 50 per cent higher than they were at the beginning of this decade. Secondly, as I travel around Australia and I'm still getting down to the country two and a half years in, everywhere I go, people talk about a supply crisis of housing across the country.

So there's a floor to house prices established by that supply issue and we'll find out where that is. And thirdly, while house prices play a role in the economy, they're not really as big as some of the things we talked about earlier in the conversation, global growth trends, productivity, the risk environment globally in Middle East and so on and so forth.It's a factor in our forecast for inflation, but it's not the main game as the Governor said a few weeks ago. It's only part of the story.

Let's talk about productivity. You've talked about it a bit already. Obviously it's a huge part of our inflation challenge, what the treasurer calls the speed limit in the economy. The US is currently having a productivity bonanza. What should we be learning from that?

Well, as you say, and the US actually is the odd one out. Most countries, my own country, the UK, Germany, Japan, most of Asia are all struggling with productivity growth. I think, and I've just come back from a trip to the US and I spent a couple of days in Texas, which is one of the poster charts for productivity. Boom town. Boom town. From Wall Street to Yall Street is apparently their motto. I'm not sure that's going to catch on. Clearly there's a very different set of market regulations and market structures in the US. And again, you pay your money and you take your choice and you drive along the freeway in the US and you see people shuffling along, collecting plastic bottles and putting them in shuffle boxes.

Sure, but there must also be business conditions that are fueling that productivity. Is there something for Australia to learn from that?

There are business conditions, but overwhelmingly the thing that you see in the US is the adoption of AI and technology. This was the theme of the meetings that I was part of over the past few weeks, an incredible flowering of investment in data centres and the hardware, but also the usage of this technology. Much of it may be a failure. Much of it may turn out to be a wrongful allocation of technology to tasks that won't actually solve its purpose. But there is an enormous vibrancy to that process. Texas actually as well is interesting because although classically a red state, they have the largest renewables energy sector in the world, which is quite convenient when they also have some of the largest data centres as well. You have a real sense of vibrancy and innovation and growth there, which is inspiring, frankly, and energetic. And a lot of people who go and see it come back with that same sense.

Clearly the figures of investment in AI are staggering. $7 trillion by 2030 is one number that I read, but it's also going to be inflationary before any productivity gains come from it. Could that same impact happen in Australia that it starts off by adding inflationary problems to our economy?

Yes. I mean, this is interesting and many of the public debates about AI of course are about job displacement and productivity improvements and all of those, what you will call supply side effects. But as you say, in order to generate those benefits, you first have to put in place the kit. And this is the current AI boom. It is actually a fairly conventional investment boom. It involves putting up huge shares. I visited one that was being put together in Melbourne, filling them full of enormous numbers of high speed servers, refrigeration units, you name it, which will provide the basis for those future.

Do we know what those data centres, what they're going to be worth in 10 years time?

Nobody knows that. It's fascinating. And actually I asked them how they funded it and the data centre I was at and it was all funded from overseas. I asked them if any Australian banks wanted to be part of it. Apparently your precise point caused them pause, which is how do we value the future income stream? It could be spectacularly high or it could be zero. There could be data centres sitting around the world unused. Unlikely, I think. But this issue of what the price of AI will be, it's not just a question of the stream of income to data centres, but how much will you and I pay for these tokens? Where will it be used? Is the million dollar question in AI at the moment. Most of the valuations assume that these companies are going to make a fortune.

In practice, several of them won't. they'll go by the wayside. And whether it's China or someone else will come in and compete that price down, hopefully to a level that's rather lower than the current sort of price you have to pay. These are really important questions about the valuation of AI stocks, and they're also a reason why we should all be nervous about whether the valuations in AI today will end up being where the valuations are when all of this shakes out.

Back in Australia, what's the single thing most misunderstood about the Reserve Bank and its role?

I don't know how to answer that because I haven't lived here all my life. What would you say it was? Well,

I think the questions belong to me, so you're going to have to have a better crack at that. Do you think the public understands what it is you are doing?

No, I certainly don't. And I don't mean that to be limited to the RBA. I think that's true of Central Banks everywhere. I was asked to come here and do this job from the UK in part to help the RBA modernise. And the strap line is Michele Bullock’s and we pursue is open and dynamic. Central Banks have a big job to do. We're given it. We're unelected officials. We have to get out there and explain ourselves and we have to listen. I spend a lot of my time travelling around Australia, listening to companies and local authorities and local organisations dealing with debt problems and all kinds of things.

And is there any standout in those interactions about what people misunderstand about the role of the bank?

People want inflation down. People are furious about inflation. I understand why. It's unfair. It hits people on low incomes. It damages price signals. It makes the job of companies difficult. What they want us to do is our job and bring inflation down. And I understand that and I support that. I'm not sure that's a direct answer to your question. But it's the most profound message that we get. Everywhere I go, I hear cost, cost, cost, inflation, inflation, inflation. And that's our responsibility. We have to put that right. And yes, we have to explain ourselves. Yes, we should communicate better.

But if you were to give me an exchange rate and say, look, how about you're really, really clear and you screw up or how about you do a great job and you're not quite as clear? I hope that most people would say, do you know what? First and foremost, I want you to do your job. I would like you to explain what you're doing too, but I really want you to be proficient at your job.

How do you think people understand having such a long target to get inflation down? We've been talking about it for a long time. We're out of the COVID period, but the target remains over the horizon.

So the reason for taking time is not over the horizon, but it's a long, I do agree, inflation is due to be back in target by the end of next year. That's quite a long and extended period. The reason we have chosen as a Board to take it slowly is to preserve as many of the gains to jobs in this country as we could. Of course, we could raise interest rates sharply. Of course we could. We could do it tomorrow. We could do it next week. We could decide, you know what? We no longer take seriously the full employment part of our objective. We're going to bring inflation down come hell or high water.

It hasn't been the Board's judgement that that is the appropriate stance, but you're absolutely right. A consequence of that is that inflation has been above target for a long period of time. And at some point we will have to say that is long enough. And the point at which you particularly worry about that is when people begin to lose confidence in the inflation target.

Do you think we've arrived at that point yet?

No, I don't think we have arrived at that point yet, but we are very alert to the possibility that we might. We are very, very clear we have to hit that two to three per cent range aiming at the mid point. We are doing it, as you say, over a longer period than some other Central Banks have done. And we're doing it in order to try to protect the jobs gains that happened during COVID. If at some point it becomes clear that that is not a feasible path, we'll take another path.

What would that be?

Well, we will raise interest rates further than otherwise we would need to do so. We're not at that point yet, but some of these upside risks to inflation are certainly on our mind and I come back from the US a bit more worried about them than I did when I went.

Andrew Hauser, thank you very much indeed for joining us.

Thank you.