Fireside Chat Fireside Chat by Andrew Hauser, Deputy Governor at Citi’s Australia & New Zealand Investment Conference, Sydney

Andrew Hauser, Deputy Governor of the RBA. In addition to that duty, he’s also Deputy Chair of the Monetary Policy Board and also an ex officio member of the Governance Board.

Now, we have just under 42 minutes in which to have a fairly in-depth Q&A and fireside chat session. So we’re just going to launch straight into it, and question one for the Deputy Governor today. Financial markets are pricing that you’re unlikely to hike rates in November, and the OA strip this morning was pricing only about eight basis points. The belief is that the September hike was brought forward due to curb inflation expectations and the upside risks that the Board noted in the statement in September. Now, do you believe that the Board now has scope to wait and see if the 100 basis points of tightening so far has worked? Or does that one extra hike in September not quite address the burgeoning inflation risks?

Thank you, and it is good to be with you all here. And I was asking someone what sort of cricket metaphor I could use for an opening question like that. A bouncer, at least, I suspect. Mitch Starc best, perhaps.

Don’t let it go through to the keeper, please.

Is that a different sport? I’m not sure. Look, we’re in a world of hard choices. I think that’s the reality here. We were the first G20 central bank, as you know, to raise rates this year. As that, we raised them three times in February, March, and May. That reflected the fact that we came into the year with domestic capacity pressures, and of course, we had the unwelcome development of the Middle East crisis as well which added fuel to fire, to be honest, here. We looked an outlier when we did that at the beginning of the year. But, looking back now, 14 other G20 central bank rate rises, we were, if anything, ahead of the curve rather than behind.

We didn’t raise rates in June or August because we wanted to take space to review the impact of our decisions in the first part of the year. Yeah, and perhaps it sounds naive now, the possibility of a resolution in the Middle East crisis. But in August, we did identify three upside inflation risks, and the first was from a prolonged Middle East crisis. The second was from the burgeoning AI and tech boom that I know you’ve been talking about a lot at this conference, and everyone is. And the third was the possibility of even weaker domestic supply constraints. By September, we judged that those three risks had crystallised.

Oil was back over $100, no end in sight to the war. AI was going gangbusters, and in the Governor’s words, productivity growth, according to the latest National Accounts in Australia, was doing nothing. So the Board was unanimous in voting to raise rates, and it said importantly that it stood ready to do more if needed. Where do we stand today?

Well, we’re a week and a half from the policy meeting, and we’re still finalising our forecast. So I don’t know for sure, but a few things are clear. The inflation outlook looks materially worse than we projected in the August report. I think you could do no worse than start with those three same upside risks. On the Middle East, oil prices are even higher, about a third higher than we assumed in the August projection. We have these debates about the so-called crack spread and higher refinery prices, and obviously, there are fewer fiscal interventions now in Australia. So the Middle East picture looks worse.

AI, well, we’re seeing higher AI prices, tech prices feeding through into CPI, not just here but elsewhere. We continue to have this extraordinary sequence of positive demand shocks around the world. And we’re having a boom in data centre construction here in Australia as well. So that’s upside too. And then on domestic capacity pressures, well inflation’s been coming in at or a little bit above expectations, despite an apparent easing in the labour market. Components of CPI that are rising the most are actually the ones most directly linked to capacity pressures like market services. And we hear from Liaison that cost pressures are the number one consideration for businesses. We said in the minutes last time, you pointed this out I think in some of your pieces, that the staff were looking at whether we needed to change our judgment on capacity pressures in the labour market again, and that exercise is underway.

I think overlaid on all three of those is the basic fact that inflation’s been high for a very long time now. And we are beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back into target at all, or certainly not for an extended period. We hear that from liaison, and we have a survey, the BOSS survey, that we work on with Macquarie University, which shows that there is an increasing share of businesses who are thinking that maybe three to three and a half per cent is the new normal. And look, that is the central banker’s nightmare. We can’t allow expectations to shift away from the target.

If that’s a picture on inflation, what’s a picture on activity? It’s more mixed, clearly. We need a period of below-trend growth to bring inflation down, and we’re seeing that happening. We’re seeing some slowing under the pressure of tighter monetary policy, higher oil prices. The labour data last week, a little bit weaker than people had expected. We’ve got the housing market obviously undergoing quite a major correction and confidence, particularly in the household sector, is very weak. But it isn’t all downside. I talked already about the overseas demand growth, particularly now in Asia, which of course are our major trading partners, being stronger than expected. And the data centre boom onshore is driving some very big numbers on the business investment side. So look, monetary policy is working. Labour market is easing. Consumption growth is quite tepid. But there are still pockets of growth and the inflation outlook has deteriorated. So that’s a pretty tricky balance. Those are the hard choices I talked about.

The challenge that’s facing the Board, it has done for some time, is do you do more to tackle higher inflation, recognising that that means weaker activity, weaker labour market? We obviously have a dual mandate. Or do we hold our horses to protect the labour market, to try and protect some of the labour market, and mindful of the potential that there may be more downside momentum of the economy, but accept the risks in so doing that the upside inflation risk embeds, and that becomes more expensive to deal with? Those are hard choices. They’re not where we’d like to be ideally as the central bank, but I think that’s what we’re facing into as we meet the week after next.

Can we unpick that and talk a bit about the hard choices? Because you mentioned 14 other central banks have actually started their process of policy normalisation or policy tightening, depending on the starting point. But the issue here is that monetary policy can’t drill for oil, it can’t unblock shipping lanes, you can’t resolve the geopolitical conflict as much as you’d probably like to at the moment. So how should central banks adapt their reaction functions when these adverse supply shocks are threatening to embed higher cost-push inflation into a world that seems to be somewhat more prone to high volatility and certainly potentially reduced supply elasticity?

I think that is our number one challenge, and actually when we meet together as central banks, it’s the dominant theme of discussion. Push back a bit on the premise that it’s all negative supply shocks. Obviously, we were talking about AI and the upside surprise on demand through the world economy. That’s a classic positive demand shock actually. The investment boom may precede a supply shock on the AI side, but it’s a demand shock for the time being. I’m not sure about lower supply elasticity either. Look at the spectacular speed with which the Chinese supply chain in particular responded to Liberation Day tariffs last year. So, supply chains have learned about how to deal with resilient shocks, and maybe that’s a sign of cautious optimism.

But you’re right, we’re seeing a lot more adverse supply shocks, and I think we expect to see more. What should monetary policy do? I think point one is what we should be clear about what we can’t do. We can’t stand in the way of a supply shock. If someone overseas raises the price of a good that we’re buying, let’s call it oil, we’re all poorer, and we have to accept that fact. Others may hold policy levers, as you say. Others may be able to drill for oil. Others may be able to deal with some of those productivity challenges that central banks can’t. So number one is some fairly ruthless truth-telling about what can’t happen. What we can do, and what we must do, is prevent one-off supply shocks or persistent supply shocks feeding through into higher second-round effects, higher inflation expectations. That will just make a bad thing worse.

So look, where the shock is temporary, where the economy is balanced, where inflation expectations are well anchored, you can still do the standard playbook of looking through it, let the price level rise, accept that you’re worse off, move on. No monetary response. But where there are knock-on risks, where the shock is big, where it’s persistent, where maybe you don’t start from balance, where maybe inflation expectations are under challenge, you have to react. You have to tighten, not fully, but you have to react in order to prevent those on-flow effects. And that’s what we, and I think actually a number of other central banks have been doing in the course of this year.

As I say, it doesn’t ease the pain of the necessary judgment. And people sometimes say, "Well, hang on. We’re already in pain because of negative supply shock. Why are you imposing more?" And it does seem counterfactual. The reason, obviously, I probably don’t need to convince this room, but I think a wider audience, it’s a continuous challenge to explain this. The reason is that even though we are laying shorter-term pain on top of pain, is to prevent a longer and potentially far worse pain down the track if inflation expectations get locked in. These are not easy communication challenges. They’re not easy to explain to people or to businesses. And yeah, it makes central banks’ work a little bit tougher. I’m not complaining, but we’re all facing into that at the moment.

If we can talk a bit about some of those challenges of communication, particularly one thing that occupies the minds of you at the Reserve Bank is unit labour cost growth. So while if we look at wage cost growth from the wage cost index, it’s largely plateaued, but unit labour cost growth remains elevated, and partly that is due to underlying subdued productivity outcomes here in Australia. Now, is the RBA factoring in a structurally lower baseline for Australia’s trend productivity? And if so, does that mean that you think policy might need to remain in restrictive territory for longer? And how does that influence probably an assessment of where real neutral rates should be in the cycle?

Some of these questions are like exam questions, Josh. Luckily, I had some advance warning. But we don’t make assumptions about structural productivity growth. We forecast, luckily, I mean, governments have to, but we forecast inflation a couple of years ahead. So our assumptions on productivity growth are only what you might call shorter-term ones. But yes, we have reduced our assumption about the underlying rate of productivity growth over that period from 1 per cent, which we had assumed out to August last year, to 0.7 per cent. That’s for non-farm productivity growth. What I would point out is we’re struggling even to get there. If you have all the charts, as you know, at the moment, it’s pretty much around 0 per cent growth, and it’s been zero cumulatively for the last decade or more. That number is the number one economic challenge for countries like Australia. It’s not unique to Australia. But it obviously determines the speed limit of the economy, the rate at which we can grow without inflation, and that basically determines everything else. Your question about what it means for interest rates is interesting. It doesn’t necessarily mean policy has to be tighter for longer. It does mean that if people haven’t adjusted their expectations to the reality of a slower growth economy. So if people continue to spend and behave as if the size of the economy is going to grow at the old rate, then you’re going to get excess demand, and policy is going to need to be tighter than it otherwise would. And we may have some of that now. Ironically, you probably know this, those economists in the room will know, that actually, if expectations were all aligned, lower productivity growth, other things equal, could mean lower real rates over time. We’re not in that world today. Not sure I want to get to that world, to be honest. I’d much rather have a higher productivity growth rate than low interest rates because productivity is low. But right now we are, I think, battling that other side of it, which is expectations not being fully aligned to the reality of the pace at which the economy, the pie, if you like, is growing.

Speaking of expectations, one of the challenges, I think, again, going back to the part of the communication, has been communicating to people about the transmission mechanism of monetary policy. You get asked at the media conference about how do mortgagees, what’s your message to mortgagees, but that’s not the only transmission mechanism for monetary policy. There’s obviously exchange rates, there’s savings and investments as well. So I just want to ask you, and when we do have a very direct cash rate transmission mechanism via variable mortgage rates, but how is the bank evaluating the distributional wedge between, say, indebted households who have experienced severe cash flow squeezes and asset-rich households that are benefiting from high yields?

This is a K-shaped thing, isn’t it?

Yeah.

Let me say point one, we’re very sensitive to the fact that higher interest rates increase the burden on mortgage holders. We see higher hardship rates. We see more calls to National Debt Helpline. I’ve visited the National Debt Helpline. Some of those stories are really heart-rending. Consumer confidence is low, not least because of higher interest rates. And you do see some sign of weaker consumption by those on low incomes with mortgages. But the data show that only about 2 per cent of mortgages are actually in negative cash flow. And that’s a lot lower than the 2024 peak because people did spend part of COVID rebuilding their buffers. In fact, the median mortgagee has over a year of cash stored away in their accounts to meet those needs should they need to.

Look, this cash flow thing, and Chris Kent was talking about this the other day, you may have seen, it dominates discussion of the transmission mechanism in Australia, but it’s by no means the most important part, and we’ve looked at this quite carefully. There are four channels of the transmission mechanism. The first, and by far the most important in Australia and in most small open economies, is the exchange rate. Some of our models say that up to two-thirds of the effect of interest rates actually comes through the exchange rate channel. People say, "Hang on. There can’t be that much from people going on holiday." But of course, it’s much more than that. It affects the cost of everyone importing goods, businesses. There’s the wealth and asset channel, housing, your super, your savings if you have them. Also very powerful. The intertemporal substitution channel, which is a long-winded way of saying if interest rates go up, actually have an incentive to save more or borrow less. And then the cash flow effect, probably, in terms of our models, comes last. It is first in the public discussion because obviously it’s a thing people notice, and we are very sensitive to that. But it isn’t actually the biggest part of our monetary. And you’re right, we’re struggling to get that point across. But I think it’s important that we keep trying to do that.

I think one of the points, because mortgagees get a lot of the attention, the greatest pain of higher inflation is held by those without a mortgage who are renting on low incomes. That’s a decent share of the total population. If you look at the HILDA data that we showed in our last Financial Stability Report, I told you the sort of 2 per cent, a bit more, of mortgagees are in negative cash flow. Well, 15 per cent of renters are in negative cash flow. And higher inflation is a gut punch to them, and we are very focused on the need to bring that down. Yes, the short-term answer to that, it can be to raise interest rates. But whilst we have a great deal of sympathy and are very sensitive and monitor closely the impact on mortgage holders, the impact on that next tranche down is arguably even worse, and it’s the impact of high inflation, which we must get down. You made the point about public understanding. We’ve done a survey. We put it out recently. We do need to keep working on the very basic point that higher interest rates actually bring inflation down. A lot of people have formed the view that higher interest rates drives inflation up. That’s not the case over the medium term. But we have more education to do to get people to understand that basic point, where we’re raising interest rates, we may be making life harder today, but we’re doing so to bring inflation in the long run down.

I have a few more questions, but so you can catch your breath and get a drink. If the AV people can just put the Slido details up on the screens, that would be great. So start thinking about your questions. We have a couple of roving mics as well around the floor, or you can go through Slido. So just start thinking about your questions you’d like to ask.

I did a Slido event once at the Bank of England years ago. It was long before we knew how the technology worked, and the questions were zooming up the screen, and we had no invigilator, and no one was actually saying, "No, we won’t put that one up." And as I was sitting talking outwards, there were things going up. "Who the effing this and that does this person think he is?" And, "Tell him to stick it," and all the rest of it. And you could see some of the Bank going, "Oh, God, what are we going to do? Pull the wire?" And they didn’t pull the wire. So, given this audience, I know you had a good evening last night. I don’t know whether that’s going to happen here, Josh. I assume you have someone sitting in the middle of it.

Thank you for that anecdote there, Deputy Governor. Hopefully we don’t have … I think it’s not happening at the moment. It didn’t happen yesterday. With that brief interlude, can I talk about-

Any bond traders here? I’m sure there’ll be a few.

They’re sitting in the front row. Okay, wind it back. Can I talk about … Well, ask you a question on another aspect of financial conditions, which is monetary policy is obviously one, but the other one is sort of what’s happening in global bond markets at the moment. We’ve seen a sharp rise in global sovereign bond yields, and global term premiums have arguably expanded as well. I think that makes … You talk about central banks in small and medium open economies and the exchange rate as a significant tool for monetary policy transmission. But you could also argue that those economies also face an issue when it comes to changes in global bond yields and also spread products. Now, so on the one hand, we have high global yields that steepen the domestic curve and raise wholesale bank funding costs. That does some of the work, if you like, of the central bank’s tightening work for it. On the other hand, widening yield differential risk currency depreciation and exported inflation. So how do you, or how does the RBA parse these competing channels, and to what extent the global term premium shocks influence the domestic policy path?

It’s a good question, and in the short period that we’re not talking about a world of negative demand versus the supply shocks, central bankers are spending a lot of time trying to work through this, and you’ll have seen from the minutes at the last Monetary Policy Board, we had quite a long discussion on this question our ourselves. These moves in long rates, I don’t need to tell you or this room, have been big and pretty sharp. And there are loads of potential explanations for it, and I saw the FT this morning said it was a bit like Murder on the Orient Express. There are so many suspects. I think if I remember that story correctly, actually, they did all kill the person as well, didn’t they? But there’s so many potential explanations for why long rates are up. Is it lower central bank credibility? Is it higher central bank credibility, post the perceived Walsh pivot?

Is it fiscal policy and debt unsustainability? Is it AI issuance? Is it policy uncertainty? Is it higher neutral rates? And that’s just a short list. What are the facts? Well, higher inflation expectations, a substantial reduction in central bank credibility is probably not the most plausible one, I think. I would say that wouldn’t I, but inflation break-evens haven’t gone up very much. So it’s real rates. And it’s cross-country. Doesn’t seem to be particularly singling out countries. France obviously, has had a bit of an excess, but most of us seen it. And it’s not clearly people waking up to the fiscal risks. I say that because you look at CDS, you look at soft spreads, things that you would normally expect to be spinning out if people were saying there’s an imminent default event. They’re not really moving terribly much. Now, I don’t mean to dismiss the fiscal explanation, but as a near-term debt sustainability story, I’m not sure about it.

Our best guess, and this isn’t terribly deep, is that some of it does reflect higher term premium, and that tightens financial conditions here, as you say, although I’m not sure we think that’s huge in Australia, given the fact that we have quite a heavy focus on the short end of the yield curve, as you said earlier. There’s probably also some increase in neutral rates, global neutral rates. And as you say, that sort of challenge is something that brings economists into disrepute. You know, interest rates goes up. Does it mean more activity or less? We say, "Well, it all depends." And obviously, higher neutral rates do mean that for a given path of rates, we actually have an easier monetary policy stance than we otherwise would have. Particularly tricky issue is the neutral rate globally is higher, but the neutral rate domestically might be a bit lower, perhaps for the productivity reasons we described before.

And at that point we do face into the possibility of an exchange rate appreciation, and as you know, we haven’t seen much of that through the course of this year. The exchange rate’s what, up what? 5, 6, 7 per cent on our forecast at the end of ‘25. We do put some weight on those stories, and as you will have seen from the minutes, the possibility that our stance may be slightly less tight for a given path than otherwise did play a role for some in the decision in September, and so we’re keeping a close eye on that. This is all different, obviously, if this thing breaks down into a disorderly sequence globally. And I think it probably is worth all of us spending some time, and I’m sure you are, working through what that would look like, how your balance sheets would adjust, how we deal with the possibility that there is a disorderly adjustment. Unfortunately, as I think you probably know, I’m a veteran of the LEI crisis in the UK, and although that was a very different situation, things can go seeming very calm to very uncalm very quickly.

We are getting some questions through on Slido. I’m probably going to reserve the last question I have. We’re going to make this a choose your own adventure, Deputy Governor. So you get to choose which question you want to answer from the-

I can’t even read - my eyesight’s very bad. You’re going to have to help me out. You choose them. I’m not sure it’s a good look for me to choose which questions are answered. Would you like to reflect on the excellent monetary policy of the RBA over life? It’s a question that’s not up here.

Dr Hauser is deserving of a raise. Do you believe that? Okay, there you go. No, no, let’s go. What would be your number one item on your shopping list to boost productivity in Australia?

Well, look, this isn’t our job, and as you said we don’t drill for oil, and we don’t do that, and I am nervous about wading into a public policy debate that involves winners and losers, and involves, to some extent, government levers. I’ll make a couple of points. Clearly, there’s a major technology wave underway globally. Clearly, Australia needs to be part of that. There’s a lot of evidence that we are, but I don’t think we can afford to close our eyes to some degree or not to the way that the world is moving in terms of technology. We may wish AI was or wasn’t a thing, but it is a thing. And a point I’ve made in several speeches in the time I’ve been here is actually if you look at Australia, the greatest periods of Australia’s economic success, it’s often been in adjusting to a major world crisis. We have a lot of things people want. Under the ground, over the ground, we have great human capital. These are actually fantastic opportunities. Talk about this, you’ve got the A50 thing later this week. I don’t think it’s just spin. Australia really does stand to benefit from this more fragmented world where people need these high technology minerals. They need know-how. They need innovation. But we do need to be open to that and understand it. I think that’s point one.

Point two is that, and this is something of an Australian thing: “this is a problem, government must solve it”, or “government is the problem”. Government has a role to play, but just as important is what business does on productivity. Over the last few years, if you look at why productivity outside the US has been low in most countries, most countries in the developed world, the first and most profound reason is very low investment. Now, people would say, "Oh, it’s red tape in Australia." But red tape is not a feature of every country facing low productivity, but low investment is. And so there is a joint obligation, I think, not just on government, but also on business, to get their arms around this productivity challenge and to embrace what could actually be a very positive future, I think, for Australia. So look, technology is probably the easy answer to that point. It’s not an easy route up the mountain. There will be many, many challenges in adjusting to an AI-dominated world, but we need to be at the forefront of that, and I hope and believe we will be.

We are getting some more Slido questions, but the way it works here is the ones that are getting the most votes are the ones that I can see. So if there’s a question you really want to ask, put your hand up and we’ll get one of the roving mics to you as soon as possible. Yes, we have a question down here. Thank you.

Hi, Andrew. Stella from Reuters. I do have a question about the quarterly CPI data that we’re going to have next week. So most economists, they’re seeing like 0.9 per cent or 1 per cent for the quarterly trimmed mean measure. Is that a meaningful miss for the Board, or is it already old news given your hike last time?

I remember, Stella, you asked almost exactly the same question to the Governor at the press conference. You’re hoping for a different answer here, I hope. Reads notes carefully.

I think, look, we’ve already got two of the three months of the quarter, and we’ve got most of the market services, which is obviously quite a big component of it. And I think it’s pretty clear that absent a very, very big downside surprise in the last month of the quarter, the quarterly number is going to be bigger than we assumed in the August report. I think, Josh, that’s what you’re saying, it’s what most of the Street is saying. That you mentioned a 1.0 for trimmed mean on the quarter, Stella, and I think, Josh, that’s probably where you are, and I think it’s where a lot of people are. We look at the data when it comes in, and we evaluate it. But it’s definitely north of what we were assuming, in August. You asked, does that matter? Well, all data matter, but they all have a coefficient on them, which is not one. And there’s a lot of debate about you feeding back just from current inflation. I think this is part of the Governor’s answer to you. You can’t target current inflation. And it’s bygones already. It doesn’t mean it doesn’t matter. It’s part of the input to our assessment, in particular, of where capacity is. So we will be looking, and I think, see, there’s another question here, actually, Josh, now I’ve got my … I realise I can see better without my glasses on, a bit ironic. Yeah, can you talk a little about the components of CPI that are important in your judgments about the economic outlook? And this links very directly to your question.

Before you ask that, can I put a rider on that?

Jeez, how many sub-questions am I going to have?

You said it was an exam, so it’s an exam.

Yeah, all right. Shall I write this down?

Yes, please.

Yeah.

Also, in addition to that question, can we talk about the net balance of prices in the CPI?

No, let’s come back to that in a minute because otherwise I’ll get overloaded. Let me finish Stella’s question and this one. So market services matters a lot, and as I say, we’ve already got most of it, and it’s already telling us that capacity pressures in the economy are probably pretty elevated and maybe a bit more elevated than we thought.

The AI data I talked to you about as well is a story we’re tracking closely. It’s not a terribly big part of the CPI. But it is an emerging trend, and some of the inputs are almost parabolically vertical. Some other parts of the CPI have been moving in a more favourable direction. We’re obviously very interested in what the housing and shelter numbers say. But look, I think, yes, we expect this quarterly number will probably be north of where we are in August. Yes, we will study it carefully when we get the final number but not because we’re trying to target that number, but because it does give us information about the underlying economy. And at the moment, certainly those numbers are causing us to ask whether there’s less capacity in the economy than we previously thought. Sorry, what was your follow-up?

My rider was, when we talk about inflation, are we looking also at the net balance of items that are rising versus falling, as in the breadth of price-

Yeah. I think and Kevin Warsh has talked about that as being one of his more interesting – I find it useful. We have a bit of a debate about this internally sometimes. The challenge is, if you plot it alongside CPI, it often, in delta terms, in terms of movements, it’s telling you what CPI is telling you. So if you have a particularly widespread or a particularly narrow spread, then that is telling you something. But if the distribution is roughly the same most of the time, you’d actually expect that measure to move up and down broadly in line with CPI. Certainly, that measure is a bit ugly, if that’s where you’re going with this. And certainly, we are keeping an eye on those numbers.

And we talk to liaison through to businesses, and I do a lot of this travel as well, trying to talk to businesses directly about, and I said this to you already, their number one challenge is costs. Many of them are trying to sit on pass-through because they are meeting relatively weak demand conditions, but a number of them have had no choice, and those who are sitting on it clearly are facing declining margins. And you see from the NAB survey, their profitability measures are weakening. That cannot sustain itself forever. You either have to push those price rises through and face the possibility that demand falls further, or you have to adjust your cost base, either by putting downward pressure on non-labour inputs or on the labour side of things. I mean, I’m stating the obvious here. We’re watching that process very carefully. The pass-through of the oil price rises, particularly the second, has barely been seen yet. And a big part of our forecast discussions at the moment is how large that lump, if you like, that ostrich egg, of oil price rises coming through in the next couple of years is going to be. It could be quite substantial.

Hi, Deputy Governor. Michael Janda from ABC. Unemployment. Do you actually believe the recent ABS unemployment figures are accurate? If they are, are you concerned that unemployment may soon break through the 5 per cent level recently outlined by the Governor?

We take all data, as you know, Michael, very seriously. I think your accuracy reference may be to the fact, as many you know, and many in the room may know, that the ABS have been putting through some technical changes to the structure of their survey. And it’s certainly true that the numbers in the last few months have been, we all have, and I’m sure you have, Josh, too, been looking quite carefully at that underlying issue for the potential that there’s noise. And there is potential, Michael, that there’s some noise in that number. That said, it clearly was a little weaker than we and others have been expecting. I stress the little. These unemployment numbers in Australia are still right at the bottom or very near the bottom of the G20 outturns on labour markets. It’s been one of the great successes of the post-COVID period, not just in Australia, but elsewhere as well, that the labour market has performed as well as it has. No lost job is one to celebrate. I would never say that. But these are still quite low numbers, internationally and relative to history. It certainly does suggest, and the labour market has been suggesting, Michael, for some time, that the labour market data have been suggesting that the labour market is easing. And as I say, we need to see some easing in the economy. Whether it goes to five, whether it goes to some other number, that’s a debate we’re having in the context of our forecast at the moment, and you’ll see our answers to that in a week or two.

We still have roughly just under 10 minutes, so we can take more questions.

You want to do your nerdy question, which I especially prepared?

Okay, we’ll do the nerdy question because-

You told me people would be gagging to hear the answer to this.

I don’t think I would-

I think we take a vote at the end on it once you’ve heard what this is about.

Can I just say for the record and for the recording that I probably wouldn’t use the word gagging? My nerdy question. Excuse me.

We’ll get this over with.

Okay.

You did ask it.

I did ask it, but yeah, I wasn’t gagging for it. Anyway. With the complete wind-down of the pandemic-era liquidity facilities and the ongoing passive runoff for the bond portfolio, how is the Bank approaching the transition to an ample reserves framework? Are you seeing early signs of friction in short-term money markets or bank funding spreads as exchange settlement balances decline?

I could go for eight minutes on this, I can tell you. This is my specialist subject. I mean, look, what does ample mean? You know this. It means that we will provide the liquidity to the market that the market wants. That’s a change from the past, when we used to tell the market what it was going to get, and the market adjusted. That was true in Australia. It was true in most countries. And we provide that liquidity through open market operations each week. We’re nowhere near the ample point yet, is the honest answer. Demand in our OMOs is pretty low. Markets are orderly. Private repo rates are below our OMO rates. So you’d be surprised if they were borrowing from us. And we’re not seeing the kind of friction you describe in terms of short rates, which remain very orderly. It’s interesting to me because obviously, coming from the UK, and Canada, and New Zealand, and others, have all seen spikes in their short rates as the balance sheet reduces, and they’ve had to start providing quite a lot more liquidity. We haven’t had to do that yet, and the market has revised down its estimate of where that point will come two or three times.

Our reserves are about $200 billion. The current market estimate of system needs is probably $70 to $100, so we may be double still where we need to be. That is interesting, I think, to those of us who are nerds on this subject, because it puts us right at the very lowest end of the international ratio of reserves to balance sheet assets. And it’s a good thing, I think, because it reflects confidence in our ability to provide the liquidity that we need, and it may also reflect the fact Australia’s been through fewer crises of the kind that other countries, including the UK, has had. But we’re watching that closely, and we’ve announced some more additions, as you know, to our toolkit, including a term repo facility that we hope to introduce in ‘27 to reassure people that we’re there across a whole range of shops. But at the moment being, and there may be short traders in the room and people interested in this, so far, so good in terms of the transition to ample. There we go. Only took a minute.

Fantastic. We’ve still got six minutes left. Questions coming up from the floor, or I’ll go back to Slido. I have one question right here at the very front on the far right.

Thanks, Andrew. Not really a markets question, but curious on your thoughts on, and happy for you to go domestic or global, the balance between labour and then, I guess corporate profitability. So maybe we’ve seen over the last 10 years or so, company profits have been relatively strong. Wage growth hasn’t been that strong, so it hasn’t necessarily been a contributor to inflation. Do businesses and corporations need to adjust potentially to a lower level of profitability over time in order to get the balance right, particularly, I guess, in the context of social unrest, in order to have the social licence to operate?

Well, this is a very complex question, and as you say, some of it lies outside my remit. In the US, the labour share has fallen, as you probably know, clearly. We haven’t seen the same thing to the same degree in Australia, and indeed in most other countries. And, as is common in these economic debates, sometimes stylised facts about the US are treated as if they are true everywhere, when they’re not. Companies are extremely conscious, as you know, about what I think is often called in the trade social licence. And there’ll be a whole range of small businesses when people say, "You’ve got to cut back on your profits," who would have a pretty hollow laugh at the moment, that the idea was that they were creaming profits and making a fortune when in fact, some of them are struggling to keep their heads above water and to employ the people who you’re talking about. I think at the other end of the distribution, there are some really interesting questions about the concentration of returns. Obviously, AI is the classic one. At the moment, the spectacular equity performance, in particular, is accruing to a tiny number of companies, where the numbers are just eye-bogglingly big.

How governments tax those companies, how they impose social norms on them is a hugely important, and very live in Australia, debate. It’s slightly different to, I think, the one you were talking about, about profits per se. But I think, if you ask me, and I’m taking your question in a slightly different place, some of these structural issues about the relationship between the new generation of companies and governments like Australia, the US, UK, and others, and the relationship between them and how you continue to impose social norms is going to be a dominant theme of the next five or ten years. Whether this issue of usurious profiteering is the primary issue or whether it comes down to other things like water usage and employment rights and people having to change radically mid-career what they do and being taken out by AI, I’m not sure. But these issues, of which you raise some, but of which there are many others, are going to shape our lives. And they’re certainly going to – we are investing quite a bit of time at the RBA, and our chief economist will talk about this in a couple of weeks, in understanding the economic aspects of AI more. But I think, as I say, in terms of the Australian outlook, there are some ups and downs in this story, but it’s much less dramatic than the stylised facts that certainly are happening in the US.

We have time for one more question from the floor. If not, I’ll go to another slider question. Yes, we have a hand up down here, relatively central.

Yeah. Thank you. Just a question on the working of the Board. For investors, it’s pretty unclear. Not everybody from the Board has his own speeches and these kind of events. So it’s a bit unclear how people actually vote and how it all works. What’s your thinking around that? How can you compare it to the Bank of England, for example?

Well, this is good also because the 48 questions on fiscal policy that are clearly on the screen won’t get answered either, Josh. Thank you.

We won’t mention the war. Thank you, Deputy Governor.

But specifically, the question about internal committee dynamics, I can talk about this for some time. The Bank of England’s model is interesting because it’s at one end of the distribution. Each member of the Bank of England is personally accountable for their voting record. They are required to account for that in Parliament and in public. And now, as you may know, those of you who trade the UK, probably quite a lot of people in this room, each individual member has their own set of minutes, if you like, a paragraph that explains their view of the economy. So they’re testing the outer bound of personal accountability.

What happened in terms of the debate on the Board and on the Monetary Policy Committee, and I wasn’t a member, obviously, but I sat in on a lot of those discussions, they were very, very lively. A lot of them were academic economists or able to have quite technical debates. And that had its ups and perhaps sometimes its downs as well. One of the interesting things that the personal accountability, I think perhaps negative things was, is that people felt so responsible for voting how they saw things that sometimes, say I was a sort of persistent dissenter on the upside or the downside. People slightly lost the incentive to convince their peers of their views. "Well, I’m okay because I’m voting for a rate cut." "Well, yeah, but rates are staying whole, so you didn’t have that influence." "Yeah, but I’m okay. I can explain myself." That decoupling, I think, that was caused by that personal accountability, I think is perhaps a bit unfortunate and means that the effective debate on the Committee can be smaller than its full number of members, if you see what I mean. We do now disclose votes in Australia, and I think that’s wholly a good thing. We don’t disclose names, and I also support that too because I think what we need to ensure, and we’ve had it today, is we have the debate on the subject and not on the individuals.

And I think it’s fairly clear that in Australia and some other countries as well, there’s a risk that you might get drawn into who said what rather than what did you say and how important is it. Final answer, and just to answer your question about how debate on the Board compares to the MPC, it’s really lively.

It’s a different type of people from the people that we had in the MPC, a much broader range of experience. We have labour lawyers, we have people that have run businesses, we have academics, but they bring an enormous amount of challenge and different perspective. And we have differences of view, and you’ve seen we’ve had split votes, and I think that’s wholly a good thing. We’re probably still learning as a community how to deal with the split votes, but it’s a mature aspect of the Board and we’ve taken it in our stride.

So I understand the point that maybe you don’t feel like you’ve heard from all of the members. You hear from me a lot, you hear, I think, from Michele a lot, and all of the members have done now outside engagements and will do more. But we will continue to find as many ways as we can to throw light on the diversity of opinion. For me, and you can take it from me, it’s the thing I think is most important of all in this complex and ambiguous world, is that we have real debates externally, internally. I think we should not be shy of being challenged, and we should not be shy of hearing alternative views. We shouldn’t be shy of saying we were wrong or we learned when that has happened. And I think if what you’re asking is does that culture exist inside the RBA as well as externally? Absolutely.

I think on that collegiate positive note, that’s a great place to leave the discussion. Deputy Governor, your exam is over. You can put your pen-

Sorry about the handkerchief and the cold. First cold I’ve caught since I’ve been in Australia. So there.

I thought you were unwell for one of the other fireside chats.

Oh, that was a different kind of illness. But anyway. Yeah, exactly.

Thank you very much, Deputy Governor.