Transcript of Question & Answer Session Listening to Australians, Interpreting the Data and Setting Monetary Policy

Well, thanks very much Governor Bullock for that address, but also joining us at The Australian Financial Review Business Summit. It is auspiciously timed again. In 2020, it was on the cusp of COVID lockdowns. In 2022 it was around the time that Russia had just invaded Ukraine. And now here we are with events going on in the Middle East and Iran in the last couple of days. I know you touched on it there in your speech, but can I just follow up and ask how worried personally are you about the events folding on there in terms of the potential economic flow on implications and are you somewhat relieved at least in the early stages that we haven’t seen a worst case scenario economically, at least in terms of something like the Strait of Hormuz closing down?

Yeah. So the first point to make I guess is that it’s very early days. We don’t, we don’t know what exactly is going to happen. The markets so far have, yes, there’s been some, oil prices have risen, gas prices have risen, as you’d expect. Yields have moved a little bit, there’s been a bit of movement in expectations about what central banks might do with monetary policy. But basically it’s been pretty orderly. Equity markets have reacted as you might have expected. So that’s all been pretty orderly. Last year we’ve been doing conceptual thinking about what might happen if there is prolonged increase in energy prices. You’ll recall last year when there was the 12-day Israel-Iran conflict and at the time we along with many others were thinking conceptually about how that might particularly impact Australia. And again, it’s complex. On the one hand, we’re a net energy exporter, so energy prices rising might assist us, it might assist our terms of trade, that might be positive for us in terms of income. But on the other hand, we’re a net importer of oil, which obviously has big implications for inflation, particularly for headline inflation, what people see at the pump. The other possibility is that if this is a very prolonged conflict and there is a very, very elevated and lengthy rise in energy prices, this ultimately is going to feed through into economic activity and I think uncertainty. If people are paying more for their petrol, they’ve got less money to spend on other things. This might impact consumption. If businesses are uncertain, that might impact investment. So all these things might impact the economy. So at the same time as there’s potentially an inflationary impact, there’s also potentially, if it’s a very elongated conflict, there’s also the potential for it to be impacting economic activity not just here but around the world. So it’s not 100 per cent clear in our case. And one thing that I think we will be doing, we are doing is we’ve done a lot of conceptual work here. Now I think we’ll be doing more work on particular scenarios. I talked a little bit about, you’ll recall in May we published a scenario when the trade war was looking quite bad. But this might be an opportunity now, and I think we will take the opportunity now to think about some scenarios around energy prices and the war.

Traditionally, central banks, including the RBA, look through supply shocks, such as a temporary increase in oil prices because of conflict or other examples over the years have been cyclones pushing up the cost of fruit and vegetables temporarily. But I suppose we find ourselves in an interesting situation at the moment where inflation is already elevated in Australia. So does that complicate your task if we do get some sort of prolonged supply shock here, is the look through the easy thing to do or do you actually have to say, actually that could be a risk for inflation more sustainably because we’ve already got high inflation anyway?

Yeah, I think that’s a very relevant point. We do have inflation which is already elevated and as I said, inflation, short term inflation expectations have picked up a bit, but mostly longer term they’re anchored. But with a supply shock occurring in a situation where we already have high inflation, I think there is a risk that inflation expectations may start to move. So that will be something, I think, that will be at front of mind for the Board. Are we in a position where it’s difficult to look through, particularly if it’s an elongated shock? You mentioned some of the instances where it’s quite easy to look through the shock, but this one might, might be a little bit harder because as you say, we already have elevated inflation and I think there is a risk that inflation expectations might become a little bit unanchored.

You said last week that we need to be patient for inflation to come down and return to sort of normal sort of target levels. I just wanted to ask, what do you mean by being patient? And given that inflation is around 3.8 per cent, unemployment’s low at 4.1 per cent, is there a risk that you are being too patient in terms of getting inflation under control?

Well, that is a very good question because as we’ve spoken about before, the Board’s strategy has been to try and bring inflation down to target in a reasonable time frame while preserving the gains in employment. That has been the strategy, and I think it still is the strategy. But it does beg the question of how patient can we be. When I was talking about being patient, I think I was using it in two ways. One is there is always a thirst in the Australian public for understanding what is happening to interest rates next. And I think, in one sense, what I was saying to people, look, just be patient while the Board sifts through the information and then we will be able to decide what to do. So there’s part of that. I notice even with the events in the Middle East now, the focus in Australia is on what does this mean for interest rates and housing prices? So I meant patient in that sense. But I also mean that we want to be patient in bringing inflation down, but also it’s critical, and I said this in the speech and I’ve said it a number of times, the Board is really focused on inflation expectations. We’ve been able to achieve this because inflation expectations have been anchored. If we see that they are not, then interest rates are going to have to respond.

And so the market seems to think that you only tend to entertain the idea of moving interest rates up or down essentially every second meeting after you get a full quarterly inflation print. Now, ahead of the March 16-17 meeting, we’re not getting another inflation read. We’ve only had one monthly number. It was still elevated in line with the previous quarter. Could you see a scenario where you’ll seriously consider an interest rate rise at that meeting, even though we don’t have a full quarterly inflation print? And are people underestimating the prospect that you could move not just every second meeting, but in consecutive meetings?

Yeah. Yes, every meeting is live. And if you go back when we were coming out of COVID for example, and inflation was shooting towards 7 per cent, we weren’t waiting for quarterly meetings then. We were moving much more quickly. Then you’ll recall actually when the markets expected us to move in July last year and we didn’t, that caused a lot of angst as well. And now I think they’re settled on the fact that we only go every quarter. I would dissuade them from thinking that. I’m not making a prediction about March, but it will be a live meeting. We have inflation at 3.8 per cent headline and we have unemployment at 4.1 tight. The Board will be actively looking at whether or not it needs to move more quickly. So I would discourage people from thinking that we necessarily only move every quarter.

You recently said the economy is in a good position with low unemployment, the economy close to balance, but given inflation is forecast to be above 2.5 per cent at least in underlying terms for almost seven years until 2028. What do you say to some of the critics who actually say you’re putting too much emphasis on maintaining employment ahead of the mandate of actually getting inflation down?

Well, we do have a dual mandate and we do have to consider employment when we are trying to bring inflation down. Now, as I’ve said before, there are critics who said we should have increased interest rates much, much higher and that would have resulted in unemployment being much higher. And I think Sarah Hunter gave a speech in which she, a couple of nights ago, or it might have been last night, where she actually put some scenarios through about what would have happened if we’d responded more forcefully, like New Zealand and Canada, who now have unemployment rates with fives and sixes in front of them. So, yes, we could have done that and in many ways that would have been the very easy decision. We tried to do something which was a little bit harder and I don’t think we ever thought it would be easy. And if you look back to the middle of the year last year, it looked like things were unfolding in a favourable way, but things changed and we had to change. So I think we’re not putting too much emphasis on unemployment. We are trying to look at where the risks lie at the moment they lie, we think more on the inflation side. So we’re paying more attention to that. We’re focusing on that. And that’s, I think, going to be a very important part of the Board’s decision over the next little while, because that’s where the risks lie.

I wanted to you tell the conversation to artificial intelligence, which is obviously a massive talking point at the moment in business and economic circles and broader society as well. Last week we saw WiseTech announce it was cutting 2,000 jobs. Block, the owner of Afterpay, slash 40 per cent of its workforce, and even CBA eliminated about 300 jobs. And that was partly attributed to AI. Where do you sort of lie in terms of is this going to be a very disruptive force for the labour market in the short term, or are you more optimistic given that actually the labour market at the moment seems very, very resilient to all this.

So, AI, you’ve got a full spectrum here. You’ve got people who are in the it’s an absolute disaster scenario in the next year or so and heaps of people are going to be at our work. And then you’ve got people at the relatively optimistic side of things that think, well, no, it’s going to help with productivity and ultimately that will be positive for employment. We’ve done a little bit of work with our business liaison program, asking businesses what they’re thinking about these sorts of issues. And broadly, I think the feedback we’re getting is that, look, there haven’t been a lot of job losses to AI yet. Yes, there are some headline numbers, but not a lot yet. They don’t expect over the next 12 months or so really for it to impact their workforces significantly. I think there’s two reasons for that. One is that, and this is a lesson I think, from other technologies as well when they come in, is that it takes businesses time to reorganise their business processes to really take advantage of the technology to automate those sorts of things. So I think where people are looking at automation, they’re looking at ways of people being able to use AI to improve their own productivity. And so ultimately there might be certain, and we’re hearing stories about certain types of jobs that will probably suffer severe job losses. But what we don’t know is where the new jobs will come from. So, you know when, I’ve told this story a few times, but when I was starting at the Reserve Bank, we had a massive typing pool and then within five years it was completely gone. And where did the jobs come up? Well, the jobs came up, technology was coming through at the time, so there was a whole lot of jobs that people didn’t even know you’d need in your organisation, coders and those sorts of things. These are all jobs that came through. So we don’t know where the new jobs might come from in these circumstances. So I’m probably not in the it’s a disaster camp. I think there is going to be disruption and there is going to be potential challenges in the labour market as people that thought they had jobs, those jobs are getting automated and they don’t. And they’re often lower entry jobs. But I also think that history tells us that there will be jobs that will come up. We just don’t know what they are yet. Doesn’t mean there’s not going to be pains in the middle.

There’s a lot of talk about productivity and it’s been fairly stagnant in Australia for the last decade. Could AI be our get out of jail card on productivity? We’re seeing some evidence in the US, some of the recent pickup in productivity late last year is being attributed to AI. Could that happen here?

I think it could. And certainly, as you say, some people attribute recent pickup to that. And I sort of, I think I’ve described myself as a productivity optimist. I think there is potential for AI to improve productivity, take out those low-level tasks. I mean, even internally we’ve discovered, we’re not getting rid of people, but we’re finding that people can automate some low-level tasks and they can concentrate on analytics. So a very simple example of this, we’ve developed a little bot utilising AI to access all our liaison notes since 2001 and draw themes out of it. So that means that we don’t have an analyst sitting there going through every single note trying to draw out themes. They can get the bot to do it and then they can use that to advance their own analysis. So I think those sorts of things will help to improve productivity. And I’m sure that many businesses around here are looking for similar sorts of uses of AI to assist their, not only to take cost out, but also to assist their teams to concentrate on what is important and what’s more commercially important.

If we can’t revive productivity, it looks like the speed limit on the Australian economy is only about 2 per cent or so according to your sort of RBA forecast. What are the implications of that more broadly, if we can only grow at that sort of modest rate?

The implications are that we can’t have demand growing at basically more than 2 per cent, which means that people can’t consume, investment can’t grow because it’s putting too much pressure on the supply capacity of the economy. Ironically, investment is needed to advance the supply capacity of the economy as well. But demand, you know, we’re used to sort of growth rates of 2.5 to 3 per cent in Australia. Unless we can get better productivity growth, we’re not going to be seeing that. We’re going to be seeing sluggish, sluggish growth.

I know you’re not in the habit of giving free advice to governments on specific policies, but we do have federal and state government budgets coming up over the next three to four months. In a general sort of gist, what would you be hoping to see connected to that sort of productivity theme?

I’d be hoping. Well, a couple of things. I think, at least from what they say, I think most governments are very conscious of a few issues. One is productivity, another is housing, which is a really important part of, important to the Australian people, and rightly so. Another issue is inflation. I think they’re all conscious of inflation. But as I’ve said earlier, governments have difficult jobs, they have to provide infrastructure, they have to provide services. What I guess I’d be asking for them to do is just to, in thinking about that, in thinking about their spending plans and their infrastructure plans, where can they be making those investments that might assist productivity and where can they be looking to remove regulations and frictions that are preventing perhaps mobility, mobility of labour, those sorts of things that might help with productivity? So I have no specific asks for them, but just for them to keep those things at front of mind.

Some of the state government infrastructure projects, there’s a lot of spending at the moment. Private sector business investment is recovering. We’re running into capacity constraints in terms of labour, resources, materials for all those sort of similar projects. Are they sort of, is there a risk of crowding out there from those state infrastructure projects against private sector activity?

I think that’s sort of, in the construction sector, we hear that that is happening in some areas. So there is a bit of a crossover between, not so much detached housing, but high density and state infrastructure projects and Commonwealth infrastructure projects. There is a crossover between the resources required there. So we hear that that is making it difficult in those sorts of circumstances. So, yes, I think, and that’s when I say that, when I talk about, in a very generic sense, demand is excess to the ability of the economy to supply. I think the construction industry is a concrete example of where you can see that pressure building.

We’ve got a question on Slido here from the audience and I’ll sort of succinctly summarise it. You cut interest rates three times last year. With what we know now about the resurgence in inflation, unemployment remaining low, was it premature to do all those three rate cuts? Did we do too much too early? Was there some sort of error or mistake there?

Interestingly, when we were easing during that period, people were expecting we would ease further. So we weren’t the only people, quite frankly, thinking that inflation was coming back down to target and we were seeing relatively weak growth in demand. And so when we were sort of, did those three rate cuts, if we hadn’t been doing those three rate cuts, I suspect people would be saying inflation’s back in the target band. What are you doing? You’re late. So hindsight is a wonderful thing. I think what we were doing was following what we thought was the most, at that time was the most likely outcome, our central forecast for the economy. And therefore what we were doing was, I think at the time, right. What we’ve subsequently found out, of course, is that there was stronger demand in the second half than we’d initially thought so we’ve had to revise our forecasts and we’ve had to change our outlook on interest rates based on that. And I think that’s what you’d expect us to do if circumstances change and we get new information. You’d expect us to react if it’s not going the direction we think thought it would. So I can’t say that our forecast will be right this time. Forecasting is inherently difficult and I hope I gave a bit of a flavour of that in my speech. But we’ve got to do it, we’ve got to do our best and we have to be prepared if we think we’re going to be wrong to change direction.

Unemployment is a low 4.1 per cent, the Reserve Bank’s latest estimate of full employment or the so called non-accelerating inflation rate of unemployment is 4.6 per cent. It’s quite a bit higher. Does that mean in all likelihood to get inflation back to the 2.5 per cent band when unemployment is going to have to rise to around that sort of level, and are you prepared to take it there if you need to, to get inflation back to the target band?

Well, we’ve got. If the labour market remains tight and there’s continued pressure on inflation, then one of the things that’s going to happen, is the unemployment rate will probably have to rise. I want to be clear here though that people often say, when I say the unemployment rate has to rise, they do a quick calculation in their head and they say Michele wants 100,000 people to lose their jobs. No, that’s not what I want. I clearly don’t want that. The unemployment rate can rise for a variety of reasons, not because people are necessarily losing their jobs, that people are finding it harder to find jobs, the skills mismatches, they might find that the skills they have are not required so they find themselves unable to get a job for that reason. So it’s a subtle point, but it’s an important point. The unemployment rate rises, it will ease a bit of pressure on the labour market and that will ultimately help to bring inflation down. In a sense, we talk about this nebulous concept of excess demand and the way it really manifests itself in a very concrete way is in the labour market. So we can’t measure precisely the excess demand gap, we can’t measure precisely the so called NAIRU, but we look at a lot of labour market indicators and all of those help us to assess whether we think the labour market is tight and that’s telling us something about the supply capacity of the economy.

Just briefly, on the currency in trade weighted terms, it’s up about 6 per cent in recent times, which is quite a jump in a short amount of time. How’s the RBA thinking about that in terms of putting downward pressure on inflation?

So this is actually again, quite a subtle point. Our estimates suggest that the appreciation in the currency is simply reflecting what we would expect to happen to the currency with the interest rate differentials moving the way they are. Our interest rates are rising relative to others. Interest rate differentials rising, and that means that that will result in a rise in the currency. And it looks to be moving in the same way it has historically. That is part of the normal transmission mechanism of monetary policy, one of the ways in which it impacts. So we don’t think it’s doing anything out of the ordinary at this time. We think it’s just doing what it normally does in response to interest differentials.

We are just about out of time, Governor. But on a slightly lighter note, I know you’re a keen runner, swimmer, I believe as well. Have you got any upcoming events you’re training? How does that sort of influence your sort of mental and physical state to be in the office? Is it part of your sort of routine as well?

Yeah, no, I try to get out in the, I didn’t this morning. I had to study.

You passed the exam.

But I would normally try to do something a bit of a run or a bit of exercise in the morning before I, but I’m training for a half marathon in May, John, so I’ve got to get out and get more running done.

I think we cheekily tracked down a photo of you running a half marathon around the time you were named governor as well. So photographers take note. Michele Bullock, RBA Governor, thanks very much for joining us at the Financial Review Business Summit. Great to have you here.

Thanks John. Thank you.