Transcript of Question & Answer Session Monetary Policy in an Era of Shocks

Governor Bullock, thank you very much for your speech. Let’s go back to May. The RBA’s forecast for inflation was pushed up, headline 4.8 per cent and you’re thinking that trimmed mean could be around the 4 per cent mark, maybe a little bit lower. As you suggested, the monthly data has basically been in line at the trim level, but the headline’s kind of come in a lot lower. So the market has moved away from an August rate hike and the consensus on the buy side and sell side thinks you don’t move again, however my forecast is still that the trimmed mean in the next print tomorrow on a quarterly run rate is about .9 or 1.25, about 3.8 in the year, which is broadly in line with your forecast, and I think the RBA still hikes at its next meeting in August. Would you agree with my assessment that the RBA’s next meeting is live?

You’re very entitled to your opinion. Look, all you’ve highlighted really is that inflation is still too high, but we are seeing the economy slow, we are seeing consumption slow and we have seen the housing market slow more than we were expecting at the time of our May forecast. It will be interesting to see, there is going to be some flow-on effects so you are going to see some impacts on underlying inflation. There’s going to be no doubt about that. We can’t do anything about that. That’s going to be cost increases flowing through. The question is what happens after that. Do they continue to increase or does it start to come off, and so the information tomorrow will be part of that that we’ll be looking at but I think it’s also - in terms of what we’ve seen in terms of the economy it’s pretty much in line with where we thought it was going to be in the May forecast. We’ll wait and see tomorrow.

Thanks for your time, Michele. With last year’s rate cuts receiving some criticism for prioritising full employment, I was wondering what are your thoughts on the arguments that unemployment should be considered a micro economic concern and be left as supply side reform to sustainably reduce the NAIRU, meaning the RBA could focus solely on inflation which would allow for the more effective management given the dual mandate forces the RBA to deal with two inversely related objectives with one policy instrument.

Thanks. Great question. As usual the most difficult ones come from the students. Controlling inflation and keeping unemployment at a sustainably low level aren’t necessarily inconsistent with one another and in fact I would argue that if you want sustainably good growth and employment and low unemployment rate you need low and stable inflation because that’s the circumstances in which businesses and households can get about their business without worrying about inflation all the time. Our mandate does have employment in it, as you pointed out - but it’s sustainable full employment. So it recognises that we can’t do anything necessarily about the structural part of the unemployment if there’s skills mismatches and those sorts of things, that’s for other policies to deal with. But I think it’s fair to ask us to take into account what we’re doing to the employment market while we’re bringing inflation down. I think that’s a fair way to think about the way we should conduct policy and the reason I think that is because, yes, ultimately we’ve really got to make sure we control inflation, but if we can do that in a way that preserves employment, I think that’s really valuable to the people who are employed. So I think there is a good part of having that part of our mandate, but I agree that if push comes to shove and we really need to get inflation down that’s where we have to concentrate.

Thank you, Governor, for the speech. Kevin Warsh, the new Fed chair, seems to be less of a fan of transparency and is looking to make changes there. The Reserve Bank has obviously had a lot of changes in recent years. You give press conferences but you give fewer speeches like this, there’s more detail in forecasts but studiously avoid giving forward guidance. What would you like to change about transparency in the RBA?

There’s probably nothing I would change about the transparency. I think there is a need for the Central Bank as an independent body to be explaining itself and be explaining itself in terms that people can understand. I think one of the things that we have done in terms of transparency at the Bank in recent years started before I was Governor, is to try and recognise that we are talking to different sorts of people. We’re talking everyone from analysts to traders to the media to our parents, so I think there is a need for us to be transparent. I think generally the reforms we have done have been good in that respect. I think Kevin Warsh’s - I don’t know him, but my understanding at least at the moment is that he doesn’t want to be drawn into forward guidance, and I entirely agree with that.

Good afternoon, Governor, it’s been a pleasure sitting in the audience of this for the past three years and hearing your discussion about inflation and the fiscal side. What really caught my eye in today’s speech was your remark towards the end saying some further easing in the growth of demand was needed, and I’m just wondering if you could elaborate a little bit about that and on the other side of that, do you think the fiscal authority is also of that view, because one way you could reconcile the inflation we’ve seen is the fiscal side operating almost as a counter to some of the monetary tightening that we’ve seen to date.

The only thing I’m pointing out there is that as growth is slowing there’s a lot of commentary about, oh, no, growth is slowing, but we assess at the moment that we have demand in excess of supply. So the growth of demand has to slow in order to bring it down so it’s not growing more quickly than supply is growing and generating that inflationary pressure. So the point I guess I was trying to get people to take away was that this is part of the plan. This is what interest rates are designed to do. They’re designed to slow demand so that it’s more in line with growth in supply and we alleviate those pressures. Now, can you do that in different ways, interests rates is one way of doing it, another way is to, as you say, decrease aggregate demand, growth in aggregate demand by using fiscal policy. As I’ve said on many occasions in the past those are matters for the government. They have to make decisions. They are elected by the Australian people and they have to make decisions on what they are going to spend money on and how much money to spend it on. So I refrain from offering advice on that, but mechanically you’re right. It’s part of aggregate demand and that’s another way to bring aggregate demand, what do you spend less on, that’s for governments.

Hi Governor, Stella from Reuters. At the last meeting you said the Board felt it had space to watch what’s happening with the Middle East conflict. Is that space still there or is it running out, especially given the rise in oil prices.

When I said I had space, you will recall at the time we had increased interest rates three meetings in a row, February, March and May. That was 75 basis points. We took back all the easing from the previous year and we felt that there was an opportunity then, having done that, to see whether or not the conflict was going to continue. I would have to say it’s still pretty uncertain and if you look at some of our scenarios in the May SMP you will see that in the adverse scenario where oil prices go up really high and stay up quite high, that not only has a big impact on inflation, it also has a big impact on growth. So I don’t know what the Board is going to decide at its next meeting, but I do know that they will be focused - obviously tomorrow’s information will be important for us in thinking about those inflationary pressures. We’re redoing our forecasts and our baseline forecasts will be important there as well, and what it’s going to come down to is whether or not the Board thinks that interest rates are at a level that they’re restrictive and that they are going to bring inflation down sustainably within a reasonable time period. That still will remain the decision the Board is making, but if it looks like that inflation is not coming down then I think the Board have some difficult decisions to make in terms of raising interest rates.

Thank you very much for the speech. In the context of what you just said about a reasonable time period and also referencing back to the speech you just gave, the trim mean has now been above the mid-point of your target band for a little over four years. Does it make any difference to the central bank, to the Reserve Bank Board’s reaction function, that you’ve already been above target now for four years and you’re forecasting you won’t get back for another two? Or can we think of it as bygones be bygones, you’re a forward-looking inflation targeting central bank, you don’t worry about price level targeting. Does it make any difference to the reaction function that you’ve already been above target for the past four years?

I think technically we might have come back into target at least for one or two quarters, but we’ve been -

To the mid-point. The trim mean hasn’t been at the mid-point.

It hasn’t been at the mid-point but it has come back under three. So I think it’s a cautionary tale for the Board. As I said, though, and I’ve said before, things changed in the back half of last year and the Board responded, and they demonstrated that they were prepared to respond, and I would say quite firmly. So I would agree with you that the longer it is out of target the more concerned that the Board becomes, and I think it is quite at the front of their minds that at the moment in the May forecast I think we had it coming back under three sort of towards of end of ‘27 and that’s a long time to be above target. Yes, I think it is focusing the Board’s mind and I also think that if - well, let’s just hope there’s no more shocks. I think the challenge is that if we end up with more coming on the oil price side of things then I personally worry that this starts to get ingrained and this is this issue about we always talk about long-term inflation expectations being anchored, they are, but short-term expectations matter as well. So I think there is - the point you raise I think is a very important one and I think that is something that the Board is concerned about.

Governor, Ross Greenwood from News 24, formerly Sky News. I just want to follow on with Paul’s question, that is if you go to the past decade, so if we go there 120 months you’ve barely been in the underlying inflation rate in that target band for barely nine months over that period of time, maybe 12, but not very much time at all. Does that imply that there have been errors made in forecasting, errors made in monetary policy or indeed that the target band itself is wrong and not fit for purpose for Australia?

Let me go to the first one. I think the target band is fit for purpose and I think if you recall back prior to COVID we had the opposite problem, we were consistently below target. What does it imply? I think it just demonstrates that forecasting - we have to do it, but it’s inherently uncertain. We do the best we can because we can’t just look in the rear vision mirror and look at the data and that tells us where we’re starting from, but we still need to be forward-looking. Do we get forecasts wrong? Yes, we do. Everyone does. But we still have to do them and we still have to make the best decisions we can make based on those forecasts. So I would like to be able to say that, you know, our forecasts - we’re really, really confident with our forecasts. The further out we go the harder it gets. The best we can do is be responsive and adaptive as things change and I think we demonstrated that earlier this year when things moved differently than we thought they were going to do and we responded.

Governor, thank you so much for your remarks today. As much as I want to ask you about what comes next, I won’t do that, I want to ask you about what has happened. Why has Australia’s inflation trajectory for the last 12 months been so different from our peers. Go back to Feb this year, you hiked rates while the market was still pricing cuts from the Fed reserve. Why have we been so different?

I think we’ve been different because we didn’t end up with a negative output gap. If you look at some of the countries that we sometimes compare ourselves, our peers in Canada and New Zealand in particular, they increased interest rates more than we did but they’ve also got negative output gaps and much higher unemployment rates than we had. We tried consciously with a strategy to bring inflation down, but without raising the unemployment rate too quickly and too sharply. So I think that’s why we look different and we’re coming from a different position than other countries. They’re coming from that negative and we’re coming from a positive demand gap. That would be my reason.

Michael Janda from ABC News. Your survey shows inflation is the biggest concern for most Australians, but it also shows most of those Australians think you’re contributing to it by raising interest rates. Do they have a point?

I think that’s a correlation versus causation question. It doesn’t surprise me in a way because when inflation is high interest rates tend to be rising, so people tend to think - and the other reason I think is because people who have mortgages at least they see increases in interest rates as an increase in the cost of living, but it’s not really. So interest rates are the response to high inflation, they’re not causing high inflation. I think what it demonstrates is that we need to be doing a better job of getting out there and trying to explain to people in simple terms what’s going on and how monetary policy by raising interest rates impacts the economy, and we have been trying to do that and at least part of the purpose of that survey was to try and get an idea of the sorts of issues that we need to be educating people more on, and the demographics of the people we need to be educating. Who are the people that would like more information and we’re not managing to deliver it to them? So I understand that that is the perception, but we’ve got to do better at explaining to people why higher interest rates are not causing inflation, in fact it’s the other way around.

Just a question about - you mentioned before commodity price volatility as something which is clouding the outlook, but a lot of that was tied to war. My question I guess is about AI, how that’s relating to commodity price volatility and how central bankers are thinking about that because you do have the Fed’s Warsh very focused on AI capex as pretty much the lion’s share of what’s happening in the US. It seems to me that there is some sensitivity obviously of rates there to what’s happening with copper and memory and things like that. How does the RBA think about that given their data centres, while growing, are actually a very small share of GDP?

Certainly in terms of Australia and the impact of data centre investment and build-out in Australia what it does to aggregate demand and inflation, because most of the inputs are imported it doesn’t really add - it’s not a big push on resources in this economy as it might be. I mean, there is a lot of chip inflation, a lot of expense going into this and interestingly when I talk to colleagues overseas, and in particular Korean colleagues, they will make the point that all the bad impacts of the Middle East conflict are completely swamped by the chip story for South Korea. South Korea is booming. But in terms of aggregate demand it’s not really, because it’s basically imported. Where we might see it showing up is in construction to the extent that there’s contention of some resources, some trades and so on. It might show up in inflation there so we’re watching that. More broadly in terms of your question about Kevin and what might happen over the medium term with AI, I think it’s all very uncertain. I think it’s possible that investment will increase pressure in various questions, not just this one. Ultimately will there be productivity improvements? Possibly, but they might be further out. So how these things sort of interact and the timing of it I think remains very uncertain.

Luca Ittimani from The Guardian. Just picking up from that, data centres obviously playing a big role in investment in Australia at the moment, but if you exclude data centres how does the RBA see business investment in Australia at the moment? How is it responding to rates? What do you see going forward?

Business investment is - a lot of the business investment is in data centres, there’s a little bit in renewables as well, but I think probably we would like to see more business investment. We don’t think it’s - and partly it’s not so much rates. I don’t think we feel that interest rates necessarily are the prime determinant of investment, but it’s more about businesses’ expectations of what they see for future demand. Are they seeing demand for their services or goods that they can invest and deliver into the future, if you like. So I think we still do need more investment and it’s clear we need more investment because productivity is not really growing and what we really need to do is see businesses leaning into investment to increase the amount of capital, perhaps, that they’re offering their labour so that labour will become more productive, and looking at ways to better improve the efficiency of the labour capital combination for production. So it’s not - outside those couple of areas I would say business investment isn’t shooting the lights out and that’s why I personally think getting inflation down and low and stable is critical because businesses do better in environments where they’re not worrying about cost pressures all the time.

Okay. Thank you for the time, thank you Governor for the speech. I would love to ask about the long-term inflation expectations and whether you’re as skeptical of that as I am, but you said a moment ago that the decision the Board will have to make is about whether conditions are tight enough to bring inflation back down to target. What I’m wondering is whether the budget, and some of the implications for credit growth et cetera that flow from that change your assessment of financial conditions and in that way have a bearing on your thinking?

So I think the answer is yes, we are watching that and the housing market is a bit of a litmus test in some sense. We are seeing commitments come off, we are fully expecting that credit is going to follow and that is all part - we talk about the cash rate, but there’s a whole lot of things we consider in terms of whether financial conditions are tight or accommodative. It doesn’t seem to be any sign that the banks themselves are holding back on credit so it doesn’t seem to be a supply thing, it seems to be more a demand thing. I think a lot of it is going to depend, certainly in the housing market, on how soon people get their confidence back. There’s obviously a lot going on and I expect that things will settle down, people will get used to the new rules, hopefully the conflict overseas will die down and they will get a bit more confidence, prices might lower a bit and people might feel more confident and come back into the market. It is something we’re watching, but at the moment I would say we think we are on the restrictive side a bit, maybe not dramatically, but we are on the restrictive side. But the credit thing I think we do need to just be a little bit careful to watch how things pan out after all these other bits and pieces die down.