Transcript of Question & Answer Session Economic Conditions and the Outlook

I’ll get my phone out here and I always like to make it clear that I’m not checking the latest updates from Truth Social about a swift end to the situation that Ian described before but checking the Pigeonhole to see your questions coming through. So if you do have those questions and reflections on Ian’s remarks, please do send those through. I can see a few coming in already and feel free to vote on the ones that resonate most to you and we can bring those forth. But just to get us started. First of all, thank you, Ian, for those remarks and reflections and sharing your perspectives on the workings of monetary policy over time and how things have changed and what those objectives have been. I think one of the really interesting points that you raised and that came out in a Statement of Monetary Policy and the Board’s Meeting Minutes as well was how when capacity pressures are elevated you see different dynamics, in terms of the pass through of inflation. I’m wondering if the Board discussed at all or if there was any evidence brought to bear in terms of the other side of that, and what I’m referring to is the transmission of monetary policy. In these sorts of circumstances and conditions are we still seeing that sort of long and variable lag for monetary policy? Does it take longer? Does the Bank need to work harder for a sort of given level of effect to take change and address some of those challenges that you laid out?

The question of how monetary policy is transmitted and the impact on the way through and different parts of the economy is certainly something that the Monetary Policy Board discusses and, if you like, quizzes the experts who bring forward their advice from the Bank staff. We talk about all of that.

The question specifically, whether that mechanism has sort of changed or altered by current circumstances, that’s something that I think is a better question addressed by the Bank staff who are advising us.

I want to make the point again as I have made that my job, even though I’m a professional economist and I might have my own views about that particular question, at the end of the day as a Board member my job is to make a decision based upon the information that’s presented before me and the same is true of the other members and we all do exactly that.

Which doesn’t mean that we don’t ask questions and in fact the experience I’ve had, certainly it’s true currently, is that if individual Board members would like to take up a technical issue like that one for instance or pursue it further with the Bank staff, with Dr Sarah Hunter and her team, then the Governor is perfectly happy for that to happen.

Very good. One of the questions that’s coming through and getting some votes in the Q&A is around financial markets. I know this was discussed. It was in the minutes from the last meeting. So wondering if you could share some insights into that discussion in terms of how the Board is thinking about this dynamic where we’re seeing very strong financial markets results in light of some of these challenges as you’ve laid out with respect to geopolitical uncertainty and that hasn’t just been a story this year. We saw that last year as well, but particularly in light of some of the conflict in the Middle East. Markets are sort of shrugging that off. What was the deliberations and conversations at the Board about some of those dynamics?

On the market side of things the Board receives advice from Dr Chris Kent and his team. Obviously it’s very important for the Board to know how the market is responding and how the market is viewing the circumstances. There are a lot of very bright people in the markets looking at these issues and as you know they’ve got their money and your money and my money at stake in managing through this.

Having said all that, it’s not always true the market is right. So we need to know what the market thinks. We need to know again from the intelligence that we receive via the Bank and via other mechanisms of consultation that the Bank operates, how people are describing this.

What are they saying? What do they think about what’s driving it? Why do they have this view? That then becomes part of the information that we take onboard when we make a decision.

The market obviously is watching the Bank very closely and the Board as it in turn watches the market. That’s the dynamic of this.

Ian, there’s a question here that’s receiving a lot of votes. I think given the historical lens you’ve brought to today’s question. I think what the question is really getting at is this question of the RBA’s target range of between 2 to 3 per cent and this question of whether given some of the structural head wins that we’re seeing, whether that target is appropriate and do we need to reconsider it.

Well, friends, you will appreciate that that is a question you need to address to the government. There is an agreement between the government and the Bank that the Bank will target it. Inflation between two and three - this is the headline inflation. Between 2 and 3 per cent, in particular, aiming at the midpoint of the target. That’s written down in an agreement between the Bank and the government.

So I elaborate a little bit on that point. Clearly the Reserve Bank has a measure of independence. It has more independence than just about any other statutory authority but it does not have the independence of the courts.

At the end of the day the Reserve Bank follows the legislation that’s put down by the Parliament and then the government has a separate agreement which reflects those broad powers with the Board as to what the government wants the Board to achieve. That’s our job. That’s the statement. That’s what we do.

So it really isn’t appropriate for me to say as it were to the boss, well, why are you giving me those instructions? Right. That’s not our role. We take the instructions from the government. We do the best we can with the machinery and the policies that we have at our disposal to deal with that.

That which includes, I was around that Board table when we did the emergency measures during COVID, when the overarching objective which was still there, in those days the wording of the Act was slightly different but it was still there.

I don’t mind sharing with you but in those few panicked early days, months really, of the COVID epidemic. That what comes to one’s mind is that statement about the economic welfare and prosperity of the Australian people.

And that was, I think, at the forefront of all of the Directors’ minds, all of the Board members’ minds, when we faced that question, what can the Bank do, what should the Board do with the machinery that the Bank has at its disposal, its balance sheet, the cash rate, right, in order to promote the economic prosperity and welfare of the Australian people at this time in these circumstances and we did.

Ian, one of the challenges I suppose that’s exacerbating the uncertainty that we have at the moment is some of the noise that you’re getting from some of the indicators and signals from the economy, and what I’m referring to here in particular and the Statement on Monetary Policy made a point of it, was some of these qualitative measures and some of the survey measures looking at sentiment among households, among businesses and how reliable and they are and what signal we can get from those looking forward about the direction of the economy and one of the points that the recent Statement on Monetary Policy pointed out was a weakening correlation between some of these sentiment issues and the signal that the Bank can glean from that about the direction of the economy. I’m wondering if you can share your perspectives or insights from the Board on how it weighs these qualitative pieces of information against some of those other hard pieces of data?

In a way you’ve answered your own question there. Firstly, that the Bank has a very extensive survey program and with the use of modern AI techniques is able to draw out the lessons from large numbers of conversation and produce a document which forms part of each set of Board papers that we see prior to every meeting of exactly that, a summary of the issues that people are raising. How they think about this. Right.

Then comes your question. What do we make of that in relation to the other data that are there? And I can almost as I speak to you now, I can almost hear Sarah saying these words about how much signal do we take from that? Right. I can almost hear her saying exactly that.

And so she, along with her team, will give the members of the Board her view on that and answer exactly your question. Right. Because, of course, if she doesn’t say that some Board member will say what you just said, well how much notice shall we take of this? And now it’s being less correlated and you’re like, exactly that.

So we’ll get a professional view from the staff and then some debate and comment from other directors and we put that all into the mix so it’s very important, I think, for people to understand that the Board receives a very systematic consistent - the Bank’s been doing this for a very long time. A very systematic, consistent view of what the survey evidence is saying.

Then, of course, comes the ABS data and what the market is saying. So it really is just the way you’re sitting there. You’re being asked to make a decision based upon all of this material and these views that are coming forward. The Bank itself has a view, it puts that forward. Then we make a decision based on all of that information. We don’t always agree but the decision is made.

How are you thinking about and have you had - or has the Board had any observations about the resilience of households in light of successive shocks? You mentioned that smoothing behaviour in your presentation.

Yeah. Well, the Board also gets a regular report on the financial stability of the Australian economy and that published in the Financial Stability Review, which is another of the documents that is publicly available. That information comes to the Board first.

So, of course, the Board doesn’t have sole responsibility for financial stability. It acts, if you like, in concert with some of the other agencies including APRA, the prudential regulatory agency and obviously the Treasury. But the Bank has an overarching role to be monitoring, concerning, supporting the financial stability of the Australian economy.

So we get those reports, and the extent to which that bears on the monetary policy decision that we make is a matter for discussion and judgment of the Board. The real issue is would you expect the Board, as it were, to go blindly into these decisions without any view or sense of what the resonance might be on things like the stability of the financial system which are highly correlated as you point out to the balance sheets of households, of firms, of banks, whether that’s something the Board wouldn’t take any notice of is just not true.

It’s all there. If you’re getting the impression, friends, that there’s a lot of information to be digested and get your head around then you’d be right about that.

That’s another reason why there are nine people there because in my time as you would expect you read these papers thoroughly. I’ve got a view. And then within the first 20 minutes somebody else has said something and I think, I didn’t think of that. Right. Where did that come from? Well, my colleagues are intelligent, educated, experienced person who reads it this way. Or say I read that paragraph five times and yet this other person has read it and said no, this. I think it means this.

Now, you’ve all had these experiences. No-one should be shocked by that. That’s what happens at the Bank Board. It’s a wonderful thing.

I might pause there and see if there are any questions from the floor. We have one there. Do we have a mic that we can use?

I know this is going to be probably a personal question, we’ll see if you can answer it. You’ve had one of the most important jobs, you being on the Board. You’ve affected millions of people’s lives, tens of millions. You’ve discussed how the Board has had disagreements and you’ve probably had arguments too, you never know. But over the time reflecting back as you prepare to leave, do you have any regrets or do you have feelings of you could have done less or maybe even more over those years? It’s a hard question.

Yeah. Well, it’s a good question. Thank you very much. Hindsight is a wonderful thing. And I would be - I think I’d - well, I would be lying to you if I said with hindsight and with the facts as they then emerged. Right. I wished I’d done something different. Even with the slide I showed you earlier on, I thought - my older son is a doctor and is remarkable at times how much coincidence there is in the sort of thing he has to do with his patients and I’m doing with my colleagues for the economy. I thought the patient’s temperature was coming down nicely. And I was thinking, along with my colleagues about recalibrating the dose. As the patient’s temperature came off. And so we did. We recalibrated the dose. The next thing I come back and the patient’s temperature has gone back up again. And all of my training and my intuition, my colleagues on the Board, we all thought now the task is not to over do this. Don’t go out the other side. This medication is good but don’t make the patient sicker by having too much of it. It looks like it’s fine. Pull back, ease off in case we go through the other side. Turn back the other way. Every parent and grandparent in the room knows what I’m talking about with a sick child. So if I’d known that information, if I knew this was going to happen, obviously you’d draw a different decision. So I think the answer is with hindsight there are things that I would have wished we’d done differently.

At the time if you ask me this on a different question which is, did I feel as though somehow I didn’t get enough information or somehow blindsided by this I would say emphatically never, never. Now I should say, of course, that the people who are giving us advice and in fact running the Bank, certainly the Governor, I hired the Governor. I’ve known the Governor since she was a graduate. I taught Dr Kent. I know these people. These are my professional colleagues. And I have not just confidence but admiration for what they bring to the Board. So I’ve never for a second felt that I was in some way blindsided, on the contrary. I’d like to give you members of the public every confidence that this institution runs well. It is well run. And the members of the Board, you can ask the others, they’ll give you their own answer but from my perspective I’m proud of what they do and the institution is a strong institution.

When you see people talking about the advantages that Australia has, what are the advantages that are going to secure our future. Good question. Almost always on that list is strong public institutions. I have devoted my time on the Board, my friend, to making sure that as far as is within my power that I have tried earnestly to build public trust and security in the strength of that particular public institution that happened to be that I was associated with. One of the roles of a Board member in my view is to be exactly that. To be a steward of the institutions, so long as you’re there, and to build public trust in that.

I recently read a book written by Robert Reich. It’s a great read if you’re interested, former Labor Secretary in the United States. It’s called Coming Up Short, because he’s a man of 4 foot 9 stature which is interesting. But I underlined right towards the end of that book a statement that Reich made, if you are called to public service it is the responsibility of every patriot, I’m paraphrasing here, to ensure that during that time you do everything you can to build public trust in the public institution. I felt that’s my calling. Yes, I would have done things differently. Not that bit. In other cases I might have made different decisions but never to feel as though in some way the Bank had let me down. Thank you.

Thank you for sharing that, Ian. I night give you the opportunity to do a bit of fact setting and myth busting because there’s a question come in here and it’s very contemporary in terms of how the Reserve Bank is thinking about housing and, in particular, you mentioned the raft of information that you get when you’re making the decision. A couple of questions are asking about the weight that the Bank gives to changes in house prices and also thinking about the capacity signals that are coming through from construction activity. Could you give some insights into those areas?

Sure. The housing issue is very important for all Australians, we know that. It’s also true that monetary policy has an impact on the housing market. Obviously on the rates of interest that people pay on their mortgages and indirectly via that on the housing markets themselves and the prices of houses. That’s not a coincidence but it is not the primary objective of the Bank.

The Bank is not targeting house prices. The Bank’s task is to produce low and stable inflation which is the best thing it can do to keep employment at full employment. That’s the task, that’s the machinery that we have.

Monetary policy is transmitted to come back to an earlier question that Liam asked me, of course through the housing market an impact is there. But it’s also transmitted more broadly through the decisions that consumers make about how much they consume and save.

The decisions that businesses make way outside the housing market about how much they’re going to invest and where they’re going to invest and look at the cost of funds at an aggregate grand level the Bank’s monetary policy would be transmitted through the exchange rate which alters the relative price of exported goods, exportable goods or tradable goods, if you like, and non-tradable goods. Way beyond the housing market.

Is the housing market affected? Yes, it is. Do we get information about cost constraints and others in the housing market? Of course we do as part of a general view of the economy. Is the Bank targeting house prices? No, that’s not its task.

And while we’re on the subject what people get concerned about, maybe what’s happening with the housing market at the moment, can I point out that there are many other things that influence the housing market well beyond monetary policy, including recent decisions the government has announced, including people’s views about where the Middle East conflict might go.

All of these things will feed into decisions that people make about very important decisions on whether to buy a house or not or whether to stop renting or buy or whatever. So I think that’s where we are. The housing market is clearly discussed.

And one of the reasons that happens, again I should make this point, lots of people write to the Governor, and not just to Michele. I mean, she’s a very open and easy going person. Right upfront as she is on the screen, that’s the lady. What you see is what you get. Very open.

They write to her and they express their concerns. They did the same thing with Phillip. I have served under three Governors and the same thing with Glenn. People write as you expect them to do. Normally different people write.

So when interest rates are going down and getting very low you hear from the older generations and they complain about interest rates getting too low and they can’t eat. Interest rates go back the other way and you hear from the younger generation for obvious reasons.

The important thing is that we hear from these people as you would expect and the Governor will give us a bit of a response in addition to the survey evidence. She will, and so did Phil, just say, well, you know, I’ve been getting these letters and people are saying this and that. Expressing concerns here and there.

I don’t know how the Governor deals with each of these letters, that’s a matter for her and her team, but as far as the Board is concerned the idea that we are completely insulated from concerns of ordinary people, quite independently of what people say to me in the street. That’s another mechanism. But just at the Board table, the Governor will give us those responses.

So the housing, the prominence of that issue, concerns people have, clearly come to the Board table. At the end of the day the Bank’s task is to keep inflation low and stable. That’s the best thing the Bank can do to promote housing construction, the extent of which there is a supply side issue.

And it’s the best thing we can do to give people confidence about what might happen to prices and wages and incomes and all of that is that the Bank does their job. Keep inflation low and stable. When we’re serving the inflation objective and the employment objective and the economic prosperity and welfare of the people of Australia.

Thank you, Ian. I think the remark on the Bank’s overall objective and that low and stable inflation and the role that that plays in broader economic activity is a good point for me to bring this conversation to a close. I think we’ve covered a lot of ground today and certainly there are a lot of head wins, tail wins, pointing in different directions. You’ve given us a sense of where some of those directions might be and what might be coming next. And thank you for sharing those perspectives and the richness of your journey and your reflections on that journey. Please join me in thanking Professor Harper.