Transcript of Question & Answer Session Climate Change and Central Banks

Thank you, Michele. I have two questions, if I can. One is: what’s on your priority list when you take on as Governor in three weeks’ time? What would you like to tackle first? And, secondly, earlier this month at Jackson Hole, we heard a whole bunch of central bankers talking about ‘higher for longer’ interest rates globally. Do you have any views on what we can expect in Australia, if we are going to see interest rates staying high for a period of time, even here? Thank you.

On your second question, I hope you’re not asking me to give forward guidance. But on that point, I think all central banks at the moment are grappling with how much further they need to go, the persistence of inflation particularly core services inflation and whether or not they’ve done enough or whether there remains a little bit more to be done. I’m reluctant to give any sort of predictions on how long interest rates might have to stay high. In Australia’s case, all I can say is that we may have to raise interest rates again. But we’re watching the data very carefully and we’ll be taking decisions – for the time being, until next year at least – month by month. On your first question, my priorities: it’s probably unsurprising to say my first priority is to keep very focused on inflation. Inflation is still too high in Australia. It is coming down and we’re forecasting it to continue to come down, but it’s still too high, so the first priority is still to maintain a focus on bringing inflation back down to target. My second priority: as you know, the Bank went through a review earlier this year and there was a lot of changes recommended in that review. In particular, changes to our monetary policy processes and frameworks – so there’s a priority in bedding that down. But there’s an equally important priority, which is to do with culture and leadership in the Bank. And one very important focus for me when I take up duties for the next few months, is going to be working on getting action on that culture, in basically getting a culture of sharing and debate and respectful challenge – and that’s something that I’m very, very passionate about, and I’m quite determined that that’s one of my priorities.

Firstly, thank you for a wonderful and very insightful and informative presentation. Second, I just wanted to ask: obviously, climate has become a new hot topic, and I’m very grateful that it’s gotten the attention of the RBA and we’re finally addressing the risks that climate poses. But the fact is that climate is just one of many planetary boundaries that we’re breaching at the moment. We’ve got issues of biodiversity loss, nutrient and phosphorous overflows, plastic pollution and you can go on. So how can our institutions, how can the RBA – how can we actually incorporate these issues, from a holistic point of view, into our solutions?

Thank you. It’s a very good question and I think everyone is grappling with that. I think climate change and ‘greening’, if you like, has been the first priority but, increasingly, what we’re seeing is that governments and organisations are broadening themselves out to sustainability more broadly, which I would suggest incorporates all the sorts of things that you are talking about. We’re less progressed on that sort of thing, but progress is being made, working on international sustainability standards, which are the sorts of things that, again – one of the first things we’ve got to get in these circumstances is transparency. We’ve got to have information about what – just like, for example, taking the case of emissions, we need transparent information from companies on what their emissions footprint looks like, and we need the same sort of thing broadening out for sustainability. So I think we are moving in that direction, it is becoming more holistic, but it’s true that much more work has been done on the greening side at the moment.

Good evening. Thank you for your lecture. More than 50 years ago, we had the publication ‘Limits to Growth’, and current scenarios show that relative decoupling would not help us meet the Paris Agreement targets. You spoke about scenarios and scenario analogies, so my question is: do you think we should include, in the scenarios analogies and relative policies, ‘Limits to Growth’ consideration and measure of economic prosperity that would go beyond GDP growth?

If I interpret your question correctly, you’re asking whether or not GDP is an appropriate measure to consider the impacts of climate change. Is that your question? I think the government is actually doing a little bit of work on this at the moment. I mean, GDP is sort of the best thing we’ve got at the moment, I think. But the government is doing a little bit of work on this topic of whether or not you can broaden out a consideration of what matters, if you like, to a country. I think, though, in terms of the scenarios we’re doing at the moment, in terms of monetary policy, the relevance, the importance, actually rests in GDP. It’s in demand and supply because that’s what influences inflation. I think, from our perspective, the focus still remains on production and supply.

Thank you, Michele. The pre-pandemic era was sort of characterised by a lot of positive supply shocks in the economy: globalisation, technology, the entry of millions of people from Chinese and other developing economies into the global labour market. Now we seem to be tackling or dealing with negative supply shocks, such as the ones you’ve outlined in your speech on climate: the energy transition. Your former supervisor at the London School of Economics has also spoken about the ‘great demographic reversal’ as being another negative supply shock, with China peaking, its working-age population shrinking and globalisation going to into reverse. So, do you think there is a risk that, with these negative supply shocks, we are heading for a world of higher structural inflation and, therefore, higher policy rates?

No, I don’t think, necessarily. But to your point – and the current Governor has spoken about this before – to the extent that productivity isn’t growing as quickly as it has in the past because of some of these factors that you’ve mentioned, it does mean that, to bring inflation down, we need wages growing at a slower pace than they have in the past. So, it does have implications, if you like, for lower productivity, a smaller pie, less for people to take a bite of the pie. So, I think that’s the main influence there; it’s that we need to get productivity up. And some of those influences that might be bringing it down: I think we need to lean into policies that improve productivity and increase the size of the pie, and that means more for everyone in the Australian society to consume.

Thank you so much for your lecture. You had a chart there with housing prices and the physical risk and how that will affect them across Australia. It was interesting that they were mainly concentrated in areas that are highly dependent on commodity exports, like WA and Queensland. Together with the lower demand for those commodities, given the transition to zero emissions and so forth, will that amplify the overall effect; and what is the associated risk from that for economic growth and price stability?

If I interpret your question correctly, I think what you’re talking about is the potential impact of structural change and the impact that’s going to have on workforces that work in particular areas. And it’s true that, if you have climate change and it’s impacting different regions in different ways, then, as I said earlier, some local communities are going to be affected much more than others. And the flexibility of the labour market to move to where the jobs are and get the skills that they need: that’s going to be really important in that context.

Hi. Thank you so much for your wonderful lecture. I just have some questions about the labour market and unemployment; obviously, the RBA has a mandate on inflation but is it specifically interested also in the labour market. How do you think climate change will affect labour productivity, structural unemployment and, potentially, even Australia’s NAIRU rate?

There is a suggestion that climate change – the Intergenerational Report highlighted that, with climate change and rising temperatures, it’s quite possible that labour productivity in some industries will decline; and it’s quite possible that, if potential output is lowered, unemployment will be higher. But that doesn’t mean that we have to accept those circumstances. There can be policies. There’s lots of work going to be generated in areas, which are new technologies, new areas, new low-emissions industries, in which there’ll be a need for labour. So, there’s going to be a really important role in making sure that we can retrain and move labour from areas where perhaps it’s not valued any more or it’s not useful and move it to areas where it is. So, there’s a role for government policy here. And, look, this won’t happen overnight. There might well be frictions and pains as we end up with this structural shift. But if you look back over the history and you look at the way technology moves on – the example I used to use was the typing pool. When I started work, there was a typing pool of something like 50 people typing. We don’t have them anymore; they do other things. So, people will move ultimately; there might be some short-term disruption. But ultimately, I think there’s a role for government in making sure that people can move from areas where perhaps the jobs that they used to have in the high-emissions areas are no longer there and how do we move them into areas where they’re now in demand.

Thank you, Michele. I was curious. We spoke a bit about how insurers were going to change their appetite for risks. I wanted to know: has there already been a change in the appetite for risk from the banking sector in how they could manage more risky investments that are affected by climate change?

I don’t think the banks have necessarily changed their appetite for risk. I think one of the things that came out of the CVA is that they’re not really highly exposed to the high-emissions areas. But I think it’s increasingly likely that, as climate change starts to bite more, they might start to look more closely at their portfolios. But at the moment I think they’re not actually heavily exposed to these areas.

Hello. Thanks a lot for your lecture. I was just wondering: as the lecture was more focused on climate change, do you have any comments on modern monetary theory paying for the Green New Deal?

I’d only say: no particular comments on that. But I would say that I think the traditional approach at the moment, our framework for monetary policy, is very much one of using monetary policy to control the interest rate, which impacts financial conditions, hence demand and hence inflation. I wouldn’t have any comments on modern monetary theory to be used for greening, no.

Hi, Deputy Governor. Thanks for your talk. You referred to tipping points and irreversible change in this potentially dire future scenario. I’m just curious to know: in your mind, when it comes to the debate around a flexible inflation target and the extent to which that guides monetary policy, what are the flash points economically or in terms of climate change that are likely to shape that debate?

Flash points. Well, there’s nothing monetary policy can do about any of that. All monetary policy can do, as I said earlier, is try and maintain low and stable inflation, price stability, because that then allows businesses and governments to make decisions associated with the transition to a low-emissions economy with much more certainty, without worrying about inflation. So, I don’t think there’s much in that particular issue for monetary policy itself. It doesn’t mean that there isn’t something in it for others, but our job to keep inflation low and stable is very important in that context to allow others to get on with decision-making, with a minimum of uncertainty about inflation.