Transcript of Question & Answer Session Inflation and Recent Economic Data

Thanks very much, Dr Lowe. We’re going to take a seat here on stage and Phil—I know he doesn’t mind me calling him that; I think he prefers that rather than being called ‘governor’, so I’ll stick with that—he has agreed to take a few questions initially from me and then we’ll throw to other media and people on the floor as well. Phil, in your speech, you’ve hinted that—or you’ve suggested and said that the RBA is close to a pause and it’s going to basically be a month-by-month proposition now for the Bank on interest rates. What sort of economic conditions or data would you want to see to be reasonably confident that you could pause the interest rate hikes? And could I just add to that: is the US a cautionary tale? We saw J Powell, the US Federal Reserve Chairman, overnight saying, ‘We thought we were close, but now actually economic activity is picking up and we’re going to have to raise rates higher than what we thought.’

We are closer to a pause and it’s a matter of logic really: as you increase interest rates, you get closer to the point where it is appropriate to stop for a while and assess the flow of data. We’ve done a lot in a short period of time and, at some point, it’s going to be appropriate to sit still and assess the collective effects of that. Before our next Board meeting, we’ll have important data on employment, we’ll have another monthly inflation indicator, we’ll have more detail on retail spending, and the business survey. So they’re four really important pieces of data that we’ll look at in our next Board meeting. If collectively they suggest that the right thing is to pause, then we’ll do that; but if they suggest that we need to keep going, then we will do that. So we’ve got a completely open mind about what happens at the next Board meeting. Yesterday, we did discuss the lessons from overseas experience because, remember, a few months ago, people were saying … advanced economies were slowing down, inflation was coming down, the battle was won. Bond yields decline, and people were feeling more confident. And then, just recently, the data, the employment data particularly in the US and in Canada and some other countries, have been stronger, and you saw the response to that by the Fed yesterday. So it is a cautionary lesson. But Australia has some positives that a number of other Western countries don’t have: wages growth here in Australia is still not too high; there’s been a very big increase in labour force participation in Australia—as I said, a record high number of women and young kids. So right across the distribution there’s been a big increase in labour supply in Australia; that’s not the case in the US. And the other consideration that we’re giving weight to is the fact that Australians have a lot of variable rate debt. In the US, when the Federal Reserve raises their mortgage rates, if you’ve got an existing mortgage, you don’t pay more; in Australia, you do. So, if you put those things together, I think we’re in a better position than many other countries, but we need to pay attention to what’s going on overseas. So, if the global economy strengthens again, that will have implications for us.

You speak about a reasonable time frame to get inflation back into target. At the moment, the forecast is for inflation not to get back to around the upper end of that two to three per cent by mid-2025. Is that a reasonable time frame? I would be thinking you wouldn’t want to let it slip beyond that. That would be getting into a bit longer territory, I would have thought.

I agree with that. If inflation comes back to three per cent by mid-2025 and we can keep the unemployment below five per cent, that will be a fantastic outcome, won’t it? We’ve discussed the case for being even more aggressive with interest rates and trying to get inflation back to three per cent before the end of ‘25*. It would be possible to do that, but it would come at the cost of forgoing many of those gains in the labour force that I talked about before. And our judgement, at least at the moment, is that the benefits we would get from getting inflation back to three per cent six months earlier at the cost of a lot of job losses isn’t worth it. But I agree with you that we want to see inflation back to three per cent by ‘25; extending beyond that I think is getting too long. But to get it back more quickly, we give up jobs, and I don’t think it’s worth it.

(* should be ‘end of 2024’)

It’s definitely a balancing act. I’m going to throw one more Phil before I throw to the floor. The RBA review: it’s going to be handing its findings to the Treasurer at the end of this month and he’ll release the findings, I think, before the budget. Just going through it yourself, are there any lessons you’ve learned going through the process or reflections where you think, ‘Oh, maybe there’s a shortcoming or there’s something we could be doing better at the Bank?’ Have you seen, through that process, something where you’ve reflected and thought, ‘Well, actually there are things we could be doing better’?

Well, we could be doing communication better—I think many people would say that—so I’ll be looking forward to their advice on how to do that better. I think the forward guidance we gave during the pandemic has come with costs, hasn’t it? So how we communicate with the market: I think that’s the main thing I would be looking for. And there are a range of other issues that I know the review committee is looking at, but we’ll, perhaps at a future event, be able to talk about those.

Okay. Let’s throw it open to the floor. I know there’s some other media here …

Governor Lowe, last month you were described as a hawk; this month you’re being described as a dove. How can you change from one to the other so quickly?

Well, I can’t and I didn’t. I mean, the message from the Reserve Bank really since May last year is: inflation is too high; we need to keep raising interest rates, and we’re on a path to do that. In February, we were faced with surprisingly strong underlying inflation, and our forecasts were prepared on a technical assumption that interest rates would get to 3-3/4 per cent, which required a couple of extra increases from where we were. So the statement last month was drawing people’s attention to that and, yesterday, saying interest rates are still likely to go up further, but by when and how much we’ve got an open mind. So it’s very consistent messaging, although the nuances do change from month to month, as they should as the data changes, and the media and the financial markets sometimes overinterpret.

But the statement this month was very different to the statement last month; the amount of words was totally changed.

It was because we had—you know, this month was kind of a bumper month for data and, for the first time ever, we had the national accounts, inflation, wages and the labour force all in one month. And those data, on balance, were a bit softer than we had expected, and it’s appropriate that we modify our language as the data changes. We’re very much in a data-dependent world and, when the data changes, we’re going to change the language. But the underlying message has been the same: inflation is too high; we need to keep raising rates, and we will. When and how much remain to be determined.

Dr Lowe—if I can jump in next … thanks for taking questions from the media today. I just want to ask you: last month, you told the Senate Estimates Committee that you listen to Australians; you do receive their letters and you read them and you respond. I’m just wondering if it’s got far more serious in tone in the last week now. We’re hearing from suicide prevention agencies who have now arranged to meet with you to discuss their concerns; things out there in heartland are getting that serious. How much notice, how much recognition, how much do you listen to those sorts of messages as they come to you? And, secondly, given what those messages are though, given what you’ve said today, what can you really tell them, what can you really do, given you’re saying that, if you don’t keep the interest rate rising, the situation will get far worse?

Yes. I mean, that’s a difficult message, isn’t it, but it’s the truth. If inflation stays high, we know that will lead to higher interest rates, people losing jobs and more pain. That’s the reality we face. It’s an uncomfortable reality, but that’s the reality, and it’s a very difficult message for people to hear. At yesterday’s Board meeting, I went through with the Board the mails that I’d been receiving, and we discussed in quite a lot of detail the difficulties that many people are obviously facing who borrowed in recent times and are facing big increases in mortgages. People write to me how it’s affecting their families and their mental health and, as I said, in the next month I’m meeting with Suicide Prevention and Lifeline to talk about what they’re hearing as well. So we’re very alert to that and it weighs heavily on my heart and the hearts of the Board members. But at the same time we know that, if we don’t get on top of inflation: higher interest rates, more unemployment, more pain. We think we can navigate this narrow path and bring inflation down and keep many of the gains in the labour market; but, if we don’t get inflation down, we’ll be in all sorts of trouble. So that’s a difficult message at an individual level and it weighs on us a lot, and I read the many letters and often I respond to them. But it’s interesting: we’ve also been receiving letters recently, saying—this is the first time since I’ve been the Governor—‘Thank you for preserving the value of money,’ because there are parts of the community who know how damaging inflation is. So it’s a difficult time.

You acknowledged in your speech the effects of high interest rates are felt unevenly across the community. Obviously, the whole point is to try to reduce spending, and we can clearly see the impact on low- and middle-income mortgage holders and, indirectly, as a result, renters. The question many people are asking though is: what about the top end of town? You did touch on this in your speech, but how are you encouraging the top end of town to reduce their spending? To illustrate that point—in a cheeky way, I suppose—have you personally felt the need to rein in your spending in recent months?

Well, I’m just one person in 26 million, so my personal circumstances aren’t going to affect the aggregate, are they? It’s difficult because monetary policy is falling unevenly across the community, and the people who are being most affected are people who borrowed in recent times and are having to pay higher mortgage payments, so that’s where the effect is being most felt. But higher interest rates have diffuse effects elsewhere. Just imagine if we had not raised rates; where do you think the exchange rate would be? Much lower; you’d have more inflation. The higher interest rates do encourage people to save a bit more. You can now, if you shop around—and please shop around for deposits—you can get high fours … per cent on your savings. So shop around, that increases the incentive to save. And housing prices have fallen partly because of higher interest rates and, at least for some people, the lower wealth they feel as the result of lower housing prices means they spend less. So there are diffuse transmission channels, but the most direct one, you’re right, is on higher mortgage payments, and I know it’s tough.

I know we do have some audience questions as well …

Thank you, Dr Lowe, for such factual information and sharing with us all this data. Matt Comyn yesterday mentioned that it’s very difficult to anticipate the future and, if someone can predict what has happened in the last two years, probably these people are not sitting in this room anyway. So my question is quite simple. It’s loud and clear that we need to get inflation under control. The question is: do you think we have a strategy? And the second part of the question: do you think we have the right people to execute on the strategy?

I’m sorry; can you repeat the last bit, because I didn’t—

Do you think we have a strategy to recover and get back and attack inflation; and do you think we have the right people in our government and banking system to execute on this strategy?

I think the question was: do you have the right strategy to get inflation under control; and, second to that, do you have the right people to be able to carry out that strategy?

Do we have the right strategy? We have one tool. At the Reserve Bank, we have one tool, and that’s interest rates, and we’re using it. And I’ve tried to set out, today and on other occasions, our strategy is to keep raising interest rates to the point where inflation is going to come back down. But we’re not trying to get it back down instantaneously; we want to preserve the gains in the labour market as much as we can and allow time for inflation to come down. So that’s our underlying strategy. And do we have the right people? You were asking about—the question is really about the composition of the Board, I guess, and this is going to be discussed as part of the review. But I can tell you we’ve got nine people on the Reserve Bank Board who take their job incredibly seriously. We look at all the data and we’re collectively committed to preserving price stability and as many of the gains in the labour market as we can achieve. So that’s the way we operate and our strategy, and the Reserve Bank review will presumably opine on the composition of the Board.

Another question from the middle of the room here.

Dr Lowe, good morning. A question for you about the reopening of China: how do you expect that to affect both inflation in Australia this year and also the inflation outlook globally?

I don’t think it’s material for the inflation outlook, but it is a positive for our economy. We’ve seen the prices of the steelmaking commodities pick up a bit, as China has opened; Chinese students are starting to come back to Australia; and we’re hoping, within a short period of time, there will be greater air travel between Australia and China, and tourist and businesspeople from China will start visiting Australia as well. So it’s a positive for the Australian economy in the short term, and I don’t think it has any particular implications for inflation.

We’ve got another question … up the front here on one of the front tables.

Thank you, Dr Lowe. As interest rates rise, unemployment is presumably going to rise too. I’m just wondering if you can comment on what level of unemployment is acceptable to the Reserve Bank.

I don’t want to put a figure on it. Our forecasts that we released a month ago have the unemployment rate rising to 4½ or maybe a bit above that, so that’s a percentage point above where it is now. Before the pandemic, we were above five and we wondered whether we could get, in a sustainable way, below five. I think it’s possible, although there’s still a lot of uncertainty around it. So I think it’s possible we can sustain an unemployment rate below five per cent in Australia—I certainly hope so—and, if we can travel that narrow path, we’ll do that. We want to minimise the rise in unemployment, but we acknowledge that slower growth does mean higher unemployment. But, if we can stay on that narrow path, we can keep it below five.

Thank you, Governor. Overnight there have been, as mentioned, statements by the US Federal Reserve Chair, being interpreted as slightly more hawkish comments for the future of US interest rates. Your statement yesterday and today has been interpreted as being slightly more dovish and thinking about a pause of rates and, as you mentioned, maybe the difference between the US and Australia is that Australia has a high use of variable mortgage interest rates, so we have a quicker transmission of the higher interest rates, and there’s been no great resignation in Australia, so we’ve got a—the labour supply has increased. But, notwithstanding that, the Australian dollar has taken a little bit of a tumble overnight and it’s down, now with US65c in front of it, which, as you’ve noted as well, could be a little bit inflationary. Do you think it matters if the financial markets don’t see the distinction in what you’re saying, and is that that the Australian cash-rate path does not really have to catch up with the US Federal Reserve Funds rate and that we could have a lower profile of interest rates possibly than the US during this episode?

Yes. For some months now, the financial markets have priced in quite different profiles for our interest rate than at the Fed. The Fed rate was getting into 5¼—I haven’t seen what it is this morning, but it could be a bit higher than that—and our rate has been, at least in financial-market pricing—a bit over four. So financial markets have lived for some time with an expected difference of one percentage point between rates here and in the United States, and the exchange rate has been broadly steady in trade-weighted terms for months now. But there are, as I said before, important differences between the US and Australia, and the wage outcomes: that’s a really important difference. I was in India the weekend before last, talking to Chair Powell and a number of other central bank governors. Our labour market outcomes are quite different: higher participation, more people joining the labour force; immigration starting again here so the labour force is expanding and wage outcomes are okay; and variable-rate debt. So they’re important differences and if the market doesn’t understand that—it’d be better if they did—I don’t think it’s particularly problematic.

A question up the back here.

Just on NAIRU, I think last year we had 3½ per cent unemployment; you put up a whole lot of stats which were saying the economy was growing quite strongly and without perhaps really worrying about inflation coming through at that stage. We’ve just got 3½ per cent unemployment roughly now and quite high inflation for a range of factors that you’ve covered. But how far do you think we need to go to get it back to NAIRU. Is it closer to four or five? Or have you got any sort of real feel on why we didn’t see too much inflation as we went down through the fours on the way down?

It’s a good question, and there’s still a lot of uncertainty. As I said before, I think we can sustain an unemployment rate below five; how far below five remains to be determined and so I’m not sure. For me, the more important issue is productivity growth. Now, over the last three years, cumulatively, output per head in Australia hasn’t increased. It’s been a difficult three years with COVID and all the disruptions. We’ve had really three years with very little change in output per hour worked. That’s the bigger challenge for us, because if output per hour worked isn’t rising, then real wages growth is going to be weak, real asset price growth is going to be weak, the fiscal challenges are going to be harder and the business environment is harder. I didn’t really talk about that today in much detail, but I think that’s a really important issue for us collectively to face into. I don’t really know what the NAIRU is—I think it’s below five—but I do know that our lives are going to be much easier if productivity growth can pick up, and the last three years have not been good.

I know there is a question on this side of the room.

Thank you very much, Governor, and thank you for all the hard work you’ve been doing under a lot of pressure over these last few years; I appreciate it. One of the other parts of the RBA’s remit is an efficient payments system. So, just to move the conversation somewhere else, you’ve recently developed a central bank digital currency and you’ve got 14 use cases, I understand, that you’re going to work on. I’m just interested in your reflection on where that might go and what that could mean strategically for the market, depending on the outcomes of those trials.

Well, the trials … some will hopefully be successful and others will probably fall by the wayside, as happens here. My own view, at least at the moment, is that there are going to be some important wholesale use cases for a central bank digital currency that are kind of, really, behind the scenes and that most people don’t actually see, but they will improve the efficiency of the payments and settlement processes. I’m still very sceptical that, at least in Australia, there will be a central bank digital currency for retail purposes that we will use to make payments. We’ve got a very efficient payments system in Australia where you can move money between any two bank accounts in the country in five seconds just by knowing someone’s mobile phone number, and it’s free. So we ask ourselves at the Reserve Bank, ‘How could we offer digital tokens which would be better than that?’ It would be costly for us to develop and maybe we could develop them and maybe they would be useful but, at the moment, we don’t think the public policy case is there. But, in the wholesale space, fixing up some of the frictions and inefficiencies in the system, I think a new settlement instrument by us could help and, if we can find a way to help, we will. So these experiments will hopefully give us some good ideas.

Just to follow up there, Phil, on a final question, you sound sceptical—and you said you were—about the case for a retail central bank digital currency in Australia, but it does seem like the rest of the world is moving a lot faster than what we thought only six or 12 months ago: obviously China, Europe, the UK, Canada. Even the US; there’s some noise there out of the US Congress about getting on their bike and doing this because they’re worried that China might get ahead of them. If they proceed with a retail central bank digital currency, can Australia afford not to, or do we have to get sucked into that as well?

I don’t think we’d be sucked into it. If they do this because they think there’s a public policy case to do it, then we would look at their arguments and experience and decide whether those same arguments apply here; and if this is the way the world goes, then we will be part of it. But, at least at the retail level, you shouldn’t expect us to be right at the front, but we could be a fast follower. Our organisational effort really at the moment is on the frictions in the payments and settlements processes, which are quite costly, and overcoming those because, if you can already move money between any two bank accounts in five seconds using a mobile phone number for free, it’s a very efficient system, and soon you’ll be able to use QR codes to do it as well. So, if we’re going to introduce a new payment method and all the costs and risks that come with that, I want to be sure that the costs don’t exceed the benefits. We’re not there yet. If we are, then we’ll do it. But we’re not there yet.

We are out of time. Could you please put your hands together for Phil Lowe, the Governor of the Reserve Bank. Thank you.

Applause—