Fireside Chat
Fireside Chat by Andrew Hauser, Deputy Governor at Citi’s Australia & New Zealand Investment Conference, Sydney
Andrew Hauser
Deputy Governor
Citi’s Australia & New Zealand Investment Conference
21 October 2026
–
Sydney
Audio
40.1MB
Watch video: Fireside Chat with Andrew Hauser, Deputy Governor, Citi’s Australia & New Zealand Investment Conference, Sydney
Moderator
Andrew Hauser, Deputy Governor of the RBA. In addition to that duty, he’s also Deputy Chair of the
Monetary Policy Board and also an ex officio member of the Governance Board.
Now, we have just under 42 minutes in which to have a fairly in-depth Q&A and fireside chat
session. So we’re just going to launch straight into it, and question one for the Deputy Governor
today. Financial markets are pricing that you’re unlikely to hike rates in November, and the OA
strip this morning was pricing only about eight basis points. The belief is that the September hike was
brought forward due to curb inflation expectations and the upside risks that the Board noted in the
statement in September. Now, do you believe that the Board now has scope to wait and see if the
100 basis points of tightening so far has worked? Or does that one extra hike in September not quite
address the burgeoning inflation risks?
Andrew Hauser
Thank you, and it is good to be with you all here. And I was asking someone what sort of cricket metaphor
I could use for an opening question like that. A bouncer, at least, I suspect. Mitch Starc best, perhaps.
Moderator
Don’t let it go through to the keeper, please.
Andrew Hauser
Is that a different sport? I’m not sure. Look, we’re in a world of hard choices. I think
that’s the reality here. We were the first G20 central bank, as you know, to raise rates this
year. As that, we raised them three times in February, March, and May. That reflected the fact that we
came into the year with domestic capacity pressures, and of course, we had the unwelcome development of
the Middle East crisis as well which added fuel to fire, to be honest, here. We looked an outlier when we
did that at the beginning of the year. But, looking back now, 14 other G20 central bank rate
rises, we were, if anything, ahead of the curve rather than behind.
We didn’t raise rates in June or August because we wanted to take space to review the impact of our
decisions in the first part of the year. Yeah, and perhaps it sounds naive now, the possibility of a
resolution in the Middle East crisis. But in August, we did identify three upside inflation risks, and
the first was from a prolonged Middle East crisis. The second was from the burgeoning AI and tech boom
that I know you’ve been talking about a lot at this conference, and everyone is. And the third was
the possibility of even weaker domestic supply constraints. By September, we judged that those three
risks had crystallised.
Oil was back over $100, no end in sight to the war. AI was going gangbusters, and in the Governor’s
words, productivity growth, according to the latest National Accounts in Australia, was doing nothing. So
the Board was unanimous in voting to raise rates, and it said importantly that it stood ready to do more
if needed. Where do we stand today?
Well, we’re a week and a half from the policy meeting, and we’re still finalising our forecast.
So I don’t know for sure, but a few things are clear. The inflation outlook looks materially worse
than we projected in the August report. I think you could do no worse than start with those three same
upside risks. On the Middle East, oil prices are even higher, about a third higher than we assumed in the
August projection. We have these debates about the so-called crack spread and higher refinery prices, and
obviously, there are fewer fiscal interventions now in Australia. So the Middle East picture looks worse.
AI, well, we’re seeing higher AI prices, tech prices feeding through into CPI, not just here but
elsewhere. We continue to have this extraordinary sequence of positive demand shocks around the world.
And we’re having a boom in data centre construction here in Australia as well. So that’s upside
too. And then on domestic capacity pressures, well inflation’s been coming in at or a little bit
above expectations, despite an apparent easing in the labour market. Components of CPI that are rising
the most are actually the ones most directly linked to capacity pressures like market services. And we
hear from Liaison that cost pressures are the number one consideration for businesses. We said in the
minutes last time, you pointed this out I think in some of your pieces, that the staff were looking at
whether we needed to change our judgment on capacity pressures in the labour market again, and that
exercise is underway.
I think overlaid on all three of those is the basic fact that inflation’s been high for a very long
time now. And we are beginning to see some signs that some people in the community are not sure if
we’re going to bring inflation back into target at all, or certainly not for an extended period. We
hear that from liaison, and we have a survey, the BOSS survey, that we work on with Macquarie University,
which shows that there is an increasing share of businesses who are thinking that maybe three to three
and a half per cent is the new normal. And look, that is the central banker’s nightmare. We
can’t allow expectations to shift away from the target.
If that’s a picture on inflation, what’s a picture on activity? It’s more mixed, clearly.
We need a period of below-trend growth to bring inflation down, and we’re seeing that happening.
We’re seeing some slowing under the pressure of tighter monetary policy, higher oil prices. The
labour data last week, a little bit weaker than people had expected. We’ve got the housing market
obviously undergoing quite a major correction and confidence, particularly in the household sector, is
very weak. But it isn’t all downside. I talked already about the overseas demand growth,
particularly now in Asia, which of course are our major trading partners, being stronger than expected.
And the data centre boom onshore is driving some very big numbers on the business investment side. So
look, monetary policy is working. Labour market is easing. Consumption growth is quite tepid. But there
are still pockets of growth and the inflation outlook has deteriorated. So that’s a pretty tricky
balance. Those are the hard choices I talked about.
The challenge that’s facing the Board, it has done for some time, is do you do more to tackle higher
inflation, recognising that that means weaker activity, weaker labour market? We obviously have a dual
mandate. Or do we hold our horses to protect the labour market, to try and protect some of the labour
market, and mindful of the potential that there may be more downside momentum of the economy, but accept
the risks in so doing that the upside inflation risk embeds, and that becomes more expensive to deal
with? Those are hard choices. They’re not where we’d like to be ideally as the central bank,
but I think that’s what we’re facing into as we meet the week after next.
Moderator
Can we unpick that and talk a bit about the hard choices? Because you mentioned 14 other central
banks have actually started their process of policy normalisation or policy tightening, depending on the
starting point. But the issue here is that monetary policy can’t drill for oil, it can’t
unblock shipping lanes, you can’t resolve the geopolitical conflict as much as you’d probably
like to at the moment. So how should central banks adapt their reaction functions when these adverse
supply shocks are threatening to embed higher cost-push inflation into a world that seems to be somewhat
more prone to high volatility and certainly potentially reduced supply elasticity?
Andrew Hauser
I think that is our number one challenge, and actually when we meet together as central banks, it’s
the dominant theme of discussion. Push back a bit on the premise that it’s all negative supply
shocks. Obviously, we were talking about AI and the upside surprise on demand through the world economy.
That’s a classic positive demand shock actually. The investment boom may precede a supply shock on
the AI side, but it’s a demand shock for the time being. I’m not sure about lower supply
elasticity either. Look at the spectacular speed with which the Chinese supply chain in particular
responded to Liberation Day tariffs last year. So, supply chains have learned about how to deal with
resilient shocks, and maybe that’s a sign of cautious optimism.
But you’re right, we’re seeing a lot more adverse supply shocks, and I think we expect to see
more. What should monetary policy do? I think point one is what we should be clear about what we
can’t do. We can’t stand in the way of a supply shock. If someone overseas raises the price of
a good that we’re buying, let’s call it oil, we’re all poorer, and we have to accept that
fact. Others may hold policy levers, as you say. Others may be able to drill for oil. Others may be able
to deal with some of those productivity challenges that central banks can’t. So number one is some
fairly ruthless truth-telling about what can’t happen. What we can do, and what we must do, is
prevent one-off supply shocks or persistent supply shocks feeding through into higher second-round
effects, higher inflation expectations. That will just make a bad thing worse.
So look, where the shock is temporary, where the economy is balanced, where inflation expectations are
well anchored, you can still do the standard playbook of looking through it, let the price level rise,
accept that you’re worse off, move on. No monetary response. But where there are knock-on risks,
where the shock is big, where it’s persistent, where maybe you don’t start from balance, where
maybe inflation expectations are under challenge, you have to react. You have to tighten, not fully, but
you have to react in order to prevent those on-flow effects. And that’s what we, and I think
actually a number of other central banks have been doing in the course of this year.
As I say, it doesn’t ease the pain of the necessary judgment. And people sometimes say, "Well, hang
on. We’re already in pain because of negative supply shock. Why are you imposing more?" And it does
seem counterfactual. The reason, obviously, I probably don’t need to convince this room, but I think
a wider audience, it’s a continuous challenge to explain this. The reason is that even though we are
laying shorter-term pain on top of pain, is to prevent a longer and potentially far worse pain down the
track if inflation expectations get locked in. These are not easy communication challenges. They’re
not easy to explain to people or to businesses. And yeah, it makes central banks’ work a little bit
tougher. I’m not complaining, but we’re all facing into that at the moment.
Moderator
If we can talk a bit about some of those challenges of communication, particularly one thing that occupies
the minds of you at the Reserve Bank is unit labour cost growth. So while if we look at wage cost growth
from the wage cost index, it’s largely plateaued, but unit labour cost growth remains elevated, and
partly that is due to underlying subdued productivity outcomes here in Australia. Now, is the RBA
factoring in a structurally lower baseline for Australia’s trend productivity? And if so, does that
mean that you think policy might need to remain in restrictive territory for longer? And how does that
influence probably an assessment of where real neutral rates should be in the cycle?
Andrew Hauser
Some of these questions are like exam questions, Josh. Luckily, I had some advance warning. But we
don’t make assumptions about structural productivity growth. We forecast, luckily, I mean,
governments have to, but we forecast inflation a couple of years ahead. So our assumptions on
productivity growth are only what you might call shorter-term ones. But yes, we have reduced our
assumption about the underlying rate of productivity growth over that period from 1 per cent,
which we had assumed out to August last year, to 0.7 per cent. That’s for non-farm
productivity growth. What I would point out is we’re struggling even to get there. If you have all
the charts, as you know, at the moment, it’s pretty much around 0 per cent growth, and
it’s been zero cumulatively for the last decade or more. That number is the number one economic
challenge for countries like Australia. It’s not unique to Australia. But it obviously determines
the speed limit of the economy, the rate at which we can grow without inflation, and that basically
determines everything else. Your question about what it means for interest rates is interesting. It
doesn’t necessarily mean policy has to be tighter for longer. It does mean that if people
haven’t adjusted their expectations to the reality of a slower growth economy. So if people continue
to spend and behave as if the size of the economy is going to grow at the old rate, then you’re
going to get excess demand, and policy is going to need to be tighter than it otherwise would. And we may
have some of that now. Ironically, you probably know this, those economists in the room will know, that
actually, if expectations were all aligned, lower productivity growth, other things equal, could mean
lower real rates over time. We’re not in that world today. Not sure I want to get to that world, to
be honest. I’d much rather have a higher productivity growth rate than low interest rates because
productivity is low. But right now we are, I think, battling that other side of it, which is expectations
not being fully aligned to the reality of the pace at which the economy, the pie, if you like, is
growing.
Moderator
Speaking of expectations, one of the challenges, I think, again, going back to the part of the
communication, has been communicating to people about the transmission mechanism of monetary policy. You
get asked at the media conference about how do mortgagees, what’s your message to mortgagees, but
that’s not the only transmission mechanism for monetary policy. There’s obviously exchange
rates, there’s savings and investments as well. So I just want to ask you, and when we do have a
very direct cash rate transmission mechanism via variable mortgage rates, but how is the bank evaluating
the distributional wedge between, say, indebted households who have experienced severe cash flow squeezes
and asset-rich households that are benefiting from high yields?
Andrew Hauser
This is a K-shaped thing, isn’t it?
Moderator
Yeah.
Andrew Hauser
Let me say point one, we’re very sensitive to the fact that higher interest rates increase the
burden on mortgage holders. We see higher hardship rates. We see more calls to National Debt
Helpline. I’ve visited the National Debt Helpline. Some of those stories are really
heart-rending. Consumer confidence is low, not least because of higher interest rates. And you do see
some sign of weaker consumption by those on low incomes with mortgages. But the data show that only
about 2 per cent of mortgages are actually in negative cash flow. And that’s a lot
lower than the 2024 peak because people did spend part of COVID rebuilding their buffers. In fact,
the median mortgagee has over a year of cash stored away in their accounts to meet those needs should
they need to.
Look, this cash flow thing, and Chris Kent was talking about this the other day, you may have seen, it
dominates discussion of the transmission mechanism in Australia, but it’s by no means the most
important part, and we’ve looked at this quite carefully. There are four channels of the
transmission mechanism. The first, and by far the most important in Australia and in most small open
economies, is the exchange rate. Some of our models say that up to two-thirds of the effect of
interest rates actually comes through the exchange rate channel. People say, "Hang on. There
can’t be that much from people going on holiday." But of course, it’s much more than that.
It affects the cost of everyone importing goods, businesses. There’s the wealth and asset
channel, housing, your super, your savings if you have them. Also very powerful. The intertemporal
substitution channel, which is a long-winded way of saying if interest rates go up, actually have an
incentive to save more or borrow less. And then the cash flow effect, probably, in terms of our
models, comes last. It is first in the public discussion because obviously it’s a thing people
notice, and we are very sensitive to that. But it isn’t actually the biggest part of our
monetary. And you’re right, we’re struggling to get that point across. But I think
it’s important that we keep trying to do that.
I think one of the points, because mortgagees get a lot of the attention, the greatest pain of higher
inflation is held by those without a mortgage who are renting on low incomes. That’s a decent
share of the total population. If you look at the HILDA data that we showed in our last Financial
Stability Report, I told you the sort of 2 per cent, a bit more, of mortgagees are in
negative cash flow. Well, 15 per cent of renters are in negative cash flow. And higher
inflation is a gut punch to them, and we are very focused on the need to bring that down. Yes, the
short-term answer to that, it can be to raise interest rates. But whilst we have a great deal of
sympathy and are very sensitive and monitor closely the impact on mortgage holders, the impact on
that next tranche down is arguably even worse, and it’s the impact of high inflation, which we
must get down. You made the point about public understanding. We’ve done a survey. We put it out
recently. We do need to keep working on the very basic point that higher interest rates actually
bring inflation down. A lot of people have formed the view that higher interest rates drives
inflation up. That’s not the case over the medium term. But we have more education to do to get
people to understand that basic point, where we’re raising interest rates, we may be making life
harder today, but we’re doing so to bring inflation in the long run down.
Moderator
I have a few more questions, but so you can catch your breath and get a drink. If the AV people can
just put the Slido details up on the screens, that would be great. So start thinking about your
questions. We have a couple of roving mics as well around the floor, or you can go through Slido. So
just start thinking about your questions you’d like to ask.
Andrew Hauser
I did a Slido event once at the Bank of England years ago. It was long before we knew how the
technology worked, and the questions were zooming up the screen, and we had no invigilator, and no
one was actually saying, "No, we won’t put that one up." And as I was sitting talking outwards,
there were things going up. "Who the effing this and that does this person think he is?" And, "Tell
him to stick it," and all the rest of it. And you could see some of the Bank going, "Oh, God, what
are we going to do? Pull the wire?" And they didn’t pull the wire. So, given this audience, I
know you had a good evening last night. I don’t know whether that’s going to happen here,
Josh. I assume you have someone sitting in the middle of it.
Moderator
Thank you for that anecdote there, Deputy Governor. Hopefully we don’t have … I think
it’s not happening at the moment. It didn’t happen yesterday. With that brief interlude,
can I talk about-
Andrew Hauser
Any bond traders here? I’m sure there’ll be a few.
Moderator
They’re sitting in the front row. Okay, wind it back. Can I talk about … Well, ask you a
question on another aspect of financial conditions, which is monetary policy is obviously one, but
the other one is sort of what’s happening in global bond markets at the moment. We’ve seen
a sharp rise in global sovereign bond yields, and global term premiums have arguably expanded as
well. I think that makes … You talk about central banks in small and medium open economies and
the exchange rate as a significant tool for monetary policy transmission. But you could also argue
that those economies also face an issue when it comes to changes in global bond yields and also
spread products. Now, so on the one hand, we have high global yields that steepen the domestic curve
and raise wholesale bank funding costs. That does some of the work, if you like, of the central
bank’s tightening work for it. On the other hand, widening yield differential risk currency
depreciation and exported inflation. So how do you, or how does the RBA parse these competing
channels, and to what extent the global term premium shocks influence the domestic policy path?
Andrew Hauser
It’s a good question, and in the short period that we’re not talking about a world of
negative demand versus the supply shocks, central bankers are spending a lot of time trying to work
through this, and you’ll have seen from the minutes at the last Monetary Policy Board, we had
quite a long discussion on this question our ourselves. These moves in long rates, I don’t need
to tell you or this room, have been big and pretty sharp. And there are loads of potential
explanations for it, and I saw the FT this morning said it was a bit like Murder on the Orient
Express. There are so many suspects. I think if I remember that story correctly, actually, they did
all kill the person as well, didn’t they? But there’s so many potential explanations for
why long rates are up. Is it lower central bank credibility? Is it higher central bank credibility,
post the perceived Walsh pivot?
Is it fiscal policy and debt unsustainability? Is it AI issuance? Is it policy uncertainty? Is it
higher neutral rates? And that’s just a short list. What are the facts? Well, higher inflation
expectations, a substantial reduction in central bank credibility is probably not the most plausible
one, I think. I would say that wouldn’t I, but inflation break-evens haven’t gone up very
much. So it’s real rates. And it’s cross-country. Doesn’t seem to be particularly
singling out countries. France obviously, has had a bit of an excess, but most of us seen it. And
it’s not clearly people waking up to the fiscal risks. I say that because you look at CDS, you
look at soft spreads, things that you would normally expect to be spinning out if people were saying
there’s an imminent default event. They’re not really moving terribly much. Now, I
don’t mean to dismiss the fiscal explanation, but as a near-term debt sustainability story,
I’m not sure about it.
Our best guess, and this isn’t terribly deep, is that some of it does reflect higher term
premium, and that tightens financial conditions here, as you say, although I’m not sure we think
that’s huge in Australia, given the fact that we have quite a heavy focus on the short end of
the yield curve, as you said earlier. There’s probably also some increase in neutral rates,
global neutral rates. And as you say, that sort of challenge is something that brings economists into
disrepute. You know, interest rates goes up. Does it mean more activity or less? We say, "Well, it
all depends." And obviously, higher neutral rates do mean that for a given path of rates, we actually
have an easier monetary policy stance than we otherwise would have. Particularly tricky issue is the
neutral rate globally is higher, but the neutral rate domestically might be a bit lower, perhaps for
the productivity reasons we described before.
And at that point we do face into the possibility of an exchange rate appreciation, and as you know,
we haven’t seen much of that through the course of this year. The exchange rate’s what, up
what? 5, 6, 7 per cent on our forecast at the end of ‘25. We do put some weight on
those stories, and as you will have seen from the minutes, the possibility that our stance may be
slightly less tight for a given path than otherwise did play a role for some in the decision in
September, and so we’re keeping a close eye on that. This is all different, obviously, if this
thing breaks down into a disorderly sequence globally. And I think it probably is worth all of us
spending some time, and I’m sure you are, working through what that would look like, how your
balance sheets would adjust, how we deal with the possibility that there is a disorderly adjustment.
Unfortunately, as I think you probably know, I’m a veteran of the LEI crisis in the UK, and
although that was a very different situation, things can go seeming very calm to very uncalm very
quickly.
Moderator
We are getting some questions through on Slido. I’m probably going to reserve the last question I
have. We’re going to make this a choose your own adventure, Deputy Governor. So you get to
choose which question you want to answer from the-
Andrew Hauser
I can’t even read - my eyesight’s very bad. You’re going to have to help me out. You choose them. I’m not
sure it’s a good look for me to choose which questions are answered. Would you like to reflect
on the excellent monetary policy of the RBA over life? It’s a question that’s not up here.
Moderator
Dr Hauser is deserving of a raise. Do you believe that? Okay, there you go. No, no, let’s go.
What would be your number one item on your shopping list to boost productivity in Australia?
Andrew Hauser
Well, look, this isn’t our job, and as you said we don’t drill for oil, and we don’t do
that, and I am nervous about wading into a public policy debate that involves winners and losers, and
involves, to some extent, government levers. I’ll make a couple of points. Clearly, there’s
a major technology wave underway globally. Clearly, Australia needs to be part of that. There’s
a lot of evidence that we are, but I don’t think we can afford to close our eyes to some degree
or not to the way that the world is moving in terms of technology. We may wish AI was or wasn’t
a thing, but it is a thing. And a point I’ve made in several speeches in the time I’ve been
here is actually if you look at Australia, the greatest periods of Australia’s economic success,
it’s often been in adjusting to a major world crisis. We have a lot of things people want. Under
the ground, over the ground, we have great human capital. These are actually fantastic opportunities.
Talk about this, you’ve got the A50 thing later this week. I don’t think it’s
just spin. Australia really does stand to benefit from this more fragmented world where people need
these high technology minerals. They need know-how. They need innovation. But we do need to be open
to that and understand it. I think that’s point one.
Point two is that, and this is something of an Australian thing: “this is a problem, government must
solve it”, or “government is the problem”. Government has a role to play, but just as important is
what business does on productivity. Over the last few years, if you look at why productivity outside
the US has been low in most countries, most countries in the developed world, the first and most
profound reason is very low investment. Now, people would say, "Oh, it’s red tape in Australia."
But red tape is not a feature of every country facing low productivity, but low investment is. And so
there is a joint obligation, I think, not just on government, but also on business, to get their arms
around this productivity challenge and to embrace what could actually be a very positive future, I
think, for Australia. So look, technology is probably the easy answer to that point. It’s not an
easy route up the mountain. There will be many, many challenges in adjusting to an AI-dominated
world, but we need to be at the forefront of that, and I hope and believe we will be.
Moderator
We are getting some more Slido questions, but the way it works here is the ones that are getting the
most votes are the ones that I can see. So if there’s a question you really want to ask, put
your hand up and we’ll get one of the roving mics to you as soon as possible. Yes, we have a
question down here. Thank you.
Questioner
Hi, Andrew. Stella from Reuters. I do have a question about the quarterly CPI data that we’re
going to have next week. So most economists, they’re seeing like 0.9 per cent or
1 per cent for the quarterly trimmed mean measure. Is that a meaningful miss for the Board,
or is it already old news given your hike last time?
Andrew Hauser
I remember, Stella, you asked almost exactly the same question to the Governor at the press
conference. You’re hoping for a different answer here, I hope. Reads notes carefully.
I think, look, we’ve already got two of the three months of the quarter, and we’ve got most
of the market services, which is obviously quite a big component of it. And I think it’s pretty
clear that absent a very, very big downside surprise in the last month of the quarter, the quarterly
number is going to be bigger than we assumed in the August report. I think, Josh, that’s what
you’re saying, it’s what most of the Street is saying. That you mentioned a 1.0 for
trimmed mean on the quarter, Stella, and I think, Josh, that’s probably where you are, and I
think it’s where a lot of people are. We look at the data when it comes in, and we evaluate it.
But it’s definitely north of what we were assuming, in August. You asked, does that matter?
Well, all data matter, but they all have a coefficient on them, which is not one. And there’s a
lot of debate about you feeding back just from current inflation. I think this is part of the
Governor’s answer to you. You can’t target current inflation. And it’s bygones
already. It doesn’t mean it doesn’t matter. It’s part of the input to our assessment,
in particular, of where capacity is. So we will be looking, and I think, see, there’s another
question here, actually, Josh, now I’ve got my … I realise I can see better without my
glasses on, a bit ironic. Yeah, can you talk a little about the components of CPI that are important
in your judgments about the economic outlook? And this links very directly to your question.
Moderator
Before you ask that, can I put a rider on that?
Andrew Hauser
Jeez, how many sub-questions am I going to have?
Moderator
You said it was an exam, so it’s an exam.
Andrew Hauser
Yeah, all right. Shall I write this down?
Moderator
Yes, please.
Andrew Hauser
Yeah.
Moderator
Also, in addition to that question, can we talk about the net balance of prices in the CPI?
Andrew Hauser
No, let’s come back to that in a minute because otherwise I’ll get overloaded. Let me finish
Stella’s question and this one. So market services matters a lot, and as I say, we’ve
already got most of it, and it’s already telling us that capacity pressures in the economy are
probably pretty elevated and maybe a bit more elevated than we thought.
The AI data I talked to you about as well is a story we’re tracking closely. It’s not a
terribly big part of the CPI. But it is an emerging trend, and some of the inputs are almost
parabolically vertical. Some other parts of the CPI have been moving in a more favourable direction.
We’re obviously very interested in what the housing and shelter numbers say. But look, I think,
yes, we expect this quarterly number will probably be north of where we are in August. Yes, we will
study it carefully when we get the final number but not because we’re trying to target that
number, but because it does give us information about the underlying economy. And at the moment,
certainly those numbers are causing us to ask whether there’s less capacity in the economy than
we previously thought. Sorry, what was your follow-up?
Moderator
My rider was, when we talk about inflation, are we looking also at the net balance of items that are
rising versus falling, as in the breadth of price-
Andrew Hauser
Yeah. I think and Kevin Warsh has talked about that as being one of his more interesting – I find it useful.
We have a bit of a debate about this internally sometimes. The challenge is, if you plot it alongside
CPI, it often, in delta terms, in terms of movements, it’s telling you what CPI is telling you.
So if you have a particularly widespread or a particularly narrow spread, then that is telling you
something. But if the distribution is roughly the same most of the time, you’d actually expect
that measure to move up and down broadly in line with CPI. Certainly, that measure is a bit ugly, if
that’s where you’re going with this. And certainly, we are keeping an eye on those numbers.
And we talk to liaison through to businesses, and I do a lot of this travel as well, trying to talk to
businesses directly about, and I said this to you already, their number one challenge is costs. Many
of them are trying to sit on pass-through because they are meeting relatively weak demand conditions,
but a number of them have had no choice, and those who are sitting on it clearly are facing declining
margins. And you see from the NAB survey, their profitability measures are weakening. That cannot
sustain itself forever. You either have to push those price rises through and face the possibility
that demand falls further, or you have to adjust your cost base, either by putting downward pressure
on non-labour inputs or on the labour side of things. I mean, I’m stating the obvious here.
We’re watching that process very carefully. The pass-through of the oil price rises,
particularly the second, has barely been seen yet. And a big part of our forecast discussions at the
moment is how large that lump, if you like, that ostrich egg, of oil price rises coming through in
the next couple of years is going to be. It could be quite substantial.
Questioner
Hi, Deputy Governor. Michael Janda from ABC. Unemployment. Do you actually believe the recent ABS
unemployment figures are accurate? If they are, are you concerned that unemployment may soon break
through the 5 per cent level recently outlined by the Governor?
Andrew Hauser
We take all data, as you know, Michael, very seriously. I think your accuracy reference may be to the
fact, as many you know, and many in the room may know, that the ABS have been putting through some
technical changes to the structure of their survey. And it’s certainly true that the numbers in
the last few months have been, we all have, and I’m sure you have, Josh, too, been looking quite
carefully at that underlying issue for the potential that there’s noise. And there is potential,
Michael, that there’s some noise in that number. That said, it clearly was a little weaker than
we and others have been expecting. I stress the little. These unemployment numbers in Australia are
still right at the bottom or very near the bottom of the G20 outturns on labour markets.
It’s been one of the great successes of the post-COVID period, not just in Australia, but
elsewhere as well, that the labour market has performed as well as it has. No lost job is one to
celebrate. I would never say that. But these are still quite low numbers, internationally and
relative to history. It certainly does suggest, and the labour market has been suggesting, Michael,
for some time, that the labour market data have been suggesting that the labour market is easing. And
as I say, we need to see some easing in the economy. Whether it goes to five, whether it goes to some
other number, that’s a debate we’re having in the context of our forecast at the moment,
and you’ll see our answers to that in a week or two.
Moderator
We still have roughly just under 10 minutes, so we can take more questions.
Andrew Hauser
You want to do your nerdy question, which I especially prepared?
Moderator
Okay, we’ll do the nerdy question because-
Andrew Hauser
You told me people would be gagging to hear the answer to this.
Moderator
I don’t think I would-
Andrew Hauser
I think we take a vote at the end on it once you’ve heard what this is about.
Moderator
Can I just say for the record and for the recording that I probably wouldn’t use the word
gagging? My nerdy question. Excuse me.
Andrew Hauser
We’ll get this over with.
Moderator
Okay.
Andrew Hauser
You did ask it.
Moderator
I did ask it, but yeah, I wasn’t gagging for it. Anyway. With the complete wind-down of the
pandemic-era liquidity facilities and the ongoing passive runoff for the bond portfolio, how is the
Bank approaching the transition to an ample reserves framework? Are you seeing early signs of
friction in short-term money markets or bank funding spreads as exchange settlement balances decline?
Andrew Hauser
I could go for eight minutes on this, I can tell you. This is my specialist subject. I mean, look,
what does ample mean? You know this. It means that we will provide the liquidity to the market that
the market wants. That’s a change from the past, when we used to tell the market what it was
going to get, and the market adjusted. That was true in Australia. It was true in most countries. And
we provide that liquidity through open market operations each week. We’re nowhere near the ample
point yet, is the honest answer. Demand in our OMOs is pretty low. Markets are orderly. Private repo
rates are below our OMO rates. So you’d be surprised if they were borrowing from us. And
we’re not seeing the kind of friction you describe in terms of short rates, which remain very
orderly. It’s interesting to me because obviously, coming from the UK, and Canada, and New
Zealand, and others, have all seen spikes in their short rates as the balance sheet reduces, and
they’ve had to start providing quite a lot more liquidity. We haven’t had to do that yet,
and the market has revised down its estimate of where that point will come two or three times.
Our reserves are about $200 billion. The current market estimate of system needs is probably
$70 to $100, so we may be double still where we need to be. That is interesting, I think, to
those of us who are nerds on this subject, because it puts us right at the very lowest end of the
international ratio of reserves to balance sheet assets. And it’s a good thing, I think, because
it reflects confidence in our ability to provide the liquidity that we need, and it may also reflect
the fact Australia’s been through fewer crises of the kind that other countries, including the
UK, has had. But we’re watching that closely, and we’ve announced some more additions, as
you know, to our toolkit, including a term repo facility that we hope to introduce in ‘27 to
reassure people that we’re there across a whole range of shops. But at the moment being, and
there may be short traders in the room and people interested in this, so far, so good in terms of the
transition to ample. There we go. Only took a minute.
Moderator
Fantastic. We’ve still got six minutes left. Questions coming up from the floor, or I’ll go
back to Slido. I have one question right here at the very front on the far right.
Questioner
Thanks, Andrew. Not really a markets question, but curious on your thoughts on, and happy for you to
go domestic or global, the balance between labour and then, I guess corporate profitability. So maybe
we’ve seen over the last 10 years or so, company profits have been relatively strong. Wage
growth hasn’t been that strong, so it hasn’t necessarily been a contributor to inflation.
Do businesses and corporations need to adjust potentially to a lower level of profitability over time
in order to get the balance right, particularly, I guess, in the context of social unrest, in order
to have the social licence to operate?
Andrew Hauser
Well, this is a very complex question, and as you say, some of it lies outside my remit. In the US,
the labour share has fallen, as you probably know, clearly. We haven’t seen the same thing to
the same degree in Australia, and indeed in most other countries. And, as is common in these economic
debates, sometimes stylised facts about the US are treated as if they are true everywhere, when
they’re not. Companies are extremely conscious, as you know, about what I think is often called
in the trade social licence. And there’ll be a whole range of small businesses when people say,
"You’ve got to cut back on your profits," who would have a pretty hollow laugh at the moment,
that the idea was that they were creaming profits and making a fortune when in fact, some of them are
struggling to keep their heads above water and to employ the people who you’re talking about. I
think at the other end of the distribution, there are some really interesting questions about the
concentration of returns. Obviously, AI is the classic one. At the moment, the spectacular equity
performance, in particular, is accruing to a tiny number of companies, where the numbers are just
eye-bogglingly big.
How governments tax those companies, how they impose social norms on them is a hugely important, and
very live in Australia, debate. It’s slightly different to, I think, the one you were talking
about, about profits per se. But I think, if you ask me, and I’m taking your question in a
slightly different place, some of these structural issues about the relationship between the new
generation of companies and governments like Australia, the US, UK, and others, and the relationship
between them and how you continue to impose social norms is going to be a dominant theme of the next
five or ten years. Whether this issue of usurious profiteering is the primary issue or whether it
comes down to other things like water usage and employment rights and people having to change
radically mid-career what they do and being taken out by AI, I’m not sure. But these issues, of
which you raise some, but of which there are many others, are going to shape our lives. And
they’re certainly going to – we are investing quite a bit of time at the RBA, and our
chief economist will talk about this in a couple of weeks, in understanding the economic aspects of
AI more. But I think, as I say, in terms of the Australian outlook, there are some ups and downs in
this story, but it’s much less dramatic than the stylised facts that certainly are happening in
the US.
Moderator
We have time for one more question from the floor. If not, I’ll go to another slider question.
Yes, we have a hand up down here, relatively central.
Questioner
Yeah. Thank you. Just a question on the working of the Board. For investors, it’s pretty unclear.
Not everybody from the Board has his own speeches and these kind of events. So it’s a bit
unclear how people actually vote and how it all works. What’s your thinking around that? How can
you compare it to the Bank of England, for example?
Andrew Hauser
Well, this is good also because the 48 questions on fiscal policy that are clearly on the screen
won’t get answered either, Josh. Thank you.
Moderator
We won’t mention the war. Thank you, Deputy Governor.
Andrew Hauser
But specifically, the question about internal committee dynamics, I can talk about this for some time.
The Bank of England’s model is interesting because it’s at one end of the distribution.
Each member of the Bank of England is personally accountable for their voting record. They are
required to account for that in Parliament and in public. And now, as you may know, those of you who
trade the UK, probably quite a lot of people in this room, each individual member has their own set
of minutes, if you like, a paragraph that explains their view of the economy. So they’re testing
the outer bound of personal accountability.
What happened in terms of the debate on the Board and on the Monetary Policy Committee, and I
wasn’t a member, obviously, but I sat in on a lot of those discussions, they were very, very
lively. A lot of them were academic economists or able to have quite technical debates. And that had
its ups and perhaps sometimes its downs as well. One of the interesting things that the personal
accountability, I think perhaps negative things was, is that people felt so responsible for voting
how they saw things that sometimes, say I was a sort of persistent dissenter on the upside or the
downside. People slightly lost the incentive to convince their peers of their views. "Well, I’m
okay because I’m voting for a rate cut." "Well, yeah, but rates are staying whole, so you
didn’t have that influence." "Yeah, but I’m okay. I can explain myself." That decoupling, I
think, that was caused by that personal accountability, I think is perhaps a bit unfortunate and
means that the effective debate on the Committee can be smaller than its full number of members, if
you see what I mean. We do now disclose votes in Australia, and I think that’s wholly a good
thing. We don’t disclose names, and I also support that too because I think what we need to
ensure, and we’ve had it today, is we have the debate on the subject and not on the individuals.
And I think it’s fairly clear that in Australia and some other countries as well, there’s a
risk that you might get drawn into who said what rather than what did you say and how important is
it. Final answer, and just to answer your question about how debate on the Board compares to the MPC,
it’s really lively.
It’s a different type of people from the people that we had in the MPC, a much broader range of
experience. We have labour lawyers, we have people that have run businesses, we have academics, but
they bring an enormous amount of challenge and different perspective. And we have differences of
view, and you’ve seen we’ve had split votes, and I think that’s wholly a good thing.
We’re probably still learning as a community how to deal with the split votes, but it’s a
mature aspect of the Board and we’ve taken it in our stride.
So I understand the point that maybe you don’t feel like you’ve heard from all of the
members. You hear from me a lot, you hear, I think, from Michele a lot, and all of the members have
done now outside engagements and will do more. But we will continue to find as many ways as we can to
throw light on the diversity of opinion. For me, and you can take it from me, it’s the thing I
think is most important of all in this complex and ambiguous world, is that we have real debates
externally, internally. I think we should not be shy of being challenged, and we should not be shy of
hearing alternative views. We shouldn’t be shy of saying we were wrong or we learned when that
has happened. And I think if what you’re asking is does that culture exist inside the RBA as
well as externally? Absolutely.
Moderator
I think on that collegiate positive note, that’s a great place to leave the discussion. Deputy
Governor, your exam is over. You can put your pen-
Andrew Hauser
Sorry about the handkerchief and the cold. First cold I’ve caught since I’ve been in
Australia. So there.
Moderator
I thought you were unwell for one of the other fireside chats.
Andrew Hauser
Oh, that was a different kind of illness. But anyway. Yeah, exactly.
Moderator
Thank you very much, Deputy Governor.