Remarks at the Australian Industry Group Executive Luncheon

Speech

Notes

Remarks at the Australian Industry Group Executive Luncheon Sarah Hunter * Assistant Governor (Economic) Australian Industry Group Executive Luncheon 20 November 2025
– Sydney
Audio 61.5MB Q&A Transcript Watch video: Speech delivered by Sarah Hunter, Assistant Governor (Economic), Australian Industry Group Executive Luncheon, Sydney Before I begin, I would like to acknowledge the Gadigal people, the Traditional Custodians of the land on
which we are meeting today. We are very lucky in Australia that our First Nations people protect our land
and culture to hand down to future generations, and I would like to pay my respects to Elders past and
present and extend that respect to any First Nations people here with us today. One of the things I enjoy most in my job is interacting directly with all parts of the community in
Australia; I always learn a lot and appreciate hearing a wide range of perspectives on what’s
happening in the economy, and how interest rate settings are affecting households and businesses across
sectors and geographies. While we are continuously assessing current economic conditions and the short-term outlook for the
economy, we also undertake research and analysis on a wide range of structural shifts that shape the
Australian economy over time. This work deepens our understanding of current conditions and the outlook by how monetary policy transmits
through the economy and how longer term forces may be changing the economy’s fundamentals. Therefore, today I thought I would highlight three key questions that we are currently researching and
analysing. In all three cases, information and insights from the business community and our own liaison
program can help shed some light on the answer. So, it’s a pleasure to be here today, not just to
share some of our work, but also to hear from you. I’m looking forward to our Q&A conversation
in a few minutes and the opportunity to gather some fresh insights. There is always change happening somewhere in the economy: a new sector is being developed as technology
and its uses advance; the composition and preferences of households continuously change; and we’re
exposed to shifting global winds from evolving geopolitical relationships, financial markets and trading
patterns. It’s not enough for us to focus only on what’s happening in the here and now, we have
to look ahead to make sure we make good policy decisions today and in the future. The first topic I want to touch on is, perhaps unsurprisingly for a central bank, inflation dynamics.
Forecasting inflation over the past few years has been challenging – indeed we were materially
surprised by the latest data, which came through stronger than we were expecting. A particular focus of our work on inflation dynamics is to understand whether businesses have changed the
way they set prices since the pandemic. Do firms now look to pass costs through more quickly, if they
can, given the recent experience of high inflation? How do firms’ profit margins vary as economic
conditions change? To get a handle on these questions, we are making use of microdata sets from the Australian Bureau of
Statistics (ABS) that allow us to look at anonymised individual firms’ pricing decisions. We’re
hopeful that this research will tell us more about how businesses respond as their costs and conditions
change, which will ultimately add to our understanding of inflation. A second topic we’re currently focused on is the economy’s supply capacity. As my colleague
Deputy Governor Hauser recently discussed, 1 the Monetary Policy Board is focused on setting monetary
policy to keep demand in the economy in line with potential supply. If we can sustain this over time and
expectations remain anchored, inflation will be within our 2–3 per
cent target band and the labour market will be sitting at full employment. Ideally, we would know what the economy’s supply capacity is at any given point in time – it
would be great if it were possible to measure this directly. Unfortunately, precisely measuring the
economy’s supply capacity is impossible – we can measure actual outcomes such as employment or
economic output (GDP) but we can’t, for example, measure full employment or the level of potential
output. We are particularly focused on ways to measure capacity in the labour market. 2 We think the labour market is
currently a bit tight – in other words, it is operating slightly beyond what can be sustained with
inflation at target, but this judgement is uncertain so we’re actively investigating how close we
are to full employment. Within this line of enquiry, some of the questions we’re currently investigating include: the extent of the upward trend in the number of women and older people in the workforce whether the easing in the cost-of-living squeeze (though we know it’s still challenging) has
resulted in some people choosing to dial back on work whether the match between the skills and expertise of those looking for work aligns with what firms
are looking for (and if the speed of matching in the labour market is faster or slower now relative
to the past). As you can see, we have plenty of questions that we’re actively digging into, and we’ll have
more to say on how we’re thinking about full employment next year. A third topic we’re actively exploring is whether the transmission channels for monetary policy have
changed in recent years, and if so how. As I’ve spoken about previously, 3 there are a number of channels
through which policy impacts the economy, and the importance of each channel depends on a range of
factors. For example, the impact of a change in rates on household disposable incomes is crucially
dependent on how many households are borrowers and how many are savers, and this can change over time. We
are currently expanding and extending our tools and frameworks that will let us explore shifts like
this. 4 A key conjunctural question that relates to the transmission of monetary policy is how to think about the
way the housing market has responded to the interest rate cuts that have already occurred. Thus far the
response has been a little stronger than we anticipated, with activity in the established housing market
picking up slightly more than expected in recent months. As outlined in the November Statement on
Monetary Policy , we are actively watching how this unfolds from here, and what that might mean
for our inflation and labour market objectives. 5 The three issues I’ve highlighted today are just a glimpse into the broader research agenda our
economists are actively exploring at the moment. We are constantly curious about how the economy is
shifting and changing beneath the surface, the drivers of these undercurrents, and what they collectively
mean for policy settings. Hearing from businesses, not-for-profit institutions and individuals across the country is a vital source
of information for this research and analysis. That’s why conversations like today’s matter.
Your insights – from the ground level – help bring our analysis to life. So, thank you for
being part of that process. I’m looking forward to our discussion and hearing what’s on your
minds. Endnotes I am grateful to
Michele Bullock, Andrew Hauser, Brad Jones, Tim Taylor, Michelle Wright, Jarkko Jaaskela and
Suzanne Houweling for their comments and suggestions on earlier drafts. All remaining errors are
my own. * 1 See Hauser A (2025),
‘ On the Rail or Off to the
Races? The Outlook for the Australian Economy ’, Speech to UBS Australasia
Conference, Sydney, 10 November. 2 This work builds on
earlier analysis that can be found in Ballantyne A, A Sharma and T Taylor (2024), ‘ Assessing Full Employment in Australia ’, RBA Bulletin ,
April, which is also discussed in S Hunter (2024), ‘ Understanding the Journey to Full
Employment ’, Keynote Address to the Barrenjoey Economic Forum, Sydney,
11 September. 3 See Hunter S (2024),
‘ Monetary Policy: Forward
Looking and Data Dependent in the Face of Uncertainty ’, Speech to the Australian
Financial Review Banking Summit, Sydney, 18 March. 4 For some early work in
this stream, see Chipeniuk K, G Nolan, M Nolan (2025), ‘ RDP 2025-04: HANK and the
Transmission of Shocks to Demand and Supply ’, RBA Research Discussion Paper No
2025-04. 5 See RBA (2025), Statement on Monetary
Policy , November.