Fireside Chat
Fireside Chat at the Committee for Economic Development of Australia (CEDA)
Michele Bullock
Governor
Committee for Economic Development of Australia (CEDA)
22 September 2026
–
Sydney
Audio
52.4MB
Presenter
(inaudible)
No doubt makes this a challenging but also exceedingly interesting time to be a
Central Bank and Central Bank Governor. I also believe this will be the
governor's last public comments, ahead of next week's meeting. I see nods.
That's good. I got this factoid correct. Thank you, Governor. Though I'm not
sure you're as excited as the rest of us, given you did have to spend three
hours in front of the House last week explaining in great detail your thought
processes. But thank you very much for doing that again.
So with that, it's my great pleasure to introduce Michele Bullock, the RBA Governor, and our facilitator for the
session, Chelsea Drake, to the stage. She's the chair at Allen's. Thank you very much.
Chelsea Drake
Thank you very much, Robert. It's also my great pleasure to welcome Reserve Bank Governor Michele Bullock.
Michele, thank you very much for joining us and taking the time to share your insights with us.
We're all looking forward, I know, to hearing what you have to say about the Reserve Bank's perspectives on the
current Australian economic outlook and the factors shaping it, the last public comments before next week's big
decision.
I will not be monopolising all of the question asking this afternoon. I know there are people in our audience who
will also have questions that they are keen to ask you. So a few things about question asking.
First of all, we encourage people to submit their questions through Pigeonhole. If you're here in the room,
you'll find the link and pass code on the screen. If you're joining via the live stream, you can submit
questions through the link on your live stream page. Now, we may not get to every question that is submitted
through Pigeonhole, so I encourage you to vote the questions that you'd like to hear answered the most, and that
will help us identify the topics that are of greatest interest to everyone today.
If time permits, we'll also take questions from the floor. If you'd like to ask a question from the floor, please
raise your hand and a microphone will make its way to you. Then please state your name and your organisation
first, keep your question brief, make it a real question, not a statement or comments, and we'll try and hear
from as many people as possible. And with that all said, we'll now get underway.
Michele, thank you again for being here. Those that follow the work of the Reserve Bank closely will know that,
as Robert mentioned, you and your senior team attended a hearing of the Standing Committee of Economics last
Friday, where you answered questions for hours on the Australian and the global economy. And I can tell you that
today we're a walk in the park by comparison to that experience. So first question, it's probably an
understatement to say that your tenure as Governor has coincided with a period of significant economic
disruption and uncertainty for Australian households and businesses. As you reflect on your time in the role so
far, what stands out to you about what the RBA has done to help the economy navigate these challenges?
Michele Bullock
So just as an aside, I remember previous Governors saying you'd be
lucky to get through your term without something going badly pear-shaped. For
Ian Macfarlane, that was the Asian financial crisis. For Glenn, it was the GFC,
and for Philip, it was COVID.
So I'm getting my share now. I hope to get them all out of the way and then plain sailing for the rest.
Chelsea Drake
I'm not sure that's the way it's going to go.
Michele Bullock
but look, it has been a bit of a wild ride. It's interesting when you reflect back prior to COVID, we were in
this situation people used to call it secular stagnation. We had inflation below target. It was about 1.5 per
cent. We were lowering interest rates. We were trying to get inflation up. It wouldn't come up. Wages were only
rising by about 2 per cent. Productivity wasn't growing by much either. And this was sort of a bit of a case
around the world.
Since then and it was basically about demand management in those days – since then we've had COVID, we had the
Russian invasion of Ukraine, and then we had of course, the whole tariffs and trade issues in 2025, and now
we've got the Middle East situation. All shocks to the supply side of the economy. There was some demand in
there as well, particularly in COVID and coming out of COVID in particular, but these shocks to the supply side
of the economy are very difficult for monetary policy to deal with. Monetary policy can deal with demand shocks,
because it can be used in a cyclical sense to raise or lower demand by raising and lowering interest rates.
But the supply side of the economy, when you get a supply shock, your trade-off worsens. So what do I mean by
that? It means that for any level of unemployment, for example, inflation is now higher. The trade-off is worse.
Now, in theory, we can say, well, let's look through that supply shock. There'll be a one-off change in the
price level, and then inflation will settle back down. But when you have a series of supply shocks like we've
had, and inflation just increases and then it drops back and increases again, the concern that we have is that
it might get embedded in inflation expectations of households and businesses, and therefore it might become
self-fulfilling.
So what can the RBA do? To your question, what do we do in the face of these supply shocks? I think we have to be
mindful that there will be first-round effects, but we need to be very careful to ensure that policy is set in a
way that minimises the second-round and indirect effects which might perpetuate ongoing inflation. So that's
really the point about monetary policy. In COVID, you'll recall interest rates were practically zero. And we're
not going back to those sort of levels of interest rates. There's quite a debate, and we might get into it in
some questions at the moment about where real interest rates around the world are going and therefore in
Australia as well. But I think monetary policy really just needs to continue to focus on making sure that we
limit indirect effects and we try to keep inflation expectations anchored.
Chelsea Drake
Okay. You mentioned a few shocks then that unfortunately for you have all happened quite early in your term as
Governor. So it does seem like supply shocks are increasing in their frequency, in their variety and diversity.
Do you want to speculate as to why that is? Is it because global economies are more connected? Is it because we
have an unpredictable US government, or is it impossible to know?
Michele Bullock
I think we're moving into a new world. Previously we had basically a world which was free and fair and open
trade. There was lots of interconnections. Increasingly though, with this geopolitical environment and also
climate change, what we're observing is that there are more - That's another source of supply shocks is the
climate change sort of issue. So, we've had sort of little supply shocks in the past, and a very big one in the
'70s, obviously, with the first oil shock and so on. Often people talk about supply shocks in the Australian
context as being agriculturally based. So, cyclones wipe out the banana crop. That's a supply shock. Do we worry
about that from an inflation perspective? Probably not. We look through it.
But I think where you've got these supply shocks and they're much more pervasive across the whole economy, that
is a challenge, and I think it is to do with the fact that we've just got much more geopolitical uncertainty,
that different countries and jurisdictions are looking at what they can do to protect themselves from
competition or the hollowing out of their industries, those sorts of things, and that's introducing policies and
behaviors which are inducing supply-related shocks. So, I think it is just pretty much the world we're living in
now.
Chelsea Drake
Good luck to you. So let's talk directly about inflation now. When people hear economists talk about price
stability and inflation, what does that mean for Australians in their everyday lives?
Michele Bullock
So I think what it means is that people are observing prices increase much more quickly than they've seen them
increase in the past. When inflation was sort of about 1.5 or 2 per cent and I think it sort of fades into the
background. People don't really focus on it. Some prices are going up, some are going down, inflation is sort of
there, but it's in the background. What happened when we came out of COVID and inflation shot up to almost 8 per
cent, all of a sudden it was right in people's faces. And quite rightly, they're thinking, "The cost of
everything is going up, and this is putting a lot of pressure on my finances." And the other point about
inflation is that it really hits the most vulnerable in the community the hardest. They're the ones that have
the least ability and income to move, if you like. They have less flexibility. They have less discretionary
expenditure. They're mainly essentials. So inflation really, really hits the people on the lowest incomes the
hardest. Hits everyone, but hits them the hardest.
So I think that's what people are observing. One thing I think, though, that it's worth noting is that for many
of those prices that rose over the past few years, they're not coming back down. So when we lower inflation, we
don't lower the price level, we just lower the rate at which prices are increasing. So I think this is becoming
fast evident to people that even if inflation comes down, it doesn't mean that the price level is. They are
permanently facing a higher level of prices. So that is the challenge, I think, and that's why people are
feeling it so much. And in many cases, their wages are not keeping up with inflation. So all of this is adding
to pressure on Australian households and businesses.
Chelsea Drake
Yeah. Thank you. And it was interesting that in a recent survey that was undertaken by the RBA, it pointed to a
misunderstanding potentially amongst many Australians about the link between inflation and interest rates. Maybe
tell us a little bit more about that, because it would be a concern, I imagine, for you.
Michele Bullock
The survey work we did suggested that there's a fair group of people who think that higher interest rates cause
higher inflation. I want to distinguish here between what people might think of as their cost of living. So for
people with a mortgage, their cost of living, if you like, would include what they're paying on their mortgages.
So as interest rates go up, they see what it costs them just to live now as going up.
Inflation is a different thing to that. Inflation is about what's happening to prices in the economy. Not
interest rates, because interest rates, they're the price of money. So inflation goes up, interest rates go up
to try and control inflation. And so I think there's two things going on. People are observing that, so they
think, "Well, higher interest rates cause higher inflation." But they also, to the extent they have
borrowing, are looking at what's happening with interest rates and what that's doing to their cost of living and
equating that with higher inflation. So this is where the message is quite nuanced and certainly something we're
trying to explain, and the reason this matters is inflation expectations.
Chelsea Drake
Exactly. So understanding what drives inflation is incredibly important, I imagine, to getting inflation under
control, because you need people to shift their behaviour.
Michele Bullock
We need people to understand what inflation is and how we're trying to bring it down and be convinced that we are
going to bring it down, because if they aren't convinced of that, then it will perpetuate itself.
Chelsea Drake
Well, let's pivot a little now and talk about productivity and AI. So there's been much discussion about
Australia's future prosperity centering around productivity, and we've had a productivity challenge for a long
time now in Australia. But from AI and digital technologies to data centres, housing, infrastructure, energy
transition, we're all investing heavily in the future. What we're interested in hearing about is how do we
determine whether these investments translate into productivity growth and higher living standards over the next
decade or more?
Michele Bullock
Productivity is the word on everyone's lips, and it's on the lips of governments as well. Let me say upfront,
nothing we can do about productivity. The best thing we can do is keep inflation low and stable at target, and
that will allow households and businesses to concentrate on doing what they do best. High inflation takes
people's and businesses' eyes off the ball. They're worried about inflation, they're worried about costs. We
want that in the background so they can concentrate on what they do to improve productivity. Now, it's not
simple. Productivity, it's a really important concept, which means we use our resources, labour and capital
resources, in more efficient ways that allow more output for the same amount of inputs, if you like.
So you can
see over history that that's certainly the case. What happens is that we
combine labor and capital in a way that allows more output for the same amount
of labor and capital, and that's what allows profits to rise, it allows real
wages to rise, and improves living standards, and that's what we've observed
over the long sweep of time. As you've noted, productivity, not just in
Australia, I would say, the US is a bit of an outlier, but in most countries
around the world, advanced economies, growth in productivity has been slowing over
decades. It's just much harder to find productivity improvements. And Australia
is in that situation as well. We're not alone, but it doesn't mean that we
shouldn't be trying to do something about it. A few things. People often turn
to the government for that, and look, there are things governments can do. They
can remove red tape. They can make it easier for businesses to invest. They can
make it rewarding for businesses to innovate. So they're the sorts of things
that government can do.
But businesses also have to step up to the plate as well. And I think what's interesting is that, With the
Reserve Bank, we do some work on productivity. We do it sort of at an aggregate level to try and get a bit of a
flavor of what's driving productivity outcomes. And one of the things that some of our team have concluded is
that over the last decade or so, Australian businesses just seem to have become less dynamic. And even those
businesses that are sort of at the frontier, or were at the frontier, are not quite as close to the frontier as
they used to be. So there is something about businesses where they're not investing enough, they're not looking
for ways to combine labour and capital in ways to increase productivity. So there's something on the business
side there as well, a bit more dynamism in business.
What the solutions to that are, I don't know, but one thing that a lot of people raise, and I think it is
important, is competition. If there's competition, that sort of spurs businesses to take these sorts of risks
and try and be a bit more dynamic. So there's something about needing to make sure that when we're thinking
about competition, things governments could be doing is how do they encourage competition as well. So that will
also help to possibly spur productivity. I don't have the answers. I know Danielle Wood, her day job is to think
a lot about the sorts of things that we can be doing to improve productivity, but government's part of it, but
business is also an important part of it as well.
Chelsea Drake
I think Gino Cassarotti will thank you for that plug for competition in the market. But just sticking with
productivity and what AI might do. AI is seen as a great white hope in many ways for productivity. I think the
Productivity Commission, which you mentioned a moment ago, has been doing some work about the AI opportunity,
and I believe it is calculated that there might be a 4.2 per cent increase in labour productivity over the next
decade as a result of AI use. Now, that doesn't sound like a lot, but when you compare it to that, I think it's
0.3% that we've been averaging that actually is a significant change. So is the Reserve Bank hoping and looking
for that? And when will you know if that's actually occurring? What are the signs—or leading indicators?
Michele Bullock
It's a very interesting question. So I think, yes, it is the great white hope. AI is the great white hope to
improve productivity. When I talk to colleagues around the world about this, I think everyone thinks that, but I
think everyone also agrees that there are very few signs yet that AI is actually influencing the supply side of
the economy. There's lots of evidence that it's influencing the demand side of the economy. So we've got this
awkward sequencing event at the moment where, in Australia at least, we are in a situation of excess demand, and
the AI boom is adding to that demand ahead of any potential supply impacts that it might have going forward.
Leading indicators, I think the place that we are looking for it most is through our liaison program. So most of
you would know that we have quite an extensive liaison program. We've been running it for over 20 years. We
speak with all sorts of businesses in all sorts of industries, community organisations. And we have done some
work, we did it last year, we did some work talking to companies about where they're at with AI. And most of
them, I would hazard to say at the moment, although that may change quite quickly, so we'll probably need to
keep on top of it, but that's where we'll be looking for indicators of whether or not people are starting to use
it to improve productivity. A lot of people equate AI improving productivity with job losses. You can do more or
the same with less people working.
I think that's possibly true, but it's also an opportunity possibly for growth, for the same amount of labour to
be producing more. And if we're expecting incomes to rise, then demand will be rising and there'll be more
demand for goods and services to be produced. So it could be a virtuous circle rather than a negative impact on
unemployment. The other point I would make is that, and this isn't new, many people have said this, is that
every time we do have technology that changes things quite dramatically, we never know where the new jobs are
going to be. We know they will be created. It's a slightly trivial example, but I've said this before, I started
work at the Reserve Bank over 40 years ago, and I reckon there was a department of 100 typists in a typing pool,
and within a few years, they were all gone. Now, what did they end up doing? All sorts of things. They
retrained, some got out. But the bottom line is that there will be new jobs created. We just don't necessarily
know where they are yet.
And that doesn't mean that it mightn't be a challenging period, if there are certain jobs that are no longer
required, that it might be challenging how we move those people from those jobs into new jobs. So it might be,
again, another difficult issue for the Reserve Bank in terms of this as another supply side thing, worsening the
trade-off potentially between inflation and unemployment. In technical terms, the NAIRU might be higher for a
while, which means that for any given inflation rate, we have to tolerate a higher unemployment rate. So these
are the sorts of challenges I think with AI. Yes, hopefully, 10 years' time we'll be seeing it, but at the
moment, not a lot, and there might be some bumpy bits in the middle.
Chelsea Drake
And talking, I guess, a little bit more about those bumpy bits in the middle, you talked quite a bit about the
supply shocks, and AI is creating a bit of a, and data centres in particular, a bit of a demand shock at the
moment for the Australian construction sector. So an awful lot of demand, potentially taking also a little bit
of capacity away from housing construction, which is another issue that's very much on the mind of banks and the
public.
So maybe we could talk now about the housing market, probably one of your favourite topics, or a topic certainly
get asked a lot about. Now, that market has been influenced by a few things over the last little while: some
interest rate rises that the Reserve Bank has made, also some changes to tax policy. And the result has been the
first softening in the housing market that probably a lot of people can even remember after a period of really
strong growth. How do developments in the housing market influence the RBA's thinking about the broader economy?
Michele Bullock
So one point to make right up front here is that we don't target housing prices. I want to be absolutely clear on
that. We do observe closely what's going on in the housing market because it is one area through which monetary
policy does have an impact. And the way we typically think about it having an impact is: interest rates rise,
then that tends to soften the housing market. That can have effects on wealth. So to the extent that households
think, "Well, I'm a little less wealthy than I was, I mightn't consume quite as much." The other thing
it does is it reduces turnover. Often, when you see a slowdown in the housing market, turnover falls. So when
turnover in the housing market falls, then there's less people going out and buying new lounges and new
televisions and those sorts of things for their new houses. So it does have an impact.
Interest rate rises do have an impact on the housing market. And as you said, our judgment is that we started to
see the housing market soften before the war, the Middle East conflict broke out. It was softening as people
were starting to expect that interest rates would rise. So we were starting to see it anyway. Then when we
started raising interest rates after the conflict broke out, then that softened things again, and then there was
the tax changes on top of that. And you can see very directly the impact of the tax changes because you can see
housing approvals for investors have just dropped. They've dropped for everyone, but they've really dropped a
long way for investors. So it has changed the dynamic for investors, whether it's worth them investing in
housing or not.
But interest rates have also had an impact, and I would also say just general uncertainty. Now having said all
that, it's worth noting that since the beginning of COVID, housing prices have risen by about 50 per cent. So
yes, we have seen housing prices come off, but if you look at a graph of the level of housing prices, it's a
slight dip down after a very long run-up. And I think there was a feeling, certainly, before this most recent
correction, that housing was, in effect, becoming pretty unaffordable. The housing price to income ratios,
particularly in Sydney, are really high - a factor of nine. And in some cities like Brisbane, Adelaide, Perth,
they were lower than Sydney, and they've all been shooting up as well.
So we've had this very long run-up in
housing prices, a concern that housing was unaffordable. So I think the
correction - we've had corrections in the past. At the moment, if you look at
how it's correcting relative to other corrections, and I think we've had graphs
of this in our
Statement on Monetary Policy
, you can see that the
downturn is sort of in the lower range of downturns in the past, but it's
certainly not out of the ballpark of the sorts of downturns we've seen in the
past. So I think, yes, this is partly monetary policy working, coming off a very
high base, and the downturn doesn't look entirely out of line with the sorts of
downturns we've seen in the past.
Chelsea Drake
Yeah. And you hear it a lot, it is such a pressure point in the Australian public: the impact that interest rate
rises have on home loan repayments, more so than in other global economies it seems. There are a few ways in
which our market here is a bit different to elsewhere and just exacerbate the problem for the Central Bank.
Michele Bullock
Well, Australia, there are some other countries like us, but many countries have a predominance of fixed rate
housing loans. We have a predominance of variable rate housing loans. The exception to that, interestingly, was
in COVID when fixed rates were very low, and I think at one point up to 40 per cent of new lending was at fixed
rate. That actually now is down around 5 per cent. So it's back down where mostly Australian housing loans are
variable rate loans, which means that when interest rates rise, when policy is tightened, it has a very direct
impact on the housing loan rate that people are paying.
Other countries, less so, because they have fixed rates, and even when we do have fixed rates, actually our fixed
rate terms are typically much shorter than some other countries. Very extreme in the United States, but most
other countries, their fixed rate loans are predominant. So what that means is that this sort of cash flow
channel that everyone talks about is much more at front of mind for Australians than it is in many other
countries.
One point I would make, though, and you referred to the hearing on Friday. When we talk about the monetary policy
transmission channel, everyone focuses very heavily on the cash rate and the cash flow channel in Australia. But
there's other ways that it works its way through the system, and a very important one is the exchange rate,
which impacts prices across the economy and shifts demand between imports and domestic production. There's also
what we refer to as an intertemporal substitution, which is higher interest rates encourage people to save a bit
more rather than spend, so it shifts that as well. So yes, everyone focuses on the cash rate channel, but that's
only part of the transmission mechanism, and it's not the whole thing, and it's probably not even the most
important part of the transmission mechanism. If you look at overseas economies where they don't have this such
strong cash flow channel, monetary policy still works. So it works through all sorts of mechanisms in the
economy, not just through the mechanism that a lot of people focus on, which is the cash flow channel.
Chelsea Drake
Yeah, it's really interesting. We're going to move to some audience questions now. And the first one, the most
popular question: What is the tolerable level of unemployment to get to where we need to be on inflation?
Michele Bullock
Well, let me preface this by saying that unemployment is something that I think we do... It's part of our
mandate. The reason we need to focus on it, though, is because having a job is really important. It's not just
important for people for money-wise, but it's important for stability, it's important for their own personal
self-belief, if you like. It's really important for lots of reasons. So high unemployment is not great. What can
we tolerate? The way it sort of works technically is that, and I don't like to talk about this NAIRU, but there
is certain levels of unemployment that if you go below that level of unemployment, it introduces a lot of
pressure in the labor market, and that can put upward pressure on wages and prices because it puts pressure on
costs for businesses, that finds its way into prices.
So it's not that I can say I will only tolerate an unemployment rate of, say, 4.5 per cent at the moment. At the
moment, we think that's a bit tight. So the question really is not what can I tolerate or what can the Board
tolerate, but what level of unemployment eases the pressure on the supply side of the economy? So that really is
the essence of the answer. There's no particular level at which I think we can get to. I think between 4.5 and 5
will probably take enough heat out of the labor market that it'll ease pressure on inflation. But the whole
point about inflation being too high at the moment is it's reflecting the fact that the demand side of the
economy is outstripping the ability of the economy to supply the goods and services, and one evidence of that is
that the labor market looks tight.
Chelsea Drake
Yeah. Thank you. Here's a question that I wish I'd thought of. It's a really interesting one. What did you find
most important out of the intergenerational report that was handed down on Monday? I assume you've had a quick
read of it.
Michele Bullock
I've had a quick read of it. The start point that many have made is that the productivity assumption is obviously
something that's really key to the outcomes here. One way to look at that is to say, well, this is our call to
action to get productivity up. This is the call to action. And that's the way I would like to think about it.
The sorts of things it highlights, demographics, I think is very important. AI seems to have swamped discussion
about everything else, but we've still got the demographic challenges, which is all about supply in the labour
market. It's all about how do we finance as the population grows older, how do we finance the retirements of
this larger cohort with a smaller cohort of workers? So these are all big issues for the government and
governments into the future, they're going to have to deal with this.
The other thing, again, that's sort of gone a little bit off into the ether with AI is climate change. That's
still very much here and with us. And it's not only about the potential impacts of climate change, it's actually
also about what we need to be doing to lean into the energy transition as well, and the investments that we need
to make and so on. These are all sorts of things that are going to add to demand pressures and so on as well. So
I think demographics, climate change, AI obviously, all of these things, and I think they call that
productivity, but all of these things play into productivity. But the big thing is productivity. And as I said,
the message I take from this is it's imperative that we focus on what we can do to get productivity up again.
Chelsea Drake
We're still staying on that topic then. And you said earlier that this is not a challenge that's unique to
Australia alone, that productivity growth is slow in most developing economies at the moment. But how do you
think Australia compares internationally? Is it a great destination for investment and capital? Does the RBA
have a view on what needs to be done to make Australia a more attractive destination?
Michele Bullock
Well, I think we have good stable institutions, we have good stable governments, a good democratic society, so I
think all those things are good. A lot of what the Government is looking at in terms of red tape and those sorts
of things, I think they're all important things to look at. It's not my area of expertise in terms of where are
the innovative parts to go to in the economy. One thing, though, I think that is slightly worrying with the new
geopolitical environment is that around the world, many countries are turning a little bit inward. The world
economy grew strongly and productivity grew well when there was open trading. Countries were doing... And
Australia benefited from this. We did what we did well, and we imported what others did well. We played to our
comparative advantages.
With the new geopolitical environment, everyone is quite rightly saying, "Well, can we afford to be that
open now? Can we afford to be so dependent on other countries for certain essentials?" The implication of
that is, that if countries do turn inward a bit, that that is going to be stifling to productivity. We're not
going to be necessarily doing the things that we're best equipped to deal with. So I think there is a bit of a
sense in which, on the one hand, AI potentially is great. On the other hand, there are features of the
geopolitical environment which are also potentially going to be a little bit stifling. And so in order to make
Australia a place that people want to invest, I think we need to be looking at all those things we talked about
earlier, about regulations, about mobility of capital and labour, and also just competition. Again, back to
competition. How do we make sure that we've got competitive markets?
Chelsea Drake
So the assumption around productivity is around 1.2 per cent. Do you think that was a reasonable long-term
forecast?
Michele Bullock
It's not a forecast, it's an assumption. And I want to be clear, people compare it to our .7. Our .7 is for the
next two years. The 1.2 is a long-run assumption. So they are not comparable. So if you hear anyone saying the
Reserve Bank disagrees with the 1.2 because we've got .7, that's not right. It's a different timeframe. I don't
want to buy into discussions about whether or not it's too optimistic or not. I would prefer to turn the
equation around and say we need productivity to grow much more strongly over the next decade or so if we're
going to deliver on making sure that the Australian economy continues to perform.
Chelsea Drake
And are you hearing any anecdotal reports in the listening programs that the RBA runs? Are you hearing anything
to suggest that there is any shift in productivity yet or not yet?
Michele Bullock
Well, the place we have been talking to businesses specifically is on AI, and I think we haven't heard a lot yet
that there's been big productivity shifts. Interestingly, a colleague at the Bank of Korea had done some work on
this, but instead of asking the businesses if there'd been any productivity improvements, they asked the workers
if there'd been any productivity improvements. And the workers said, "Yes, I've saved an hour or an hour
and a half, and I've taken it as leisure. Takes me less time." So there's an interesting question about who
you ask. We're asking the businesses, and they're saying, "No, we're not seeing productivity yet."
The workers might be seeing some productivity improvements, but they might be choosing to take it as more
leisure. Because you can choose to take the productivity improvement in higher wages, you might choose to take
it as more leisure. That's the other option here. So look, no, I don't think so. And in fact, there tends to be
often a J curve in these sorts of things. While people fiddle around and try and figure out what to do with this
new technology, productivity actually can even decline. But once we reimagine our business processes, people get
familiar with it, they start using it, then you might see productivity take off. So I think the bottom line on
all of this is that it's still the early stages of the AI productivity boom.
The government is trying to do some other things, like trying to lower regulation in some areas. I know that
because the Council of Financial Regulators is also looking to see what we can do to reduce regulation on
financial institutions, which might help with lending and lending to innovative new businesses. That might help.
I know there's some work being done to try and allow mobility of labor across states. It seems odd to say that
you can't just be a nurse in New South Wales and just instantly start work as a nurse in Queensland. You've got
to go through a process. Same for electricians, same for other sorts of trades. Why can't we have just much
better mobility of labour? That would be a big help, I think, for productivity.
Chelsea Drake
Just checking in with the floor. We might be ready to take one question from the floor. There's one here at the
front of the room. If you'd remember to state your name and your organisation, please.
Questioner
It's a question about considering the level of global debt that's in existence.
And we have Central Banks not necessarily coordinated, but all lifting rates.
And then we have a scenario where they're doing that to fight inflation. So my
question is: Have you modeled a scenario where the Middle East nations, the end
of that war results in them setting aside their religious differences and
setting the price for oil that will help them repair their balance sheet and
therefore drive inflation higher, and then governments are paying a coupon that
they probably didn't think they'd pay a few years ago?
Michele Bullock
So no, we haven't modeled that scenario. We did model a scenario where oil prices go up to something like $200 a
barrel and stay there. And that's very bad for inflation, obviously, and very bad for the world economy as well.
So at the same time as it's inflationary, it's also really bad for growth. So the United Arab Emirates, for
example, has withdrawn from OPEC. So one implication might be that they can't keep the price of oil up there
because when the price of oil is high, others will sell into that market, and that will help. Because actually,
prior to all of this, oil prices were quite low. And if anything, what this has demonstrated, I think, is that
with the price of oil going up so high, that there is an incentive now for businesses and households and so on
to think, "How can I reduce my use of oil?" So the price incentive, if you like, is making people
think more heavily about electrification. We've all seen stories about the number of electric vehicles that are
being imported into Australia now. So the price signal is going to result in some sort of behavioural changes,
not only among households and businesses, but also among countries, I suspect. So they'll try and reduce their
reliance on oil and those sorts of products for which the prices are high.
On the more general comment about government budgets, bond yields are rising around the world. They're probably
rising for three reasons. One is they're expecting Central Banks to raise interest rates because of inflation.
They are observing, in many countries, very large deficits, government deficits, and no particular signs that
these are coming down, and that they're adding, obviously, costs to the governments to finance those. So there's
reasons why government bond yields are rising anyway, in an orderly fashion at the moment, but they're still
rising. But as you point out, this is adding to financing issues for governments. And if the economy is growing
more slowly than the interest rate they are being charged, then that is just going to keep widening over time.
So that's the challenge, and that's why the productivity issue is so important. We need to be able to grow
faster without generating inflation.
Chelsea Drake
Thank you for that question, and interesting to hear you talk about bond yields then, because that's certainly
covered in the newspapers a lot at the moment. There seems to be a level of concern amongst financial
commentators at the size of yields, but it doesn't sound like the RBA is concerned yet about what we're seeing
in the market. Is that right?
Michele Bullock
We would be concerned if we thought that this was disorderly. It's not disorderly. The increase in interest rates
at the long end of the curve at the moment, as far as we can tell, it's not in inflation expectations. We think
they're reasonably well anchored. It's in the real yield, and there's a couple of influences there. It's global.
It's to do with the fact that because there's much more risk around, they think Central Banks are going to raise
interest rates, there's uncertainty and risk, so people are demanding a bit more return, real return, to hold
longer dated debt. And the other thing we think is going on is that the neutral interest rate, so that's the
interest rate that is neither expansionary nor contractionary, we think that is rising around the world, and
it's rising basically because there's a lot of investment going on, and that's putting pressure on the savings
pool, and that means that the interest rate tends to rise.
So that's sort of what's going on around
the world, and that's the two factors we think are influencing what's going on,
but it's not been disorderly. We would worry if it looked like there were
illiquid markets, that markets were selling off, and that was aggravating the
rise in interest rates, and they were selling off for reasons of leverage.
Perhaps they were leveraged, and they have to get out of things quickly, if we
were starting to see that sort of thing. So it's on our watchlist. Our little
advertisement, our
Financial Stability Review
, comes out on the 1st of
October, and it will talk a little bit about some of these sorts of issues,
what are the sorts of things that are vulnerabilities that we've just got our
eye on.
Chelsea Drake
Well, speaking of that then, I don't know if this is a vulnerability that you've got your eye on. I think you
talked about the demand for yield, the demand for debt. A lot of that's driven in the corporate market by the AI
boom. Is there at all a concern, or is it on your radar that there might be a bubble, and that these, the
Magnificent Seven, whatever name they have, are propping up the US stock market, that some of that could turn
out to be]
Michele Bullock
Well, yes, that is something that I think from a financial
stability perspective, yes, all Central Banks are a little bit worried about
that. It might not be a bubble, but it might be, and if it unwinds in a
disorderly manner, then that could have implications for the financial system
and also for the real economies. As we saw, if financial stability issues
arise, as we saw in the global financial crisis, then that does ultimately
impact the global economy because what the financial system does is it
basically facilitates movement of funds from savers to investors, and if that's
not working well, then that impacts the real economy. So yes, that is another
issue. Some people think it's a bubble, some people don't. I don't have a
particular view one way or the other, but it's a risk that I think we're
watching.
Chelsea Drake
Okay. I see there's another question at the back end of the room.
Questioner
You mentioned before the exchange rate. Has the RBA, in the last month, changed or varied the way it considers
how to deal with the volatility of the exchange rate and keep it in the band that it prefers? And just also, the
CEDA CEO, Melinda Schlanger, who's obviously got her first meeting next week, any advice that you would give her
on that meeting? Any tips?
Michele Bullock
Answer the second question first. No. No tips for Melinda. I think she'll do perfectly well without any tips from
me, and she's a great addition to our Board, so I very much welcome her.
On the exchange rate, we have a freely floating exchange rate. We have not intervened in the foreign exchange
market for about three decades, since the global financial crisis. We would not intervene... We certainly don't
have any idea of levels that we would want it at. We have models which look at the fundamental drivers of the
exchange rate, and the two big ones are commodity prices and interest rate differentials. And as far as we can
tell at the moment, the exchange rate is basically reflecting those fundamentals. It's within the range we would
expect it to be reflecting those fundamentals.
The circumstances in which we might intervene are if the foreign exchange market gets disorderly, that liquidity
dries up, and that hasn't happened in recent decades, so we haven't had to. Doesn't mean we don't retain the
policy ability to do so. We hold foreign exchange reserves, and the purpose of those foreign exchange reserves
is to use them if the Monetary Policy Board thinks that we need to use them for policy purposes. So that's what
they're there for. We haven't used them in the last few decades, but it doesn't mean that if things did get
disorderly, we wouldn't.
Chelsea Drake
Thank you. We've spent a lot of time talking about the mandate around inflation, also around the labor market.
Question from the audience about the retail payments review -which has been other work that the RBA's been
doing. Any thoughts on the feedback received from industry, and what do you think the regulatory priority should
now be for the Australian payments system?
Michele Bullock
Well, we're going to release something on that fairly shortly. We will release something fairly shortly, which
sort of summarises, in case you didn't want to read all the 50 submissions, we'll release something which talks
about the main themes. The main themes that have come out have been mobile wallets, three-party card schemes,
agentic commerce. I think they're the three big themes. Oh, and account-to-account payments is the fourth issue.
Chelsea Drake
Do you explain all those things in the paper as well?
Michele Bullock
The paper will talk about those sorts of things. The Payment System Board meets... What are we? We're in
September, so they meet again, I think, in November, and they will then decide what the priorities will be. But
we'll release something fairly soon, which will set out the feedback we're getting from the submissions and
where the focus has been in those submissions, and then we'll decide how to prioritise based on the public
interest, competition, efficiency and stability.
One of the big points about payments in this quite volatile world is that resilience of payments is really
critical. The ability of people to continue to make payments in possibly difficult circumstances is critical. We
need to be able to allow commerce to proceed, and for that, the payment system needs to remain resilient. So
they're the sorts of things we'll be measuring the priorities against to decide which ones to prioritise. The
summary of the submissions will be coming soon, and then probably after the Payment System Board towards the end
of this year, there'll be something on where we think we might prioritise.
Chelsea Drake
Thank you. Just checking... Oh, we have another question in the room, in the... Oh, sorry, in this corner
somewhere. I can't see the person, but there they are. Just over here.
Questioner
Governor. Just a question. So your former colleague, Lucy Ellis, has told the ABC News that over the past couple
of weeks, the internal board members of the RBA have been signaling to the market that you want to raise rates
on Tuesday, as opposed to perhaps the board members that are not internal to the RBA. Is she right?
Michele Bullock
So you know I don't give forward guidance. I'm not signaling anything. I'm only one person on the Board, so I
can't tell you what the board will want to do. The only thing we've been doing in the past few weeks is, we
highlighted after our most recent meeting that we felt that the inflation risk was skewed to the upside. The
things we highlighted were excess demand, the issues to do with what's going on in the Middle East, and
inflation expectations. And the question we're asking ourselves, "Are some of those things materialising?"
The Middle East conflict has gone on now for much longer than people thought it would. Initially, people were
thinking it might go for a couple of months. It's still going six months later. Oil prices are still elevated.
Excess demand, there still seems to be excess demand in the economy. So all we've really been highlighting is, I
would say, not a position on interest rates, but highlighting, here are some of the risks that we think might be
materialising, which are going to be important for considering whether to raise rates.
Chelsea Drake
Thank you, Governor. This might be the last question from the floor. I think we've got time for one more.
Questioner
I just want to quickly follow up on that question. You say you're only one person on the Board, and you can't
speak for the Board, but have you thought about or have you decided how you're going to vote next week?
Michele Bullock
You always try, don't you? No, I'm not going to talk about how I might vote. Sorry.
Chelsea Drake
Shocker. Okay, and we might do one last question from the audience via Pigeonhole as well. A question around the
impact that shifts in population can have on economic activity. Do you want to say anything about if there was
to be a drop in population growth, what that might mean for inflation? Or is that one more thing that the RBA
tracks as part of all the things that you track?
Michele Bullock
So I think the way we think about population growth is that typically, population growth increases demand, but it
also increases supply, and the way people typically put it is, isn't immigration inflationary because you've got
more people coming in and spending more money, and that adds to demand? But the point is, it also adds to
supply, because a lot of those people come in and they work, and therefore, when we think about it, we typically
think that it probably is much of a muchness. So it raises demand, but it also raises the ability of the economy
to supply. So where it bites is the housing market, because the housing market can't respond, and that's, I
think, what people would observe.
So I'd say it's not inflationary in and of itself because it has impacts on both demand and supply, but there are
particular bits of the economy where it can have an impact because they can't respond. The supply of housing
can't respond, and that's where you tend to see pressures arising, whether that's from immigration or - well, as
the intergenerational report pointed out, we don't have a lot of natural growth in population anymore, and that
looks like it's extending out into the future. But it's fair to say that to the extent we've been growing, GDP's
been growing over the last few quarters, it's been growing due to population growth. Its GDP per capita hasn't
really risen much over the last year or so.
Chelsea Drake
That's the productivity challenge again.
Michele Bullock
Again, there's a productivity challenge there, yeah.
Chelsea Drake
Okay, thank you. So a final question for you, Governor, as we try and wrap up. Let's pull together many complex
strands of that conversation. We focused a lot on short-term economic shocks and how you manage them. But what
do you see as the key structural forces that will shape the economy? Let's look out a little bit longer ahead
over the next decade.
Michele Bullock
Yeah. Well, I don't think I can add much really to the intergenerational report. Demographics, critical. The AI
thing, yes, it's going to be really important as well. Climate change is going to be really important as well.
All these things are going to play out over the next couple of decades, but as I said earlier, they're all
feeding back into the productivity question. So it's all about productivity.
Chelsea Drake
That must be frustrating for a central banker who says you can't fix productivity with monetary policy.
Michele Bullock
It is. We can't fix productivity, but if we can keep inflation low and stable in the background and give
businesses and households comfort that they don't have to worry about inflation, and they can concentrate on
doing what they do best, then that's the best thing we can do for productivity.
Chelsea Drake
I think that's a great note to end on. Thank you very much. Thank you, and thank you for all the insights you've
given us over the course of the last hour into the many challenges that the Reserve Bank has to navigate as it
tries to drive us to the inflation target, at the same time protect jobs for everyday Australians. We'll leave
the conversation there. We'll thank the Governor