Interview
Interview With Money News, Nine Radio
Sarah Hunter
Assistant Governor (Economic)
Sydney
–
14 October 2025
Evan Lucas
So first and foremost, we need to start with the big story, which you guys continue to allude to over
and over for good reason. It’s the landing of inflation. Do you feel that we are getting there
despite the fact that there are signs something like service inflation is sitting at the top of the
band and goods inflation is sitting at the bottom of the band? Are we tracking in a direction that
makes you confident that you’re going to land the plane?
Sarah Hunter
It’s an excellent question, and as you can imagine, it’s something we focus on a lot here
at the RBA. Look, I think we’ve made really good progress on bringing inflation down, as the
Governor said as well. Inflation was up at close to 8% at one point, and we’ve now got it back
inside the target band, underlying inflation, and that’s a really great achievement. And
we’re not far off that midpoint. So hopefully, we’re pretty much there and hopefully we can
really keep inflation around that midpoint of the target band going forward from here. As you alluded
to though, in the latest monthly data, the last two months that we have, we did see some signs of
inflation coming through a little bit stronger around housing costs and also market services.
That’s a bit stronger than we were anticipating. So we’re definitely going to be watching
that. And obviously, as a forecaster, things always play through a little bit differently to what
you’re expecting.
So for us here at the bank, that means we update our forecast and then we provide that
advice to the board so that they can set policy. But really, the job from here, as you say, is to make
sure that we keep inflation around about that midpoint of the target band. We know that’s
what’s best for the country and that’s what we’ll really be focused on.
Evan Lucas
So one of the parts of that services led area is something like rent. Rent at the moment according to
the latest totality data and also for PropTrack is moving at about 4.1 per cent. How are
you taking that change, particularly considering how large housing is inside the inflation basket,
into consideration and what that might do to your forecasts around rates?
Sarah Hunter
Yeah, it’s a really great question. We’re definitely watching rent, watching housing
inflation more broadly. As you say, it is a big component of the overall basket. In terms of how we
see rents playing out from here, we’ve been seeing the softening in rents for some time. We
weren’t expecting too much more of that to happen, but we’ll certainly be looking to see if
we get a significant turn up and that’s something that we would monitor going forward. It’s
one of the factors that goes into our outlook for the economy. And really, when we’re setting
interest rates today, what we’re really trying to do, think about is, where do we think things
are going to be in 12 to 18 months? Because that’s when an interest rate decision
today has the most impact. So we’re always looking ahead and we’re always thinking about
what might be happening to rent, say, and to other parts of the economy. But it is something that
we’re watching.
We’ll have more to say in an updated set of forecasts in November, and obviously the
Board will make its decisions then. But we’re always responsive to how the data plays out and how
the outlook might shift. So the August forecasts were what they were, but they’ll be changing in
November and they’re always evolving. So it’s a constant monitoring job.
Evan Lucas
Is there any other parts of the inflation figures that are sort of catching your attention? You know,
your latest sort of Senate testimony is that you are aware that there are things that have come in a
little bit hotter than you were hoping. Outside of housing, what else is catching your attention?
Sarah Hunter
Yeah, so the other component that we pay quite a lot of attention to is market services. There’s
a couple of reasons for that. One, as a group all together, it’s a relatively large chunk of the
CPI as well. But two, it’s also because it’s very influenced by domestic conditions.
It’s also a part of the CPI that we know monetary policy can have a particularly large impact
and the contrast would be something like petrol prices. They’re really set on global markets and
we don’t have any influence over those. So we will look through volatile items like petrol, but
we do focus on core underlying inflation items like market services. So we did see some signs that
some of those market services were perhaps a touch stronger than we expected them to be in our August
forecast. So that’s a watch point as well. And that information is flowing into our November
forecast update that we’re working through at the moment.
And so those two areas in particular, in terms of inflation perhaps being a bit stronger,
housing and market services, they’re where we’re focusing our attention at the moment.
Evan Lucas
Other thing that’s happening in the inflation figures that’s coming up is that you are
actually about to navigate into the monthly figures in terms of being the full suite and full basket
of what’s going to be on offer. Can you take me through the amount of work that your team has
done leading up to this, but also what your team will be doing with that data going into the future,
because it is going to be what the RBA is going to base its assessments on going forward, and how a
monthly read will be different to a quarterly read.
Sarah Hunter
Yeah, great question, because this is a once-ever change to go through, so it’s very exciting.
As a central banker and a macroeconomist and the team here, we’ve certainly been doing a lot of
work on this. And it’s just great. We’re so pleased that the ABS have been able to build
this out and put this in place for us. It really is going to make our jobs, or at least the
information that we have, will be much more frequent. We’ll get 12 reads a year on
inflation rather than four, so it’s fantastic. But what we do know is that to begin with, there
is going to be a bit of a transition period. So the reason for that is that one of the really
important things that we need to understand about inflation and inflation momentum is we need to be
able to look through seasonal changes in prices. So a really great example are the Black Friday
sales. The prices of many things will be what they are just before the sales start and then
they’ll obviously come down when the sales kick in. Now, you know, Black Friday’s been
around for a while now, so the ABS have got a bit of a handle on it. They know it happens at the end
of November every year and so on and so on. But what the ABS are working through at the moment is
that some parts of the CPI, where they’re collecting the data on a monthly basis now, they
actually don’t have enough data to fully know and understand what the monthly seasonal patterns
are. They know what the quarterly patterns were from before, from the previous series that they were
producing, but they’re still learning about the monthly patterns. And so they’re learning,
we’re learning with them. And just while that’s happening through that transition period,
we’re going to keep looking at the quarterly trimmed mean series, which is where we take out
these seasonal patterns and really look at the actual underlying momentum, as well as the monthly. So
the monthly will give us extra information, which is fantastic.
It will really help us in our forecasting, in our advice to the board. But just whilst
those seasonal patterns are being fully worked out and built into the data, we’re also going to keep
looking at the quarterly series. And that transition period is going to run for around about
18 months, maybe a couple of years. So the ABS are going to keep publishing that quarterly trimmed
mean through to the middle of 2027. But it’s just a transition. And once we get onto the other side,
we’ll have a full monthly, which, as I say, will be absolutely fantastic, a real step forward, and
we’re all very excited for it.
Evan Lucas
So the other thing that is starting to eventuate on what has happened with movements in rates in
2025, and you alluded to it in your last meeting and likely to be in the minutes with what we’ve
seen coming out today, is that house prices are starting to move. They’re moving, you know,
slightly back towards the sort of levels of speed of change that we saw, you know, through 2022 and
2023. How much further can you see house prices moving, particularly considering, as you’ve
alluded to, the cost of living crisis, also the fact that real wages are slightly better than
inflation? Where does housing go with rates still expected to come down further, but also moving now
to levels that some people would argue are unsustainable?
Sarah Hunter
Yeah, it’s a great question. So what we do know, we’ve seen it in the past and we’re
seeing it again this time and it’s not a surprise. We do know that when we start to cut the cash
rate, you do tend to see a relatively quick response in the housing market. So house prices start to
rise more quickly than they have been before. We’ve seen that many times in the past. It’s
not surprising. We understand it’s obviously connected to the sort of borrowing capacity of
people that are purchasing a dwelling. And so that does tend to come through. And so it’s not a
surprise. It is actually one of the main transmission mechanisms for monetary policy. In terms of
where house prices can go, we don’t target house prices. They’re not part of our mandate.
We’re obviously concerned about inflation and about achieving full employment. We also have a
responsibility around financial stability and making sure that the banking sector is resilient and
stable, but we’re not targeting house prices, so we don’t publish a forecast for house
prices in particular. And we do understand, I do very much understand that if you’re trying to
get into the market, if you’re a first-time buyer, that affordability constraint is very real
and very challenging. We know that governments are trying to tackle that, but as we said before in
quite a few different forums, really the solution is supply, fundamentally. Interest rates do have an
impact over the cycle, but interest rates go up as well as going down. And so when interest rates
start to go up, we tend to see that house price growth at least slows. And actually, you can see
declines in house prices. We’ve seen that in recent years. So, we have an impact in terms of
timing, but really the structural fundamental in all of this is supply. We know there’s activity
and efforts now to try and increase supply, but it’s going to take time.
Basically, because it takes time to build new dwellings, it takes years to get a new
apartment block fully up and completed and to get those apartments into the market so people can buy them
or rent them. So, really, that’s what we’re, you know, we’ve observed it in the past and
that’s what we’ve said recently. This cycle isn’t likely to be any different in that
regard.
Evan Lucas
The other thing that the RBA is also clearly showing in its forecasts and going forward is a rate of
growth that is below historical trends. Your average is sort of around the 2%. Has Australia now got
to a level of maturity that we need to accept, like all developed economies, that that sort of 2%
growth is now going to be standard? And how that also filters through into things like consumer
confidence, but also in our outlook for how our economy will be over the next couple of decades?
Sarah Hunter
Yeah, it’s an excellent question. And as you’ve probably seen, we, recently downgraded our
assumption for productivity growth, just to really reflect what we’ve been seeing on the ground
and it took us a little time to fully understand what was playing out, because COVID had such a
disruptive impact. But we now do think that that pace of productivity growth that we’re
currently achieving is a bit lower than we thought before. I mean, I think in terms of that
historical comparison, you’re right. We’ve seen a faster pace of trend growth, or the pace
that can be sustained without generating inflation in earlier decades. Partly that’s because we
have stronger population growth, particularly in the 80s and the 90s, but also we did have stronger
productivity growth in those periods as well. In terms of the time horizon and what it looks like
from here, we’re very focused on, entirely focused really, on the sort of two year horizon, two
and a half year horizon.
That’s because that’s the horizon over which monetary policy has an impact.
We’re not saying anything about what might happen beyond that. We could see stronger productivity
growth in the future. Perhaps artificial intelligence really does start to embed itself and unlocks
substantial gains for many sectors right across the economy, that other changes can play through as well.
We’ve seen that in other countries. It’s not impossible to see that here. So we’ll be
revisiting this issue and thinking about that going forward and revising our assumption if we need to in
either direction in the future. And in terms of consumer confidence, yeah, it’s a really tricky one.
We’ve seen relatively subdued levels of consumer confidence right across a number of advanced
economies. So we’re not alone in this happening right now. We think that maybe part of the story
there is the increase in the cost of living. So it’s just more expensive and people just got to get
used to that again. And we’ve said it a few times. We’re trying to bring inflation and keep
inflation low at around two and a half percent, but we’re not trying to bring the price level back
down. So we won’t be going back to milk costing a dollar a litre. Remember that from pre-COVID.
That’s not going to happen again. We don’t want that to happen. That would be a really bad
outcome, If it did, it would mean the economy was in a really deep recession and that would be terrible.
So maybe that’s part of it, that we’re all just slowly adjusting to that new cost of living.
Maybe there is something what you said in terms of that momentum and pace of growth, although we’ve
not really looked at that. It’s a bit of a puzzle, to be honest with you. I think we’ll learn
more over the next few years as things finally completely normalize post-COVID, touch wood, I hope, and
we’ll see where we’re at.
Evan Lucas
The final question that comes from all of that discussion, which was absolutely enlightening in terms
of what you’ve just told us there, Sarah, is we are going to get the question of what is A, the
neutral rate, and B, how many more rates down? Your forecasts, I know, are based on the market. It
says two, but are you feeling that what you’ve done so far is taking the foot off but are still
at restrictive? Can we see or understand what 2026 will look like from the RBA’s perspective
with rates?
Sarah Hunter
Yeah, great question. So in terms of neutral, I’d say a couple of things. One, it’s very,
very hard to estimate. You get very wide error bands on these types of models that we use. And so
neutral is only ever whatever you estimate it to be. It’s really a sort of long-run concept
that’s looking through all of the different factors that might be, and shocks and everything
else that might be, buffeting the economy today. If all of those things went away, what would be the
neutral rate for the economy or rate where interest rates are not stimulating or restricting the
economy? And so having said that then, it’s not really a target. We certainly don’t think
of it as any kind of target or a number that we’re aiming to take the cash rate to.
What we’re really looking to do is, given everything else that’s going on across the
economy, the global conditions, what might be happening in terms of that consumer confidence response
we were just talking about and how that might show up in consumer spending, what government spending
is, what business intentions are with respect to investment, all of that stuff put together, what do
we think needs to happen to the cash rate to keep inflation around the midpoint of the target and
keep us as close as we possibly can to full employment? And so all of those other things that are the
reasons why the cash rate can be at different rates to neutral at any given point in time.
In terms of looking forward from here, yes as you said whenever we do a forecast, we have to put in an
assumption, the cash rate we have to build it on something, typically we will use the market path, so
in August that market path had around about another two cuts in, but that’s no guarantee for
anything. I have been forecasting for a long time, I can say that my personal forecasts have been
wrong many times, you get data come through in different ways than you expect, you get different
shocks that happen that you can’t foresee at any given point in time, so we’ll see how
things play through going into next year but really the job for the board is to take all of that new
information that comes in, the updates to our forecasts and outlooks that we will give them. We have
one coming in November and we’ll have going into next year as well and they will set the cash
rate accordingly. So it is really no guarantee and you really can’t say definitely what the cash
rate is going to be next year, we don’t know, but what we will be doing is advising the board
who will be setting the cash rate to respond to what is actually happening, as I said to try and
achieve the mandate, so try to keep inflation roughly speaking where it is today at around
2.5 per cent and to keep the economy as close as we can to full employment.