Firside Chat
Fireside Chat at Nomura 100
th
Anniversary Event
Michele Bullock
Governor
Washington DC
–
16 October 2025
Audio
60.5MB
Watch video: Fireside Chat with Governor Michele Bullock, at Nomura 100th anniversary event, Washington DC
Transcript
Moderator
(start of recording missed)
The other interesting thing I think is, you know, economists
often are made fun of, ‘cause we talk about, on the one hand the other hand, and let’s say
central bank governors or central bankers tend to be even more ambiguous at times. I’d say not
this Governor, but I used to work with Michele the early nineties and perhaps ‘cause of how
you’re a country girl and you’ve grown up in rural Australia and Dale, you’re a, I
think a pretty straight talker. And with that we can get into it. Sure. Michele, thank you very much
for coming here. A great pleasure for us.
Michele Bullock
Sure. Thank you for having me. And I was just telling Rob, I apologise if I sound hoarse before I
left, My little 1-year-old granddaughter gifted me with this cold. So I’m now, so I apologise
and hopefully my voice stays strong for this.
Moderator
It sounds good.
Michele Bullock
Sounds alright so far.
Moderator
Have some water? Okay, well let’s get going. So there, there is a Slido and so I do have an iPad
here. If you do have questions when we’re talking, please input them and I’ll put them into
the discussion. So look, let me, let me start Michele, with just your general view on the Australian
economy. It seems like activity is maybe perking up a little bit, but also it seems that inflation
might be a bit stickier than, than we thought. Can you just kind of give your overall thoughts on
where we’re with the Australian economy?
Michele Bullock
Sure. So I might just go back and give a little bit of context. So like many countries, we had
inflation in Australia peak sort of towards the end of ‘22 in our case at
7.8 per cent – much higher than it had been decades and certainly higher than it had
been throughout inflation targeting period. And the strategy of the Reserve Bank Board was a very, a
very deliberate strategy to raise interest rates. We raised interest rates very quickly from
practically zero to 4.1 per cent, the cash rate. And then we ultimately raised it a little
bit further to 4.35. But we, we did that very quickly, much more quickly than we’d done in the
past. But we had a very deliberate strategy that we didn’t want to raise it more than we had to,
to bring inflation down. So we were actually quite criticised for not following the lead of some
other central banks who took their interest rates up at the above five. So it was a very deliberate
strategy of the Reserve Bank Board to try and bring inflation down within a reasonable period because
we wanted to try and maintain the gains we had in employment. If you’d said pre COVID, we could
have an unemployment rate with a four in front of it, no one would’ve believed it, but it got
down to three and a half in the midst coming out of COVID and that that was too tight. There was
labour shortages, there were big issues there. But 4.2 per cent at the moment is good.
So where are we at? We’ve got inflation now back in the target band. Headline
inflation is a little bit volatile because we’ve got subsidies, government subsidies particularly
for energy which are swinging that around. But if you look in underlying terms, it’s gradually come
down and it’s, it’s now 2.7. A little bit of recent data suggests a couple of things. The first
is that we have been predicting that the economy would start to turn, particularly consumption would
start to turn because real wages have been rising and also wealth has been rising, particularly in the
form of housing prices and equities. And those two things usually result in a, in an increase in
consumption. And we are seeing that and I’d have to say the most recent data suggest that’s
been maybe a little stronger at the margin than thought. The second thing is that inflation, a couple of
things in the most recent, although monthly data for inflation, for those of you who don’t know, we
have only a monthly indicator. It’s not a full monthly CPI, we are getting that in November, so yay.
But at the moment we’ve just got this partial indicator and it’s very volatile. We don’t
put a lot of weight on it. But most recent data suggested that there were a couple of elements, in
particular housing dwelling/building costs and market services inflation, looked a little stronger than
we’d been expecting. So those two things together, activity looking a little stronger, the labour
market still judged possibly a little tight, it’s a bit uncertain but possibly and inflation looking
like there might be some elements there, so those sorts of things are at the back of our mind. And I
think we talked about that coming out our latest board meeting that that these sorts of things were
giving us a little bit of time to think about whether or not there’s more reason to come or
not. And, but certainly if you stand back, it’s actually good news. The economy is turning,
inflation is back in the band. We just want to make sure we keep it that way.
Moderator
It seems to pretty balanced overall the economy right now and fully agree with you – when you
look around the world, you know, you go back to when all the central banks were raising rates, there
was a lot of talk about the RBA should have been faster in raising rates. But perhaps off you
actually preserved a lot of the employment at 4.2 per cent.
Michele Bullock
And as I said, that was a very, there was a very deliberate strategy and, and look, you know, the
job’s not done. My job – I’m paid to worry, and I still worry. But we, we have a
legislative change now which makes it very clear that we have a dual mandate. It’s inflation and
unemployment. But having said that, if inflation gets out of control, that is ultimately bad for
employment. So we really need to make sure we try and balance that.
Moderator
Okay, so let’s stick to inflation because when it comes to inflation, we need to talk about and
kind of decide how much slack there is in the economy. And I think it was the, the August monetary
policy statement you had three risks, and I think one of the risks that you highlighted was that
maybe excess demand may be a bit more than you judge. Where is the RBA in terms of its thinking
around the amount of slack in the economy?
Michele Bullock
Sure. So I think at the moment we think we are probably close to balance in terms of the output gap,
but it’s very hard to judge these things. And ultimately inflation is what tells you whether or
not you’ve got an output gap. The employment, we think it’s still marginally a little bit
tight, but we look at a lot of different indicators of the labour markets. So those two things
suggest to us that maybe it’s a little bit tight but it’s close-ish to balance. I should
comment that when we were raising rates and then we held rates for a period of about 13 months,
and some people were saying, look, the economy isn’t growing, the economy isn’t growing,
you should be lowering interest rates. And what we were trying to explain to people was that coming
out of COVID – supply of the economy was growing at trend, and we can talk a little bit about
that if you like but it was growing, but demand coming out COVID had increased so much that it was
well above for supply capacity of the economy. So we had to slow demand down just to bring it back
down towards balance. It was well above the ability of the economy to sustainably supply those goods
and services. And I think that’s basically, we feel now we’ve sort of achieved that. How
fast demand can now grow depends on how fast supply grows and that’s when this whole issue of
productivity comes up.
Moderator
Well let’s talk about that because the RBA has lowered productivity forecast a bit. But the
thing that I found interesting is you’ve also lowered your projections of aggregate demand as
well.
Michele Bullock
That’s right.
Moderator
Can you explain that a little bit more?
Michele Bullock
Sure. So one of the, one of the puzzles for us in our forecast was that our labour market and our
inflation forecasts were sort of coming out in line, but we were completely overestimating demand.
One of the things that we think partly explained that puzzle was that we were overestimating
productivity growth. So we adjusted down our growth in productivity assumption for the next couple of
years for our forecast period down from 1 per cent to 0.7 per cent. And what we
think was happening was that businesses and consumers were, what we are observing was they were
adjusting to the lower productivity already. And so that’s why inflation and employment were
coming in where we were forecasting, but we were expecting demand to pick up more quickly and it
wasn’t. And we think that the thing that married those two was the fact that we were
overestimating productivity. Our new assumption means that demand of say GDP growth of around two is
probably a long run or you know, for the next couple of years that’s sort of consistent with
supply response of the economy. So it does mean that you can’t grow as quickly and it means real
wages can’t grow as quickly. That’s what, and that’s why for those of you who watch
what’s going on in Australia, there is a very big focus on productivity. The government is very
focused on what we can do about productivity. I would argue that we at the central bank can’t do
anything much about productivity. I think probably the best we can do is keep inflation low and
stable and that gives businesses and consumers the best environment in which to make good decisions.
Moderator
Including investment, which can increase productivity.
Michele Bullock
Including investment that can, that’s right.
Moderator
Okay. Let’s switch gears a little bit. We talked about Australia just on the global economy.
Michele, I’d like to, you know, there’s still a lot of uncertainty out there and yeah,
markets seem to be taking it all in their stride and maybe, maybe it’s the AI transformation
that is really driving all that. But as you said, central bank is, are paid to worry. Can you talk a
little bit about your thoughts around the global outlook?
Michele Bullock
Yeah, sure. So yes, every meeting practically I go to everyone comments on the fact that the markets
seem to have a very goldilocks view of what’s going to happen in terms of the macroeconomy. You
know, you’ve got credit spreads very low, you’ve got equity markets booming, it all seems
as if they’re discounting really bad macroeconomic outcomes. The risks -- so from
Australia’s perspective, we’ve been thinking about this in terms of what it might mean for
the world trading system because as a small open economy we’ve done very well out of open trade.
And for us what’s really important there is potentially the impact on Asia. Our direct exposure
to the United States is fairly limited. We don’t expect, and Australia has got the very low
10 per cent tariff rate with a couple of sectoral things. So for us, really the more
important thing for how we might be impacted by the global circumstances is the flow on effects and
the indirect impacts that might come through Asia and in particular China. So at the moment I’d
have to say that we -- back I think it was the May
Statement on Monetary Policy
. We did
a couple of scenarios, we did what called a trade war, which was a like, you know, very bad. Everyone
retaliates and world trade basically collapses in on itself and that would’ve been very bad for
Australia. But I think our central projection is for, yes a bit of a slowing in in world trade, a bit
of a slowing in China but maybe not too much. And that ultimately that would be a little bit
deflationary for Australia. But I think at the moment it seems that the very worst outcomes we were
thinking about possibly have been avoided. It doesn’t mean that there’s not a lot of time
to play out here. The effects of this are going to play out over the next few and you know, if
tariffs are maintained and others put on tariffs as well, these are all going to have impacts which
go out some time. And ultimately it isn’t good, we talked about productivity, it’s
ultimately not good for productivity because resources aren’t necessarily moving to where
they’re most efficiently used and of best use. I understand why this is happening and you know,
to be fair, there has been a tendency over the last few decades for increasing frictions in world
trade – this has just been a bit of a step change, if you like. So I think at the moment our
central projection is things will slow bit, it’s not going to be disastrous, but I also think
that the very, very seemingly rosy view of the markets probably isn’t right here. There is going
to be I think a long running impact.
Moderator
Okay. So a rockier path …
Michele Bullock
Possibly and look, you know, part of the issue here is it’s not just uncertainty, it’s
unpredictability – you just don’t know what might come out tomorrow morning. And where
there’s general uncertainty I think people can sort of deal with that, sort of know the
distribution but with unpredictability, sometimes you’re talking about very fat-tailed
distributions – things could go one way or the other. And so I think that’s sort of a
little bit of the challenge in the world we’re in.
Moderator
Right. Sticking to kind of the world view but bringing it back to Australia, you, we talked about how
Australia’s in a pretty good spot in terms of pretty close to trend growth and inflation is
within the band right now, but also the fiscal side in Australia is, is very good – one of the
few AAA nations. But you, you know, linking it to the rest of the world there are, there are
challenges and we’re seeing gold prices go through the roof and people talk about there’s
no alternative to the dollar and so there’s a million to gold. What’s the chances that
Australia will be shone in a much brighter light as you know, being one of the ones that are as you
said, a good spot and could start to get a lot more interest for foreign investors?
Michele Bullock
Well it’s possible and certainly in some discussions I have, there is that feeling I get from
people that they are interested in what’s going on in Australia. I mean we are a big resource
exporter obviously and we export a lot to China but we have more than just iron ore - we’ve got
a lot of gold as well. But more than iron ore and coal, and rare earths obviously is one of the ones
that is getting a lot of discussion. I think though, a couple of things. Coming out of COVID and like
many other countries there is more of a focus of the current government, and I understand why, on
security of supply chains and Australia’s security of its of its own manufac-- not manufacturing
so much but there’s certain things that we’d like to think that we could continue to do
ourselves. So security of our supply chains, I think that is getting more attention in Australia, as
it is elsewhere. I don’t think it’s manifesting in tariff barriers. I think the government
has made that very clear that we we’re not going to be retaliating with anything with tariffs.
But I do think there is still a bit of a security focus on making sure that we control our own
destiny a little bit and we’re not dependent on others. So there’s that. The fiscal
situation, yes, it is when you compare it with overseas, it does look better, but it still gets a lot
of attention in Australia. Because if you look at the forecasts for the current government forecast,
there are deficits out into the foreseeable future. Quite substantial ones because spending is
growing very quickly and revenue’s not as strongly, obviously. So there is a big debate in
Australia about how does the government get its fiscal position into a more sustainable -- make hay
while the sun shines, while we’re doing well. If we can’t make the budget stronger during
this period, while the economy is doing quite well and there’s lots of people employed, then
what happens in the next downturn? I know it’s a question that resonates around the world as
well. And even though we look, we are in a better position than many – our debt to GDP ratio is
30-40 per cent, it’s much lower and we’ve had a couple of surpluses and a
relatively small deficit, the most recent one. But still people in Australia are a bit concerned
about what it might mean going out.
Moderator
That’s interesting because the budget deficit just recently came out is under
1 per cent of GDP, there’s not many countries that are talking about fiscal
consolidation with such a …
Michele Bullock
Yes, it is. It is.
Moderator
That’s good. Okay, let’s shift from fiscal to monetary policy and you know, of course, r
star, everyone you must get asked a thousand times, how devilishly difficult it is to actually
estimate. And I think the RBA has various models where it can be anywhere between 1-
4 per cent, so very hard. But at the same time as a central bank you have to kind of gauge,
you know, the stance of monetary policy. Where, where would you gauge the stance right now? Very
tight, tight, neutral, loose, very loose?
Michele Bullock
So we use, and I think my colleague Chris Kent is giving a talk, I’m not sure if he’s
already given it or it’s later this week, but he’s talking about how we think about
financial conditions. And yes we do think about, we do have models with the neutral rate but we are
not slavish to those models because as you said, they’ve got very wide error bands on them. And
it’s a long-run concept in the absence of shocks, where might neutral be. So the sorts of things
that we look at, we look at regularly, are what’s happening with credit. It’s often
something that tells you a little bit about financial conditions. We look at longer-term interest
rates, including what markets are thinking is going to happen to short-term interest rates. So a
little bit of, if those sorts of conditions are easing, then that that sort of is easing financial
conditions for borrowers. Some of the other things we look at are, we often present a graph in our
Statement on Monetary Policy
which shows mortgage repayments because in Australia,
it’s not the only mechanism through which monetary policy works, but the cash flow channel is
quite an important one because we have a high proportion of variable rate mortgages. So what we look
at is what’s happening with required repayments on housing loans and that gives us a bit of
an idea of that pressure on budgets. Interestingly, in Australia what we’ve observed is that as
scheduled repayments have come down on interest and principal, households have, you know, on average
sort of maintained their payments. So they’re putting more into saving and so they’ve got
some buffers above what they need. So they’re the sorts of things we look at. So what I’d
say in answer to your question is we don’t think policy is really restrictive at the moment. We
likewise don’t think it’s accommodative. I would say we think it’s marginally tight,
but ultimately the test of that is going be what happens with inflation and demand. So once
you’re getting around about where you think you need to be, I think that’s where it becomes
quite uncertain. And you know, there are some models, I know the market sometimes focuses on the
average of our models, which I think suggest the neutral interest rate is about three. It might be,
it might not be. So I think at the moment what we’d say is probably still a little on the tight
side, but not much. And there’s a fair bit of uncertainty about it.
Moderator
Okay. That’s looking at monetary policy but then you could broaden that because monetary policy
transmits through, you touched on that a little bit, various other interest rates, loan growth, house
prices, the Aussie dollar, the equity market. When you look at kind of broader financial conditions,
a financial conditions index, how would you characterise that now in Australia?
Michele Bullock
So, and this is, I guess what I was alluding to, if you look at some of these other things, some of
these things are suggesting that policy certainly isn’t as tight as it was. Housing prices is
one thing we’re observing and that is one of the transmission mechanisms of monetary policy. On
the other hand, there’s a lot of folks in the cash flow channel, but there’s also the
intertemporal channel. So higher interest rates encourage people to save more now and that’s
what we’ve observed. But if we start to see people consuming a bit more, as some of the data
suggests we might be, then that’s indicating for us that the channels are working as we’re
easing interest rates. But remember we only started lowering interest rates in February, we’ve
gone down three quarters of a percentage point in that time. Some of that is flowing through, but
there’s still, we still think it’s, you know, 12 months that monetary policy takes to
flow through.
Moderator
The long and variable lags working their way through.
Michele Bullock
Yes. The long variable lags, that’s right.
Moderator
Okay. But ladies and gents, I’m getting quite a few questions coming through if you want to vote
on them, I’ll be very democratic and, and weave in the ones that are most popular. Michele I
want to talk a little bit about monetary policy framework and strategy. So in 2023, the RBA had this
independent review to strengthen the monetary policy framework. Can you talk us through how the RBA
is adapting to some of those new innovations and procedures?
Michele Bullock
Yes, so there’s some very obvious things. So one of the recommendations was fewer meetings, so
that we would have more time to do analysis. There was a bit of a feeling that with monthly meetings,
it was sort of a bit of a treadmill and we were a bit too focused on the day-to-day. So we’ve
done that. The other obvious thing we’ve done is institute press conferences, and the statement
now comes from the Board rather than the Governor. They’re the obvious things. What’s going
on behind the scenes at the Bank? Well we’ve reworked our processes. So we used to have a
meeting, one meeting to sort of discuss the economic conditions and then monetary policy
recommendation would be made in a paper and sent to the Board. Now we have a series of lead up
meetings. We have sort of a, just a discussion about the current economic and financial conditions
with lots of different people. The idea isn’t to make a decision. The idea is to make sure
everyone is on the same page or at least everyone has had an opportunity to put in their views.
We’re trying very much to get out diverse views rather than thinking. So that happens early. We
also have meetings of individual departments where staff get to put their views into meeting as well.
And then we have a, what we sort of call a pre-policy discussion where we discuss what the strategy
might be, and we’ve tried very much to start introducing scenarios. So we are making much more
use of “what ifs” and we use some models to do that. Models aren’t perfect obviously, but it
gives you a bit of a flavour. So we trying very hard to, when we talk to Board, not just talk to them
about what are we going do this month, but what might a path look like or if certain other things
happen, what might that imply for the Board’s monetary policy strategy. So that’s in,
there’s more modelling capability that we’re introducing there as well. So there’s a
whole lot of things under the hood and I’d say if you ask me in a nutshell what we’re
trying to achieve is we are trying very hard to get as many different views onto the table as
possible. And this was a point about the review, so that we thought broadly about what the possible
implications might be if we’re not right in our central scenario, what might be the implication.
So this is really, and it’s still a work in progress finished. But it’s, I’d like to
think it’s quite a different process and a different journey that we we’re trying to go on.
Moderator
Okay, excellent. Look, I’d like to get your views on central banks and the RBA’s use of
forward guidance. It seems to me that there’s times when forward guidance can be useful, but
also times when it’s perhaps less useful and kind of where do you think we are right now with
regards to the use of forward guidance?
Michele Bullock
Well, some central banks use it quite a lot and still use it. As you know, I’m very gun shy of
forward guidance. When it was used by my predecessor Governor Lowe back during COVID, there were good
reasons why it was used, I think. And it was used as part of a policy package including a yield curve
target for three years, term funding facilities, forward guidance on interest rates. So it was all
trying to make sure that we kept funding costs and financial conditions as easy as we could. So there
was a good reason for it. Unfortunately, and maybe other central banks haven’t had the same
issue, the qualifications around it were never picked up in Australia. So hence the interpretation
that the Reserve Bank Governor promised that there would be no interest rate rises until 2024. If you
look back at what he said and so on, he didn’t promise anything. It was qualified, but the
qualifications never got picked up. And so for myself, I think that would I rule out not doing it,
never doing it again? No, I wouldn’t say that, but I think it has to be in very particular
circumstances, and I would also think that we would want to think very carefully about how we were
positioning it along with other possible tools. One of the things that we also recommend is we
undertake a review or set out framework for alternative monetary policy tools. And that’s
something we will do. And I expect forward guidance will get picked up there.
Moderator
Okay, because my impression is now with the Australian economy close to balance and still a lot of
uncertainty out there, forward guidance may not be so useful at this point in time. But I guess the
challenge is, you know, if forward guidance, you can have a very strong forward guidance or a weaker
forward guidance, but it does help guide markets and avoid big surprises in markets. I guess the
challenge for, I’d love to hear your view, but right now with the RBA is with no forward
guidance, there is the risk that markets could be surprised at some point.
Michele Bullock
Well we did surprise them actually, we surprised them in July, when everyone expected us …
Moderator
So how do you think you can get out, is there ways to, because you don’t have to always give it
at the Monetary Policy Board meetings, but in between the meetings as you get more flow of data which
gives you a bit more certainty of where you’re heading, is there ways, for instance –
could more of the board members do more regular speeches or things like that?
Michele Bullock
Yeah, I think, and I was asked this question actually after that July meeting, why didn’t you
come out and say this earlier? Part of the problem is that the board makes a decision, so I
can’t actually pre-empt what the board might decide so that’s part of the challenge. And
the same would go for individual board members coming out and saying, they can only say, they can
only sort of give their view. They can’t tell you what the board might ultimately decide. And on
that occasion, you’ll recall we had a 6-3 split. It was our first time that we released
unattributed votes. So I mean I think we are trying very hard to give the market an idea of the sorts
of things we are looking at to enable them to figure out what they think our reaction function might
be. I think what happened in July was they read something into the data, which we did not read at
all. And so maybe the lesson from that was that we weren’t clear enough in explaining how we use
the data and the limitations with it. But you know, at the moment I think, given the experience we
had back with the previous Governor telling people what we think will happen with interest rates in
six months’ time, I am still very gun shy of that frankly.
Moderator
Right. Yeah, fair enough. Okay, so I’m trying to weave in some of the questions here. So Aussie
house prices are reaccelerating, which isn’t seemingly now being driven by immigration. Just to
paint a scenario, if inflation does gradually come down and it gives room for the RBA to cut rates
further, if house prices really start accelerating and you get more riskier lending, how will that be
dealt with?
Michele Bullock
Yeah, so another thing that’s come out of the review is that we now have a bit more of a
structured process of liaising with APRA. So, APRA is the macroprudential authority. They’re the
ones who have the tools, the macroprudential tools. So what our concern is there, it’s not house
prices per se, which are the issue, it’s as you said, it’s if that turns out to result in
much riskier lending, people chasing housing. So we’re alert to that and that’s where we
are talking to APRA, we’re talking through the Council of Financial Regulators, we’re
identifying what the potential risks might be. One of the ones at the moment, and we’ve
highlighted this in our recent
Financial Stability Review
, is that investor lending
tends to respond more quickly to interest rates.
So we have observed that. Investors can exacerbate housing price cycles. So even though
they mightn’t be riskier borrowers, they can exacerbate housing price cycles, which means that
others can get caught if they’ve got risk lending. And we’ve observed that in the past. So
that’s one thing that we’re on alert for and APRA is also on the alert for. And so they’re
the sorts of things we’ll be watching. But again, you know, I can’t really control housing
prices. And if we focus on the financial stability side of things, then we’ve got to work with APRA
to try and address those things through macroprudential tools.
Moderator
And there’s very close collaboration on that.
Michele Bullock
It’s very close collaboration there and the review recommended we put in place more arrangements
which we are doing.
Moderator
Okay. We talked a bit about China and there’s a few questions here I think, given what’s
been happening with the US-China renewed trade tensions, asking the question if the tensions do
ultimately lead to the threat of the US administration of a hundred percent tariffs on China, what
would be the effect on the global and Australian economy? Maybe you can talk about the Australian
economy.
Michele Bullock
Yeah, sure. So couple of things up front. First of all, we have observed trade flows have been quite
nimble so far. Now that’s partly because what we’ve observed is that under the current
tariff regime, Chinese exports to the US have fallen, but they’ve found other places to go. Some
of them have gone to other Asian countries, some to Europe. Now there’s a whole question if they
increase tariffs quite dramatically and that effect is bigger, that does raise in my mind the risk of
retaliation or at least defensive strategies from some of these other countries, which would be bad
for the world economy. I think part of the problem in China at the moment is that they are, I mean
they’ve got deflation effectively, and they’ve got lots of production and competing
provinces competing down the prices of many manufactured goods – cars is a good example –
and then exporting that to the rest of the world. There is a challenge with China and it’s, you
know, I think this is being pointed out by the IMF and you know, the authorities say they understand
it but they’ve got a massive population. If they can encourage the consumption side of that,
that would be very powerful for their economy. But they’re still focused on this export-led --
so if the tariffs go up, I think there potentially is quite a lot of disruption to the world trading
system. I think it potentially raises the risk, as I said, of defensive strategies from others. And
ultimately I don’t think it’ll be good for the Chinese economy either because at the same
time as they’re trying to solve this problem of oversupply, the government hasn’t really
done anything at the moment that is addressing the long-run issue of consumption in the Chinese
economy. So I think the risks are much higher in those circumstances.
Moderator
Right, there is this … campaign. You also need demand.
Michele Bullock
That’s right, you need demand. And Chinese consumers, if they’re not confident then
they’re not going to consume.
Moderator
Yeah. Okay, last question for you Michele, because we’re almost out of time. The Australian
superannuation industry, which is the pension fund sector, has been growing in leaps and bounds. I
think it’s almost like maybe 160 per cent of GDP, something like that. So in the RBAs
Financial Stability Review
that came out earlier this month, there was a discussion how
if the super fund industry continues to grow at this rate, it’s going to continually need to
increase its investments offshore in order to diversify. But that that does pose the risk of FX and
liquidity risks and that could, given the size of the super funds, it could amplify stress in the
domestic financial sector. Can you talk about that a little bit and what the RBA is guarding at,
looking at for that?
Michele Bullock
Yeah, sure. So it’s really, we are looking at the interconnections between the super funds, the
Australian banks. So the super funds hold a lot of Australian bank paper for example. They
increasingly hold, as you mentioned, offshore, but they also hold relatively illiquid investments as
well. So equity investments in things that aren’t necessarily easy to sell off. So I think the
concern is that as they’re still in the accumulation phase, that won’t always be the case,
but as they continue to accumulate assets, the extent to which the liquid assets are held in things
like bank paper, if there is outflows, if they need to liquidate quickly, then that could actually
have impacts on the financing of the Australian financial institutions themselves. So there’s
this link here. There’s nothing much we can do about that. I know APRA has been doing a lot of
work on liquidity with super funds, but I think the other thing that we are quite concerned about,
and we raise this in the
Financial Stability Review
as well, is it’s not just super
funds, this is across the board, this idea that financial risks might coalesce with operational
risks, and the two things coming together might make things worse. So examples might be at the same
time as you’ve got ructions in financial markets you had in April, say like where you’ve
got big volatility, if at the same time there was a cyber attack, say. Those two things coming
together could make things much, much worse than just a financial crisis or, or an operational one.
So what we are trying to think about is how those sorts of multifaceted risks might eventuate. Again,
not much we can do about it, but you know, APRA again, we are doing a lot of work in thinking about
how do we make these systems more resilient, operational-wise, how are institutions addressing
operational risk, how do they recover. So I think that’s also a really important part. It’s
not just about the liquidity and the financial markets, it’s also about this extra facet.
Moderator
Great. Michele, we covered a lot of ground. Thank you very much for stopping by.