Speech
Interview with Bloomberg Australia
Andrew Hauser
[
*
]
Deputy Governor
Sydney
–
20 February 2025
Video
Questioner
Such a rare treat to speak to you or to speak to anyone from the RBA, so we appreciate your
time. I think what that introduction sort of left out is the fervour we have felt, this nationwide
applause, sigh of relief. Do you feel like a bit of a rockstar this week?
Andrew
In terms of what? I didn’t hear the introduction. Do you mean in terms of the labour
data?
Questioner
No, in terms of the first rate cut in four years.
Andrew
Oh I see. Look, I mean, central bankers are probably not the people you want to invite to
your rave or your dinner party, to be absolutely honest. We are paid to worry, and we are paid to be
serious about the economy. So I wouldn’t say there was celebration in the RBA about this. We did
what we always do – we look at the data and try to form a view about where monetary policy should go.
Questioner
Was there consternation though? I do wonder in that room how hard was it to get to
consensus given that there are still data points that would support a hold? Perhaps in a different
environment?
Andrew
Well look, it’s interesting, isn’t it? I am sure you are reporting this – the
markets had formed a view that it was more or less a slam dunk that this would be a rate cut. The
debate in the room, as the Governor Michele Bullock said earlier this week, was more balanced and that
there was, as there always is, an exchange of views about the case for a hold and the case for a cut.
And as you say, there were factors on both sides. We reached clear consensus on the decision in the
end. But I think it would reassure you, and I hope it reassures markets too, that we are not sort of
saying – oh well, the answer’s already there, so we follow the market and we just do what
people are expecting – we look at the economics, and we make a decision.
Questioner
There is nothing pre-determined about this particular trajectory of this easing cycle,
for any central bank at the moment. It is interesting – we heard from the Treasurer that
inflation is in the rearview mirror. With a lot of the risks – be they global tariffs and
counter tariffs or election-year spending – do you think that’s going too far?
Andrew
The Treasurer can speak for himself. There’s been a great deal of positive news
about inflation in Australia. Just to remind you – and I know you know this – we adopted
a somewhat different strategy to tackling the inflation spike in Australia to other countries. We
raised interest rates to a level we thought that were restrictive, but we didn’t raise them to
the sorts of levels that other central banks had done, precisely because we wanted to protect the
gains in the labour market. And I think as you’ve been talking about earlier – labour data
out today show that the labour market in Australia has been incredibly strong. But inflation has also
come down as well. What we said in December is that we would form a view about whether we’ve
become sufficiently confident that inflation would come sustainably back to target – to the
midpoint of the target two and a half – to begin easing. We did reach that position of
sufficient confidence, but this is not a done deal yet. The underlying rate of inflation is still
3.2 per cent, which is slightly above the band. The headline rate of inflation is in the
band. And so although we’ve removed some of the restrictiveness that we had in policy, there is
still restrictiveness in the system, and we still need to see a bit more good news on inflation
coming back to that midpoint.
Questioner
And the jobs data was quite nuanced, right? Because even though unemployment ticked up,
even though we saw more full-time jobs than expected being added, participation is still really high.
The wages data this week showed further slowing. And does that tell you that some of that robustness
might start to fade in the coming months?
Andrew
And which bit of it shows you that it might fade?
Questioner
That we’re starting to see the signs of perhaps a little bit more vulnerability in
the labour market. And of course, Australia’s not the only one that’s dealing with that
scenario.
Andrew
It’s quite hard to see bad news in the latest employment data. They remain very
strong. I think the debate about the labour market is a slightly different one, which is although we
know employment has been growing strongly, inflation has been coming down. And as you say, wage
inflation has been coming down too. So, there’s a very lively debate about whether that
employment growth leaves us with less capacity in the labour market or a bit more. If there is a bit
more, then inflation will come down more quickly than we’re predicting. And that’ll be good
news because it will mean that we can adjust policy more rapidly. But we need to see more information
on that, I think, before we before we can be sure.
Questioner
How does a change in immigration numbers potentially affect that, particularly with the
labour market, but broader growth in general? Because we are expecting that regardless of who wins
this year’s election.
Andrew
So I tread into issues of migration with some tentativeness as a central banker. Obviously,
Australia for long periods of time has had a model of substantial immigration as part of its growth
model and it’s done very well out of that. In terms of the inflationary implications of
immigration, broadly speaking, our view is that it’s a wash. So, every person that comes into
the economy, in general, they increase the labour supply, which pushes down on inflation. But they
also have to purchase things and they have to consume things and they have to spend money, and that
increases demand. And broadly speaking – you can debate the details – those two effects
probably factor out, leaving inflation roughly where it would be otherwise.
Questioner
I do want to get your view on the property market. I know it’s not an RBA
topic, but it is a national obsession, of course.
Andrew
I’m a renter, I should say. That probably immediately puts me in the same category
– I’ve got nothing at stake here.
Questioner
But it is an ongoing problem, and it is something that feeds into the affordability and
the cost-of-living crisis. Is there a balance there? Is there a policy balance that you can see?
Andrew
Well, I think one of the quite encouraging bits of news in the latest decline in inflation is
that some of those metrics, whether it’s dwelling costs or rents, have started to come off
inflation in those two amounts. And that was one of the surprises in the undershoot of inflation that
we and the market both saw in those numbers. And so, there is some cooling there. I hesitate to say
that, you know, where this is going to leave us in two- or three-years’ time. And clearly there
are major structural challenges in the Australian housing market that I’m not going to wade
into. All we can do is, you know, take as an input our best read of what’s going on in the
housing market.
Questioner
Not two or three times, but two or three years in the future. But let’s look forward
to April. If I put it to you that the monthly CPI data that you get – maybe the two readings
beforehand – show that first quarter trimmed mean is going to come in under the forecasts from
this week, would that trigger a move?
Andrew
No single piece of data will ever trigger a cut or move. We get a lot of data in every month
from surveys, from hard data, from our liaison people that are out around the country talking to
businesses. And our job is to put all of that information into a hopper and form a view about the
outlook for inflation. Clearly, the inflation numbers are important. As you know, there are
challenges with using the monthly data in Australia because the monthly indicators are not even
called inflation numbers, they are partial reads on inflation. We only get a full,
100 per cent read on inflation once a quarter. That causes us to aim off a little bit from
the monthly numbers. But look, I mean if they come in weak, that will obviously be important for us.
And as I say, I won’t quite say what’s not to like here, but a world in which our forecasts
for inflation maybe being a little bit above on the basis of the market curve, if we get news on the
downside of that, that’s a cause for celebration.
Questioner
Do you envisage a challenge where rates stay the same – because there is, of
course, so much caution, uncertainty – inflation continues to come down and you get that de
facto financial tightening scenario? Is that a worry?
Andrew
Well, it’s interesting actually, because our forecast, which shows inflation stabilising
slightly above the midpoint, has got some interest. Point number one is that’s conditioned on
the market curve, which assumes that there will be three or four more cuts. But one of the pieces of
information that the Board reviewed before making its decision was an alternative version of that
forecast, which looked at what would happen if we held interest rates constant – which I think
is your question. And under that forecast – and we didn’t publish this, but I can tell you
this is what it looked like – under that forecast, inflation didn’t stop at 2.7, it
undershot the midpoint. Not by a lot, but by a little bit. And that factor alone was quite an
important input into the Board’s decision. So, holding interest rates constant would have led
inflation to undershoot, and that was an important part of our discussion.
Questioner
Where do you see the neutral rate at the moment? There’s a note out from CBA this
morning, modelling and coming out with it being around 2.9 per cent for the nominal
neutral.
Andrew
Well there’s a chart in the
Statement on Monetary Policy
that shows the
range of estimates of the neutral rate and it runs from something like 1 to 4. Now, three
percentage points of difference in such an important macroeconomic variable is pretty useless, to be
honest. It’s far, far too vague for us to put a great deal of weight on that. We show that
chart, I think to make two points. One is that it is very uncertain and if anyone ever tells you
– and I don’t think you’ll ever get a senior central banker to tell you I know what
neutral is going to be and it’s two point X or whatever – it shows how uncertain it is.
But what they all show as well is that we’re clearly restrictive. And there has been a debate
about that, too. You know, can you afford to cut interest rates if you don’t if you’re not
sure you’re clearly restrictive? We are sure we’re clearly restrictive, both before the
rate cut and now after it as well. But I would not want to put a number on it within that range.
Questioner
Do you feel that markets, investors are on the same page as what the RBA is putting out now?
Andrew
Well, no, but they never are. So let me let me clarify what I mean by that. I spent decades
of my life in financial markets and I very much value them – listening to them, talking to
them, being challenged by them – because markets, as you know, are not one view. There are many
views coming together to trade to get to a single outcome. And so we learn a great deal from speaking
with market participants and we learn a great deal from market prices. If you look at the interest
rate curve in Australia at the moment, you will see still priced several further cuts. And all we
were saying in our forecasts was that on our judgment, if you put that rate curve into our best guess
about the economy, inflation is probably going to be a little bit above target. And so we don’t
have the confidence that the market does that that number of cuts will bring inflation sustainably
down to target. But let me be clear, we could be wrong. And I know it’s sort of a crime for
central bankers to say we could be wrong, but I think we should be doing it more often. And in this
case, if we’re wrong and the labour market shows it has more capacity and inflation comes
through weaker, then policy will respond. So, I don’t think – I’m not abashed about
that point – clearly, the market currently thinks that there will be greater capacity in the
market. That’s not our central view, but it might be right. And if it is, we’ll learn from it.
Questioner
To that point, Governor Bullock says that she’s more of a glass half full person,
that you’re more of a glass half empty person.
Andrew
She said that?
Questioner
Yes, she did. She did quite recently. And I guess I put my question to you – as I
guess, you know, perhaps the resident pessimist, that’s how she’s characterising you
– what do you see as the biggest risks facing the economy?
Andrew
I’ll tell you why she said that, actually – because she was given the, you may
know this, by Phil Lowe when they handed over a cup that I think was his, which said glass half full.
And I thought it would be rather funny to get a cup that said glass half empty. She didn’t
actually think it was very funny. So I’m not quite sure about that. In terms of risk –
look, I mean, number one, I’m going to be boring, but I’m going to say it anyway. The focus
is still rigorously on inflation. There are risks in both directions to inflation; we’ve spent
most of the interview talking about that. We’re not going to somehow stop worrying about other
risks in preference to that. That’s our number one focus. We talked about the uncertainties
around the labour market and the possibility that there is greater capacity. That would be a good
risk to have, if it happens. We haven’t talked yet, I guess, about the global economy, and
perhaps that’s where you’re going. Obviously things are changing and I think in a number
– I’m sure you spend a lot of time talking about this on your show – anyone who
tells you they know how this is all going to shake down in the long run is wrong. We’re all
learning and things are moving very quickly. I think one of the important points I’d say is
actually that very uncertainty about trade policy and about outcomes in general globally, not
exclusively in Australia, may itself have an effect on activity in Australia. So, if you’re a
firm or if you’re a household planning to make an expenditure that in some way depends on a
certain outcome in the global economy and you know that – who knows what’s going to happen
in the next period – you might just wait. Now, waiting is very sensible for an individual, but
it could be really bad news for the economy. So, I think for me personally, one of the factors in the
decision this week was actually a sense that, look, maybe that pervasive uncertainty itself may have
some short-term depressing effect on activity. If you want to think about how the various initiatives
that are being mooted around tariffs and non-tariff trade policy are going to affect Australia,
there’s a huge range of outcomes – really huge. How big are the tariffs going to be? What
are they going to be faced on? Will there be retaliation? Will it be in the main economies that we
trade with, or will it not be? You plug those various uncertainties into a model and you can get
almost any outcome. It’s not good news for Australia if there’s a widespread depression in
global activity; that’s not what the financial markets currently expect to happen. But Australia
has thrived when the global economy has thrived and it’s struggled when it hasn’t. So, we
are very reliant on continued good global activity. The implications for inflation are less clear.
Normally, if you impair the supply side of the economy, you’d expect inflation to rise. However,
if it cuts demand, inflation may fall. So, although I think it’s pretty clear that tariffs
– if they push through and they have a material effect on global activity – it will
probably reduce activity in Australia, its impact on inflation is less clear. So, you know, everyone
is crunching through numbers. We have a section in our latest report that talks about various
scenarios. But the truth at the moment is you pay your money or you take your choice. We are waiting
to see how this evolves.
Questioner
Is it more of a broad global risk for you or is there still specific risk when it comes
to China? Because, you know, traditionally Australia’s growth has relied so much on the strength
of China. We know that they’re moving away from industrial production, from the property market.
That’s not going to improve meaningfully anytime soon. Does that have strong implications or are
we well diversified?
Andrew
It could do. I mean, I was talking about this with your colleague earlier. I think if you
look at Australia’s long history, Australia has actually been incredibly effective at responding
to the changing shape of demand in the global economy. You talk about traditionally our links with
China. Of course that’s true in recent years, but if you go back 20 years, 30 years,
50 years, 100 years, Australia’s actually specialised in a whole series of different
activities and done very well out of it, based on where the demand in the global economy is. If the
demand in the global economy moves on from steel being sold to China, then Australia will need to
think about adjusting in that respect. And as I said, I have some optimism actually – this is
not glass half empty – that Australia will respond to that in due course. But look, we are
keeping a very close eye on Chinese activity, as I know you are too. It’s been challenging in
China in recent years, with the demand growth and the adjustment in the property sector. One thing I
would say is I think that steel production and iron ore exports from Australia have held up
surprisingly well. Two or three years ago you could see all sorts of people drawing charts with big
lines going down – you know, peak steel is far behind us. Actually, demand for steel has held
up. And we have people in China, who are based in the Australian Embassy, that go around and talk to
a very wide range of Chinese businesses and thinkers and academics and policymakers. China’s
been quite clever about diversifying itself in its use of steel, away from the traditional uses and
towards, you know, in data centres, for example. I suppose we all go – AI means you’re
going to need a great deal more data centres that still need steel. So, the death of steel is
probably foretold a little bit too early sometimes. But look, if we have to adjust, we’ll have
to adjust.
Questioner
And before we go, given the confounding global circumstances and challenges, would you
rather be a central banker here in Australia or at the Bank of England?
Andrew
I’d rather be a central banker here, actually. It’s been a fantastic year so far.
And it was quite lively, back in the UK. I was at the centre of the LDI crisis a couple of years ago,
so a little bit of calm can be helpful. But this has been a huge privilege to come here. It’s
quite rare for non-nationals to be asked to be senior policymakers in the central bank, and I’ve
hugely enjoyed it. But it’s also a very important responsibility that we’ve all been given
to try and navigate Australia through this difficult set of circumstances. And the ability to live in
Australia, to live in Sydney and travel around this great country is brilliant, to be honest. And so
yes, I am glad – and hopefully Bloomberg doesn’t reach the UK, does it? Andrew Bailey
won’t be watching this, I’m sure. But if it does – sorry Andrew. But no, definitely
an upgrade trade.