'A Narrow Path' - Speech by Governor Philip Lowe - 7 June 2023

good morning everybody and Tim thank you for that introduction it's a real pleasure and honor to be able to join you at uh your annual Australian Summit this morning I would like to discuss the narrow path that the Reserve Bank board is seeking to navigate that path is one in which inflation Returns the target within a reasonable time frame while the economy continues to grow and we hold on to as many of the gains in the labor market as we possibly can I think it is still possible to navigate this path and it's certainly our ambition to do exactly that but it's a narrow path and it's likely to be a bumpy one and there are risks on both sides and I'll talk about some of those risks this morning but really what I want to start off doing is to talk about the importance of the destination that is a sustainable return of inflation to the target range and I'd also like to talk about our strategy for getting to that destination including yesterday's decision to increase the cash rate again I'll then turn to some of the factors that the Reserve Bank board will be considering as it navigates the return of inflation to the two to three percent target range as you can see in this first chart the recent inflation readings have been the highest in more than 30 years the reasons for this are well known they include the supply side disruptions caused by the pandemic Russia's invasion of Ukraine and the very large fiscal and monetary stimulus that was delivered to support economies during the pandemic and our job is Australia's Central Bank is to make sure that this period of high inflation is only temporary and it's really important that we're successful here high inflation's corrosive and it damages our economy it erodes the value of money and people's savings it puts pressure on household budgets and it makes life harder for businesses and to store its investment inflation makes us all poorer and it hurts people on low incomes the most and if inflation stays too high for too long it will become ingrained in people's expectations and then the high inflation will be become self-perpetuating as the historical experience clearly demonstrates the inevitable result of this would be even higher interest rates and at some point a larger increase in unemployment to get rid of the ingrained inflation and the board's priority is to do what it can to avoid this as you would know over recent times the Australian economy has been operating at a very high level of capacity utilization you can see this in measures of capacity utilization from surveys which are shown in the top panel here but it's also evident in the labor market which has been very tight and recently the unemployment rate has been around the lowest it's been in 50 years it's clear that the level of demand in the economy has been pushing up against the supply capacity of the economy and this has been contributing recently to the outward pressure on prices the return of inflation to Target does require a more sustainable balance between aggregate demand and aggregate supply in the economy and the tool that the RBA has to use to achieve this balance is interest rates I acknowledge that this tool comes with some complications its effects are filled unevenly across the community and Rising interest rates are causing significant financial pressure pressures for some households but this unevenness is not a reason to avoid using the tool that we have it's certainly true that if the board had not lifted interest rates some households would have avoided for a short period the financial pressures that come with higher mortgage rates but the short-term gain would have been at a much higher medium-term cost if we had not tightened monetary policy the cost of living would be higher for longer this would hurt all Australians and the functioning of our economy this would ultimately require even higher interest rates to get inflation to come back down again and more unemployment so as difficult as it is the rise in interest rates has been necessary to bring inflation back to Target within a reasonable time frame the evidence suggests that the higher interest rates are working and that inflation is coming down as you can see in this chart in the March quarter CPI Peak CPI inflation rate peaked at 7.8 percent um and it's now coming down subsequent to the March quarter the monthly CPI indicator showed a pickup in the 12-month ended inflation rate in April to 6.8 percent this monthly outcome was a little higher than we had expected but it has not changed the fundamental assessment that inflation is trending lower in Australia as you can see in this next chart if we exclude volatile the volatile items and the travel component of the CPI inflation was five and a half percent in six month annualized terms in April that's uh two percentage points lower than it was in October last year so inflation is coming down this decline inflation is also evident in declining prices in global markets as you can see here oil prices have reversed much of the increase that followed Russia's invasion of Ukraine and the prices of mini base metals have also declined as have the prices of many food commodities in global markets and you can see here the prices of Wheat and beef have both come down similarly the prices of international shipping is normalized after the spike during the pandemic any time these lower shipping costs and lower commodity prices should be reflected in the prices that Australians pay for goods and services but working in the other direction Services price inflation Australia remains very high rents are increasing quickly and there'll be further large increases in electricity prices this year in addition unit labor costs are increasing briskly an issue that I'm going to return to in a few moments and these developments mean that it is too early to declare victory in the battle against inflation the path back to two to three percent is likely to involve a couple of years of relatively slow growth in the economy and we're likely to receive confirmation of that later this morning even so as the board navigates the path back to two to three percent it's seeking to preserve as many of the gains in the labor market as is possible to do one of The Unsung but very positive side effects of the pandemics of the pandemic was a once in a generation Improvement in the Australian labor market over recent months I guess as you can see in this next chart a highest share of Australians have had a job than ever before and the youth unemployment rate has been the lowest it's been in many decades they're very real and very tangible economic and social benefits to this it's a significant achievement and our ambition at The Reserve Bank is to return inflation to Target while holding on to as many of these gains as is possible I want to make it clear though that the desire to preserve the gains in the labor market does not mean that the board will tolerate higher inflation persisting there is a limit to how long inflation can stay above the target range the longer it stays there the greater the risk that inflation expectations adjust and the harder and the more costly it will be to get inflation back to Target if inflation stays High this will damage our economy and all Australians will feel the effects of this yesterday's decision to increase interest rates again was taken to provide greater confidence that inflation will return to Target within a reasonable time frame it follows recent information that suggested greater upside risks to the bank's inflation Outlook Services price inflation is proving persistent here in overseas and the recent data on inflation on wages and on housing prices were higher than we had factored into our forecasts given this shift in risks and the already fairly drawn out return of inflation to Target the board judge that a further increase in interest rates was warranted in making this decision the board had a very detailed discussion of the slowdown in household spending and the stresses that some households are under because of higher interest rates and higher rents we understand that it's very difficult for many people at the moment but the board also considered the cost for households and the economy of inflation staying too high for too long it's in Australia's interest that we get on top of inflation and that we do so before too long and the board of The Reserve Bank will do what's necessary to achieve that outcome as we make our decisions over coming months there are a number of factors that will play particularly close attention to and I'd like to briefly discuss four of these the first is developments in the global economy economic growth in the advanced economies is slowing as restrictive monetary policy has its effect even so labor markets have been surprisingly resilient in many economies and in many countries unemployment rates are at multi-decade lows headline inflation's declining as the covert disruptions are overcome Energy prices for and food prices decline but concerningly Services price inflation is proving to be very persistent in many economies as you can see here it's still above six percent in the United States and five percent in the Euro area and it's proving to be persistent this persistence reflects strong demand for services and strong growth in wages against the background of weak productivity growth so one source of ongoing uncertainty is how quickly Services price inflation globally will moderate and whether the needed moderation here will require further increases in interest rates it is noteworthy that interest rates are higher in the other English-speaking economies than they are in Australia and in most countries they're expected to go higher still so they're higher than Australia and they're expected to go higher the other significant source of uncertainty for the global economy at the moment is the strength of the economic recovery in China the economic indicators were weak in April after a strong bounce back following the easing of the covert restrictions late last year and consistent with the Chinese economy operating with a fair degree of spare capacity at the moment inflation in China is much lower than it is in the rest of the world this has implications for Australia not just in terms of the prices of goods in World Markets but also the prices of our resource expert exports which have declined recently reflecting the slowdown in the Chinese economy the second consideration that the board's giving close attention to is the strength of household spending domestically in aggregate growth in spending has slowed since the middle of last year as the pandemic bounce back faded and the effects of both higher interest rates and the cost of living pressures began to bite on household finances we expect that consumption growth will remain subdued for some time largely for these same reasons although stronger population growth is going to provide a bit of an offset to this there is a quite a lot of uncertainty about the outlet for consumption at the moment given the large number of factors influencing household finances and spending some of these factors are shown this next chart employment's been rising very strongly people have been getting more hours of work and normal income growth has been strong these are all positives in contrast the real incomes have declined and the required mortgage payments is a share of household disposable income will reach a record high later this year many households are transitioning from fixed-rate loans over the next few months and they will experience the same increase in repayments that has occurred for people on variable rate Borrowers rents are also increasing quickly and that's putting pressure on many people's finances another complicated complicating element is the very mixed experience across households and firms retail spending on Goods has been weak as you can see but spending on many services has been firm and the data that the banks share with us suggests that spending is most subdued amongst households with a mortgage especially those who borrowed a lot relative to their income in the last few years and it's also quite weak with spending quite a week for people who rent at the same time other households accumulated large additional savings during the pandemic and there's evidence that they've run these savings pools down but other households have very limited savings and very very small Financial buffers and one of the other indicators that we're monitoring very closely is mortgage areas you can see that in the bottom corner there more with your ears remain very low although they have increased a little uh recently banks are reporting to us that their customers are managing to make the higher mortgage payments although they have had to come cut back on on some spending so it's a pretty complicated picture at the moment and given the importance of household spending to the economy the board will be paying very close attention to all these indicators at its upcoming meetings a third consideration that the board is paying close attention to is the rate of growth in unit labor costs that's the difference between growth in nominal labor costs and productivity this is because over time there is a close relationship between inflation and the rate of growth in unit labor costs as you can see in this chart over the entire inflation targeting period the cumulative increase in the CPI has been closely matched by that in unit labor costs low as you can see there have been some periods of Divergence in the very recent times unit labor costs have been increasing very quickly in 2022 they Rose by seven and a half percent which is one of the largest annual increases over the entire inflation targeting period well the causation between unit labor costs and inflation runs both ways ongoing strong growth in unit labor costs would underpin ongoing High inflation outcomes in Australia now the best way to achieve a moderation and growth in unit labor costs is through stronger productivity growth which would also underpin durable increases in real wages in our national wealth and would make more resources available to fund the public services that we all value unfortunately growth in productivity has been weak over recent times date as you can see here the level of output power worked in Australia today is the same as it was in late 2019. over those three and a big years there's been no net growth in labor productivity in Australia now the reasons for this are complicated and they're not well understood productivity growth was slowing before the pandemic and it's entirely possible that the disruptions caused by the pandemic made things worse many firms had to focus on Survival rather than growing their business Supply chains were interrupted some firms hoarded labor other firms found it was hard to get labor investment was delayed and finance tightened up none of these things were helpful for productivity growth of setting this there was Innovation as firms found new ways of working during the pandemic I think it's unlikely that the Innovations in this front weren't were enough to offset the detrimental effects of covert on productivity from these other channels that I just spoke about the uncertainty here is what comes next it's certainly possible that with the pandemic now behind us productivity growth will pick up advances in science and technology will help increase digitization and the use of our official intelligence offer the prospect of stronger productivity growth so too could further improvements in the way that services are delivered in Australia as well as reforms to public policy but there is considerable uncertainty here what's critical of the trends over time not the outcomes from quarter to quarter at the aggregate level wages growth is still consistent with inflation returning to Target provided the trend productivity growth picks up given the importance of this issue and the increased risks on this front the board will continue to pay close attention to Trends in productivity growth and their implications for the sustainable rate of growth in nominal wages in Australia yeah a fourth important consideration is inflation expectations as they risk usually if people expect inflation to stay high then it's likely to stay high firms will adjust their pricing behavior and workers will seek bigger pay Rises to compensate from for the higher ongoing inflation currently measures of inflation expectation derived from Financial market prices are around the middle of the two to three percent Target ranges you can see here and the same is true for professional forecasters this suggests that Financial Market participants and economists expect that the RBA board will be successful in containing inflation in containing inflation over the years ahead that's welcome measures of in expected medium-term inflation for price and wage Setters are unfortunately more difficult to obtain one measure that we have is from a survey of Union official Union officials that the RBA has run for a number of years where we ask Union officials for their expected inflation rate over the next five to ten years and showing the results of that survey in this chart as you can see this measure of inflation expectations has increased significantly after it was very low for a number of years although it's at a level that was common before the pandemic when inflation average close to the Target at the midpoint of the target for households the main data on inflation expectations relate to just the year ahead we don't have expectations of inflation over the medium term from households understandably given the elevated inflation rate at the moment and the forecast for inflation over the next year short-term inflation Expectations by households are pretty high at the moment due to the importance of medium-term inflation expectations remaining contained the board is going to continue to monitor these and other measures very carefully over the months ahead finally putting all this together we remain on the narrower path that I spoke about earlier but there are significant risks we're particularly attentive to the risk that inflation stays too high for too long if that happens expectations will adjust inflation will persist interest rates and unemployment will be higher and the cost of living pressures that Australian families are experiencing will continue the board is seeking to avoid this and yesterday's further increase in interest rates provides greater confidence that inflation will come back to Target within a reasonable time frame some further tightening of monetary policy may be required but that will depend upon how the economy and how inflation evolve the board will continue to pay close attention to the developments in the global economy Trends in household spending and the outlook for inflation in the labor market the board remains Resolute in its determination to return inflation to Target and we will do what's necessary to achieve that thank you very much for listening this morning and I'd be happy to answer some questions thank you [Applause] great thanks Phil what's great to see here thanks very much Phil we'll take a seat now and we will open the floor up to some questions and then I know we've got a very keen group of journalists that will also like to take some questions so that was a very comprehensive review Phil Let's uh let's take it table can I go to where can I go to the floor to see if there's any questions to start with otherwise I'll kick off myself with some slider questions we do have a roving mic and Philip has calmly agreed to were to take these questions from the floor okay there we've got one can we get a microphone to this gentleman here just stand up for a moment thank you aren't you fighting an uphill battle here with the Australian governments just spending money if there is pinned back if you want to spread the pain a little bit and get the adjustment coming through quicker to get supply and demand in line sure the Episcopal side they could be doing more address this incentive estimates last week and my summary of the budget was that it was broadly neutral in terms of the inflation Outlook in the short term it was helping uh the interventions in the energy markets the price caps and the rebates that the governments are giving some households on their bills will bring inflation down by roughly three quarters of a cent next financial year so that's that's helping um uh but broadly fiscal policy is neutral at the moment and monetary policy is uh restrictive another question here if we can get a microphone doctor hello Peter um there's been a discussion in the last few days that giving a pay rise to the lowest paid will have very little effect on inflation um what kind of effect what would we expect to see from giving a pay rise to the lowest pay well it really depends upon how widespread the uh the larger pay Rises are it's perfectly understandable for the lowest paid workers in the the country to be compensated for inflation it's it's you know it's tough and we know it's tough so that's perfectly understandable we'll get ourselves though into trouble if we accept the premise that all workers need to be compensated for inflation because if you accept that premise then inflation's seven percent wage risers match that what do you think inflation will be next year and it'll be high again and then you'll have to have high wage increases again so we're in a difficult position where the society understandably wants to protect the lowest paid workers but we've got to make sure that the higher inflation doesn't translate into higher wage outcomes for everybody because if that happens the inflation persists and we'll be in the world that I spoke about before that we're really trying to avoid so it's a really tricky Balancing Act we're trying to manage at the moment refresh got a question up the back hello uh Sean Morgan from the ABC uh The Reserve Bank undertook modeling that showed around 15 of mortgage borrowers face negative cash flows at a cash rate of 3.75 we're now at 4.1 percent how much further do you think interest rates can rise before we see a serious rise in mortgage arrears for sales and defaults those calculations that you referred to were based on the assumption that people made no adjustments so if people can cut back spending or in some some cases find additional hours of work that would put them back into a positive cash flow position that's not to say that there's not very significant uh stress out there in households at the moment but as I showed in the um chart here that arrears rates remain low people are affording to to pay their mortgages even as they roll off from the fixed rate loans to variable rate loans the areas rates remain low but the banks are telling us and this is understandable that people having to cut back in spending and I think that's going to be the the environment we're operating in a while for for a while yet people will make their mortgage payments but they have to cut they'll be cutting back spending in other areas in our session earlier Philip we had Dr Richard Clarita who I know you know from his time on the Federal Reserve and now Pimco I think he's coming out here shortly at the latter part of his presentation discussion this morning they talked about well the question came from our own Global Economist Seth Carpenter have they thought about a range for inflation in the US they've got a single point at the moment which is Circa two percent they have talked about it to Australia the target range of two to three percent given that inflation is clearly not transitory at the moment and it seems to be sort of stuck well above that range there's even has there been any thought given to that two to three percent rage as being sort of the appropriate range given that backdrop that issue was examined in the recent review of the the RBA conducted by an independent panel and they concluded strongly that uh the two to three percent targets the right target for Australia uh We've long had a flexible inflation Target I think that served the country well inflation moves up and down but I we really want people to be confident when it's away from their target range it will come back we're not kind of specific about kind of needs to come back to an exact number but we want you to be confident we want the community confident that we'll come back to average two point something yeah and I think that's the right framework for Australia yeah and you've been very clear in your messaging that it's your your resolve and the board's resolved to to get inflation back into that that's that's our job to do it because as I said in my prepared remarks the inflation stays High we're going to feel a lot of pain the whole Community will hurt you know inflation's corrosive and it hurts people on low incomes the most yeah so we've got to get inflation back down and I know that it is difficult in the short run but what we talked about at our board meeting yesterday is if we were to avoid this typically in the short run we will have a lot of pain in the medium term and that will end up being more costly for us all so I know it's difficult but we need to get inflation back down and we're really committed to doing that and yesterday's decision demonstrates that yeah terrific can I open it up to the to the floor again for some questions there's one over here the governor governor Neil must have known two questions please uh why is it taking so long to realize that three handle is ineffective against uh six to eight percent inflation when the evidence offshore from central banks have been on the job fighting inflation far earlier is is a much higher rate than needed and also they've had better success and secondly um with the quantitative easing that we were doing an unconventional policy is it did you feel that the the harm caused by that and the inefficiencies in the market have really been worth it in the long-term effects and you feel that the bank might be better off operating with a more conventional structure and say at one percent uh flooring in rates may be hand back to the to fiscal measures and hand back to the government now there are a lot of questions there um the first one will kind of why why our interest rate's lower than the rest of the world I mean they're they're a few considerations the first is that we had been prepared to have a a slightly slower Glide path back to the inflation Target in some other countries because we really wanted to lock in if we could this once in a generation Improvement in the labor market so our inflation forecasts have inflation returned to the top of the target band in mid-25 other countries were getting there earlier and we were we were comfortable with that so that was one one factor another Factor was that Australians pay most of them most Australians have variable rate mortgages I mean in the United States when interest rates go up if you've got an existing mortgage you don't pay any more in Australia you pay more kind of within a week or two so we've had a in Australia a very big hit household disposable income from home mortgage rates that doesn't happen in other countries so that's one reason we think that interest rates perhaps don't need to go up as much as they do elsewhere and the third Factor has been that nominal wage growth in Australia was lower than it was in most other countries measures of wages in the US and the UK have been running close to five they're lower here so they're they're the three um factors that have um led us to have lower interest rates than the rest of the world and if any of those factors change then we would have to reconsider you asked about uh use of quantitative easing or perhaps quantitative tightening now um it's clear in retrospect that the central banks and the fiscal authorities did too much during the pandemic I think that's pretty clear but I just in when when you think about that I just invite you to go back to those days of the pandemic it was scary we did what we thought was the right thing at the right time with the information that we had we want to do everything that we could to protect the country from the economic effects of the pandemic yeah we did that and at the time we were doing that we thought a vaccine would take years to be developed the restrictions would last for ages and turned out the scientists developed vaccines in record time we all got vaccinated and life returned to normal more quickly than any of us at least certainly I expected and that was the advice that we were getting as well to take ages so we did what we thought was necessary in retrospect we did too much um now with interest rates away from the lower bound our view is that interest rates Remain the tool for monetary policy and quantitative tightening isn't really an effective monetary policy tool when you can use interest rates so the focus for us is very much on the cash rate right thank you any other questions from the floor we've got another one over here thank you Dr Lowe Commonwealth Bank Treasury just uh just picking up on on that last question from Neil uh when we look at what's been happening with the with this hike group we had the pass in April and then we've had a May in June increase you sort of relayed the message in April that you wanted to slow down the pace of the rate hikes and that was sort of well accepted by the market and now we've gone back to an accelerated task of parts of Road hikes is that uh putting together what you've been telling us today and in the releases is that because you've become more concerned about the wage measures uh you put a lot of emphasis on you know later costs uh running at seven percent which is now in line with service inflation so it looks a lot more like the rest of the world so we're starting to look at at least concerned about looking like the rest of the world and is it also the case that the board is less tolerant of any slippage on getting back to three and a half or three percent so three percent quite bid 25 is the forecast is the board now less tolerant of taking that risk of taking so long compared to whatever what's happening in the rest of the world there hasn't been any shift in our tolerance um that's that's uh you know we want to get inflation back to Target within a couple of years and that that hasn't changed what has changed over the past couple of months is our assessment of the risks and it's not just the wages data the inflation read for April was higher than expected we've seen housing prices rising again when we thought they'd still be falling and when we look overseas we see a lot of persistence in Services price inflation larger again because unit labor costs are rising quickly and there's been a lot of a strong correlation between inflation developments abroad and what happens in Australia so upside surprises on inflation upside surprises on wages upside surprise on housing prices upside surprises on inflation overseas we felt like we couldn't just sit highly and say well this is just all accidental it's all just noise the conclusion we reached was that this represents upside risks to the inflation Outlook in Australia we have been prepared to be patient in getting flashing back to Target but our patients has a limit and the risks are starting to test that limit so we thought we needed to respond after holding steady in in April yep we've got another question out here thank you good morning Dr Lowe Daniel Sutton from Channel 10. every month that you make your decision on rates everyone is very keen to express their view about what you've been doing and I know your comments about budget and existing policy but I'm wondering given it's the only leader you can afford what's your view about what levers government can be pulling in addition to what they're already doing to help bring down inflation I'm talking about new policy additional things they can do to help you um the government doesn't advise me on interest rates so I don't like advising them um they should do I think that's a good division of responsibility but uh um a couple of additional observations I would make one is about the productivity reform agenda we we really need to focus on that because if we're going to have nominal wage growth of three and a half to four percent then we need to have productivity growth of one percent a year we're not generating that at the moment so that's not fully within the hands of government because business has an important role to play as well so that's one area to focus on the related error is the sustainable rate of growth in nominal wages and we just very much you know we want to we want to deliver two and a half percent inflation for you over time and hopefully the country can deliver some productivity growth so the sustainable rate of growth of nominal wages is equal to two and a half percent plus whatever productivity growth we can deliver so we have to face into that reality is is a country and faster growth in nominal wages can only be supported by faster growth and productivity Dr Jim Chalmers certainly sounded like he was making some comments yesterday in relation to your decision how do you respond to what he said in Cambridge um not going to respond to a kind of particular comments he makes up he he um like me want to get on top of it get on top of inflation so you know we have to do that and uh the boiler Reserve Bank is strongly committed to it I think we can still do it with preserving the gains in the labor market or at least some of them but if inflation stays high for too long then we won't be able to so that's the that's the the path we're trying to navigate and the government understands that yeah I don't think any any of us start a shock once we saw the uh the fair wage commission come out with a 5.75 wage increase late last week that that we got an interest rate increase yesterday and I'm sure there was many other factors that were taken into it yeah so can I just there are many other factors that was just one factor as I said that and I think it's important because it's not it's not like we're just responding to the fair Work Commission we've seen developments overseas the domestic inflation data housing prices the exchange rate uh the fair Work Commission decision state government wages policies and the federal government wages so there's a whole bunch of things and when a whole bunch of things all point the same direction it suggests the risks are shifted and in our risk management framework we we respond to that yeah that's that's our frame of reference yeah we saw and we again heard uh you know Richard Clarita referencing back to the inflation in the 70s and the Damage that that did uh that's why all central banks are focused on on slaves inflation Dragon so to speak do we have um we're getting close to time but do we have any more questions looks like we've got to okay we'll grab one over here Sky News see if we can get that microphone working Edward Boyd at take three take three Governor Lowe Edward Boyd at Sky News look you have mentioned the fair work commissions rule last week were you surprised by the increase in the minimum wage how large it was and how much is this going to add to the risk of a wage price spiral in Australia over the next few months it was higher than we had affected into our forecasts as I said in my prepared remarks uh how much it adds to the inflation outcomes really depends upon whether it spreads across other parts of the labor market now the the share of the labor force that's covered by the award increases is still fairly small the concern would arise if the five and a three-quarter percent increase became a benchmark or a quasi Benchmark for outcomes in private sector wages more broadly um I'm really hopeful um that doesn't happen and the big increase last year didn't become a benchmark for for other increases so we have some experience here but the longer these big increases go on the harder it will be for wage outcomes in negotiated agreements to stay with our so it's a risk factor where we're monitoring and as I said before the solution here is stronger productivity growth to underpin Big increase in nominal wages we have a question down the front here if we can can we get a mic to this gentleman just here just oh sorry we've got let's go with this question and then can we bring a mic up to this front table afterwards thank you very much wrong just curious as to what you might think um what things could go could go right when Dr Clarita was speaking before he uh he referenced the four in American productivity uh down three percent a figure that he he sees me the code he just did not believe I'm just curious as to whether or not the productivity numbers that you're referenced in your talk today could be understating uh Australian productivity and we could be seeing a we may see a rapid increase in productivity in the effect that that would have on on the inflation interest rate Apple we might be can I just take issue with your first comment a lot of things are going wrong a lot of things are going right this country now we've got the lowest unemployment rate in 50 years highest share of people who are lucky lucky enough to live in Australia have a job than ever before youth only plums the lowest in decades commodity prices are very high our terms of trade basically the highest in 150 years and our public finances well I've got kind of medium-term issues at the mirror at the moment they're in pretty good shape that's a pretty good collection of facts I think we can kind of forget that so we've got a you know the country's got a very good base um to work from and um the the current rate of aggregate wage growth is consistent with inflation return to Target provider productivity growth picks up so that's a lot of countries in the world would um would like that set of characteristics and we're there and I think we can still navigate our way back to two to three percent inflation while keeping the gains in the labor market so things actually are going right I know it's tough for people at the moment and that's the inevitable result of the pandemic and Russia's terrible invasion of Ukraine and that hasn't those two things have an effect on us all but there is a path back to better times and increasing real wages and on productivity growth I'm hopeful it again picks up and I think the pandemic really had a disruptive effect on businesses I know even at the Reserve Bank how we had to slow down investment it was disruptive and we couldn't hire people and it kind of affected us and every business is the same so um I'm hopeful but um we shouldn't fall into a state of despair Australia's Got a great economy we've got great people fantastic prospects people want to come here they want to come and live and work here and prosper here we're lucky and I think we've got to remember that yeah I think that's a very good point um Philip because you know what we are coming from is a set of interest rates that not just in Australia but globally were set for a pandemic that many in fact most had never experienced in their life across the Globes we've gone from Emergency Settings at point one the normalization is going to cause pain and disruption right around the world so you know it is the theme of this Summit disruption and I think you know the interest rate cycle is no different to that um I'm one of the older ones in this room that can remember when we had 17 mortgages back in the early to mid 80s so you know normalizing to an interest rate of four percent doesn't cause me a great deal of concern from a long-term perspective these are still very relatively low interest rates so I think your optimism but I mean I wanted kind of also acknowledge the kind of the high inflation it's hurting people isn't it I mean the pro price level goes up seven percent in a year that really hurts people and mortgage rates go up a lot that that's hurting people yeah right um I think if we and I'm hopeful this will be how it plays our inflation comes down and we can go back to Rising real wages again and we can get through this period of difficulty but the the fundamentals that we have in this country are still pretty positive yeah very positive yeah I think what we're all seeking ultimately is let's get to that Peak rate from the peak rate um then we can start making I think very Sound Investment decisions do we still have a question we've got just this chapter here thank you uh you've talked a lot today about if inflation remains for a period of time or becoming better than expectations so in the Narrow Path so how what are the risks you guys consider being that the interest rate tool that you have um won't be effective across the board given the wealth in Boomers and the demand is coming from a lot of people that interest rate increases don't necessarily affect given you're across all the data does it does it does interest rates hit enough of the population to be able to stifle the demand to bring the um to to get the results that you want in inflation and I guess secondly just linked to that is given the increases of productivity you've said are required what period of time would the RBA look because that's not by May data relativity went up so we're okay sort of how how long for a period of time do you know that's sustained uh that take the the first issue um first that it's clear that the higher interest rates are causing consumption growth to slow we can see that in retail spending and the national accounts come out in an hour or so so we'll see evidence of that I assume as well but I think it's you've got to be careful not to think that the whole effect of monetary policy Works through the mortgage Channel remember what I said earlier that in the United States when the FED raises rates people with an existing mortgage don't pay any more yet monetary policy in the end works pretty much the same in the United States as it does in Australia so there are a lot of other channels through which it works through the exchange rate through affecting expectations through expectations the availability of credit and the investment Outlook so in Australia understandably the focus of everyone's discussion is the mortgage Channel but there are a lot of other channels that are working out there and affecting both economic activity inflation as well so I think the monetary policy response is working and the effect that people on that have mortgage defectors most acute for people have mortgages is it and that's that's really tough at the moment so we've got a more concentrated effect than in other countries but the aggregate effect it's working as it is elsewhere around the world the strong growth in Services prices I think is linked to strong growth in unit labor costs and we're seeing this you know in every Advanced economy strong growth in normal wages weak productivity growth that has to manifest itself in large price increases and we're no different from from other countries around the world there so yeah okay we are um unfortunately we have uh run out of time and it's been extremely generous uh Philip that you took the opportunity to enjoy us to join us particularly after yesterday's meeting um we all recognize that you and the Reserve board have one of the most difficult jobs in the current environment which as we are seeking to normalize rates so we do appreciate the thought and effort that goes into it and can you please join me in thanking our Reserve Bank Governor Philip Lowe we're going to take a we're going to take a short break now and there will be some morning tea have a stretch your legs a toilet break and some refreshments thank you [Music]

Channel: Reserve Bank of Australia

Views: 3,756

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Id: 2cv74zT7NPQ

Length: 50min 23sec (3023 seconds)

Published: Wed Jun 07 2023