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00:00Well the Reserve Bank of Australia says the risk of inflation expectations drifting higher is
00:04quote elevated, warning that if they were to become unanchored, a sharp economic slowdown
00:08could be required to bring them back down. RBA Assistant Governor Sarah Hunter has been
00:13highlighting those risks today at the Bloomberg Forum for Investment Managers and she joins us
00:17now exclusively in the studio. Always great to chat with you when we say you know your job is
00:21to worry, right? But how much more worrying are you doing these days given the broader environment?
00:27Yeah, absolutely. It is our job to worry. So we do always pay attention to things like
00:32expectations and other things that might knock the economy on a short term basis. But as we were
00:38discussing, I think it's because we've had a sequence of shocks over the last five, six years
00:44really since Covid and it's you know, we're facing into another one. And that's so that is part of what
00:50we're thinking about. It's another inflationary shock coming through the economy. We know that in
00:54particular when households see movements in fuel prices. So when you drive past a petrol station
00:59every day, you see the cost of diesel. It's higher than it was pre-conflict. We know these are
01:04particularly salient that they can have an impact on expectations. So what we're seeing at the moment is
01:09the short term expectations. That's what people think is going to happen to inflation over the next
01:13year or so. But they're elevated, not surprising given what's happening. We're paying particularly close
01:19attention to medium and long term expectations because that's the those are the kind of movements
01:23where that would suggest a bit more persistence and that risk materializing. We're not seeing
01:28anything too worrying yet in that data, but we're just conscious that, yeah, it's a heightened
01:32environment. And so what we want to make sure obviously in terms of our policy lever and how we set
01:38policy
01:38that we don't have that elevation from short term getting into medium and long term. And that's what we're
01:44conscious, right? Because I think even two weeks ago, you were assessing, okay, second, second half or
01:49second, second quarter, I should say, 2026, we would see maybe $100 US dollars a barrel for oil would
01:55start coming back down reopening of the strait. Nothing's really materialized since then. Are you
02:00having to readjust those expectations? Oh, in terms of what's happening in the Middle East? Yes. So we
02:06and we're not the experts on this. We don't have a crystal ball. And we're certainly not
02:12geopolitical and sort of commentators or analysts or anything like that. We use information we get
02:17from outside the bank and financial market pricing or futures curves effectively for our oil price.
02:22The inputs are kind of changing all the time. The inputs are changing all the time. Exactly. So yes,
02:26we're having to monitor it every day. And I'm sure like others, I wake up in the morning and I
02:30check
02:31my phone and wonder if something's happened overnight. Yes, it's still a very uncertain environment. We're
02:37still finding out how it's going to play out. But yeah, the longer it goes on, obviously,
02:42the longer prices remain elevated for oil and other products, the more that will come
02:47through into the local economy. And we'll make that inflation outcome worse. So I think like
02:51everybody, we would love to see some resolution in the not too distant future. But in the meantime,
02:56yep, we keep watching and waiting. We know that inflation has been above what the RBA would be
03:01comfortable with even prior to this latest conflict. But are we closer now to that real fear that
03:08inflationary the mindset inflation mindset is becoming more entrenched? Well, that's another
03:14way of talking about expectations drifting up and staying persistently high. And that's certainly
03:20something that we're conscious of and looking at. I think also, though, you know, high inflation or higher
03:26inflation in and of itself is just not a good outcome for the economy. We know from empirically,
03:31if you look around the world, higher inflation economies, businesses find it harder to invest to
03:36take those types of decisions. For households, it's really hard to budget. And that's particularly true
03:40for those on the lowest incomes, the most vulnerable in our community. So I think, you know, getting
03:45inflation back down to target is a good outcome anyway anyway. And part of that is making sure those
03:50inflation expectations remain anchored. And so that, I think, is the real sort of grounding point
03:55for the board's decision last week and that the governor talked about at the press conference as
03:59well. Trimmed mean hasn't been at around two and a half percent or even around that for almost five
04:05years now. Right. What do you think is driving that? We know that the last five years have been
04:10pretty crazy in terms of macro events. But do you think there's still grace for the RBA to try and
04:15meet
04:16that? Well, I very much hope so. We're very committed to getting inflation back down. We focus
04:22on underlying inflation because it gives us the best steer for what will happen to headline. But
04:25obviously, ultimately, we want to get headline back down. I very much hope so. I think it's been
04:30interesting looking at the economy over the last, I guess, 18 months or so, because trim mean inflation,
04:36underlying inflation was moderating through to the middle of last year, more or less. And then it came
04:42through more strongly than we're anticipating in the second half of last year. And we think,
04:46part of that story is, you know, capacity constraints reemerging. We've got a stronger
04:50pickup in domestic demand than we're expecting. Some of the fallout from tariffs that we were
04:56discussing a year ago perhaps wasn't as severe as many people were expecting. So I think there's
05:03quite a few factors that have lifted that underlying inflation in the months immediately prior to the
05:08conflict. And now we have this shock coming through that will add to it again, as I was talking
05:12about earlier on. So I think you've summed up why the board are so committed to getting inflation back
05:18down. You're taking the the actions they feel are necessary to achieve that because we do have to do
05:22that. That's the job. And we have to keep hold of that as our North Star. We think we can
05:27do it.
05:28Absolutely. And we have a lever to do it. And let's hope that conditions become perhaps a little bit more
05:34stable
05:35and we can get there over the next couple of years. What do you see in terms of the risk
05:39of a lower
05:39potential growth rate and how that's feeding into, I guess, the difficulty in being able to rent in prices
05:44too? So we revised our forecast for productivity growth back in August last year. And we think at the
05:52moment, and this is sort of thinking over a two or so year horizon, so quite short term really in
05:57the
05:58productivity world. We think that labor productivity growth at the moment is probably around about 0.7%
06:03year on year. That's lower than it has been historically. I mean, for us, what that means is
06:08just when we're looking at the pace of growth in GDP, it just gives us a lower number, if you
06:14like,
06:14that we think about as what's sustainable for the economy. And when we say sustainable, we mean
06:18that that's consistent with inflation remaining around our target. If that's, if we could see that
06:25productivity pace pick up a bit, and that that didn't come through in inflationary pressures,
06:30that would be great. That would be a great outcome for the economy. It's not a policy that we have
06:35really any control over. We don't have the right levers. But if we can achieve that, that's a good
06:39outcome for the country. And we'd be very happy to see that. But we do have to be mindful of
06:42where
06:42we are today in that sort of very short term two year horizon. And that's our focus.
06:46Treasurer Jim Chalmers was upstairs with you again defending the government's budget that was
06:52delivered last week. In terms of the implications for the RBA and for your mandate, what do you see
06:57those as being? And, you know, as we were talking about earlier, you're also kind of trying to work
07:02around the modelling and forecasting around that as well. Yeah, absolutely. Forecasting is always a
07:07challenge because there's always things changing. I think in terms of the budget. So we only got it on
07:12Tuesday when everyone else did. So we don't get advanced sites. So we're still working our way
07:16through what it all looks like and means. And we've also for us, we're very conscious of and taken to
07:22consideration all of the state budgets as well. And we've had some of those already, but we we've got
07:26some still to come before our next forecast are released in August. So we're going to be putting
07:32all of that together to see what that looks like in terms of what's happening to government demand
07:36and also thinking about the tax side and how that might be changing to give us that part of that
07:43picture for aggregate demand overall in the economy and how that stacks up against our supply capacity.
07:48So it's very much looking through that aggregate lens and taking into account the states as well
07:53as the federal. The states actually are responsible for around about half of total spending in the
07:57economy, for example. So we can't ignore them, even if they perhaps don't get quite as much
08:03attention across the country. Everyone's obviously trying to work out the implications of the tax changes
08:08pertaining to the property market. To be fair, sentiment at least had begun to cool even before this on
08:15account of the rate hike cycle. Are you worried about the risk of cooling the market too much?
08:21Look, so we know that the housing market is what happens in the housing market into dwelling
08:26construction is actually one of the most responsive parts of the economy to monetary policy changes. So we
08:32know when you increase the cash rate, as we have just over the last few meetings, that that will dampen
08:38down
08:38activity in that market. So we're not surprised to see that response. And then, as you say, we've also got
08:42tax
08:43changes coming through as well. And that's always a risk. And if we see that outcome start to play out,
08:49then obviously, the board will take that into consideration and be thinking about that in the
08:52context of future policy decisions. But as you can see in our latest forecast, we are expecting the pace
08:58of growth in dwelling construction activity to slow over the forecast horizon. And that really is
09:03consistent with that sort of those increases in the cash rate that have come through already. And
09:09but so it's not a surprise, but it's something that we'll be watching for sure.
09:13The economy is expected to slow in the second half of the year, we haven't had a technical recession
09:17since the pandemic. Are you confident that we can avoid that?
09:20Oh, yeah, forecasting stuff. And then I'd never say I'm confident on on any particular outcome. But I think
09:27that what we're seeing in terms of the lead indicators for activity and how we're looking at the impact of
09:33the
09:34increase in oil price and how it flows through is our baseline forecast doesn't have that outcome built
09:39into it. And it wasn't an outcome that we saw in the the two alternative scenarios that we've presented in
09:45the S&P as well. So we know things could play out differently rather obviously in terms of how things
09:49play out in the
09:49Middle East. So we've we've have been running scenarios to consider alternatives. And in those two that we published, we
09:55don't get that outcome either. But look, we are very alive that there are risks on all sides of the
10:01spectrum right
10:02now is particularly challenging for central banks. These kind of supply shocks are really hard for us to navigate in
10:07terms of achieving our mandate. And so we're focusing on what that means and then giving our best advice to
10:13the board
10:13so they can make their decisions. Wage growth at around three percent. Does that look reasonable or starting to look
10:18a bit
10:18disconnected versus the other data points? So so we weren't surprised by the WPI print that we got last
10:25week. It was more or less in line with what we were expecting. There's always sort of ons and offs
10:29underneath the
10:29surface. You can see in the forecast we do expect that WPI growth will remain around that sort of low
10:36threes around three percent through the forecast horizon. Then we'll we'll see what plays through. That's really
10:40connected to what we think is going to happen to the labor markets over the forecast. And we we do
10:46think that
10:48conditions will become a bit less tight in that markets. And again, you can see that in the forecasts and
10:53it's all
10:53connected with what we have to have happening to GDP growth. And we think that that's going to be a
10:58little bit below
10:58trend over the next couple of years. But again, we'll just have to wait and see. The baseline forecast has
11:04inflation
11:04getting back to two and a half percent at the end. But it's built on a number of assumptions and
11:07judgments. And the one thing
11:09where we're always pretty confident of actually is that at least one of those assumptions or judgments won't actually come
11:15true. So it is a
11:16constant sort of job of reevaluating and reassessing as you move through time. I'm told I have to let you
11:23go. But do you miss
11:24being in the private sector at this point in time? Oh, look, I'm honoured and privileged to do this job.
11:29It is very, very
11:30fulfilling and I have a fantastic team. So no, I can't say that I want to be doing anything else
11:35right now. Even when the job gets
11:36hard, I really appreciate that I'm able to do this and work with the team that I have. We appreciate
11:40you taking the time to speak to us as
11:42always tough times being a central banker at the moment. Sarah Hunter, Assistant Governor and Chief Economist at the RBA
11:47joining us
11:47exclusively here in our Sydney office. We have much more on Australia Ahead every Tuesday, 10.40am if you're watching
11:53here in
11:54Sydney, 8.40am if you're tuning in from Hong Kong. You can also take a look or listen, I should
11:58say, to our Bloomberg Australia
11:59podcast, delving into the biggest stories, shaping the country's role in global business. You can find that at Apple, Spotify
12:05or
12:06Bloomberg.com. More ahead here on the Asia trade. This is Bloomberg.
12:14I'll see you next time.
12:14I'll see you next time.
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