Inflation remains top of mind as the Reserve Bank of Australia continues to keep interest rates on hold at a time when the United States Federal Reserve signals that it will start cutting rates.
One of the new lead architects behind the RBA’s thinking is Deputy Governor of the bank Andrew Hauser. Hauser formerly worked at the Bank of England and was chosen by Jim Chalmers, the first-ever senior appointment from overseas.
Hauser is just back from a meeting of central bankers in the United States at which the Chair of the US Federal Reserve, Jerome Powell, indicated it was time for US rates to fall. Will that produce a rethink in Australia where the Reserve Bank has flagged rates are likely to stay on hold until next year?
Obviously, a significant part of the inflation story over the past two or three years has been a global story. It’s been related to global supply chains. It’s related, obviously, to the fallout from COVID and the impact of all of that on global demand.
But no. The decision on interest rates for the U.S. is for the U.S. to make. The decision on Australian rates is for the RBA and for the Australians to make, and we’re obviously hopeful that in due course we would follow suit. But we have to take account of the outlook for inflation in Australia. And inflation unfortunately is still a little bit too high at the moment.
Sadly, at the moment Australian inflation is a bit stickier than it has been in the US. And there’s a variety of reasons for that.
We’re not yet as confident, as Jay is in the US, that inflation in Australia is back on a sustainable path back to target. And therefore we have to hold rates where they are for the time being.
On the delicate balance of reducing inflation and maintaining employment:
We have made a very conscious decision to […] set policy to bring inflation down, but to bring it down slowly enough that we protect the employment gains.
And the employment gains in Australia have been quite stunning, actually. Even now, the numbers that are coming through in the monthly releases, where people have been predicting an imminent downturn in the labour market, it could still happen, but even now, […] we are creating jobs at a pretty spectacular rate.
On his controversial speech questioning the certainty with which people proclaim about economic issues, which caused a stir among some commentators, Hauser says:
Frankly speaking, I think Australians would have every right to be bloody annoyed at a foreigner lecturing them to shut up and agree with the central bank, which would go down like a bowl of sick if an Australian tried to do that in the U.K. as well. But that wasn’t what I was trying to do it at all. In fact, it was the exact opposite. I was trying to make the case for humility but not for a lack of diversity of views.
I’ve loved my short time in Australia so far, and I’m here to listen, learn and serve. And it’s been quite nice actually – [I] had quite a long list of people sending their private support for the messages I was trying to give in the days after the speech.
TRANSCRIPT
Michelle Grattan: When Jim Chalmers appointed Andrew Hauser from the Bank of England to be Deputy Governor of the Reserve Bank, it was taken as a sign that the Treasurer wanted to shake things up there. In his few months in the new job, Hauser, who is the first ever senior appointment from overseas to the Reserve Bank, has already caused a stir, at least among economists and commentators outside the Bank. Amid calls for the Bank to take interest rates down or up, Hauser lamented, and I quote ‘the extraordinary certainty with which individual views about the outlook for the economy and the path of monetary policy can sometimes be expressed.’ The Deputy Governor has just returned from a central bankers Conference in the United States where the message from the Chief of the US Fed, was that it was time for rates in that country to fall. Andrew Hauser joins us today to talk about interest rates, the economic debate and reform of the Reserve Bank.
Andrew Hauser, were you surprised that your speech caused so much controversy and indeed some outrage, and would have there been the same reaction if you’d delivered it when you were at the Bank of England?
Andrew Hauser: Well, Michelle, thank you very much for the opportunity to speak with you on your podcast. The point of my speech was really a plea for humility and humility, particularly from us as central banks. There’s a tendency for economists, including central bank economists to use models to produce forecasts of the future that are a sort of single version of the truth and then defend those views at sort of all costs, you know, have a bit of a go at those who disagree with them. But in truth, and I’m sure most people understand this, setting monetary policy is something we do under conditions of massive uncertainty. We have to forecast variables. We have to do it a long way out, and we have to struggle with something which in the sort of technical language is called Knightian uncertainty, which is, you know, inflation and the things we care about are a function of an enormous number of different decisions and people’s livelihood and so on and so forth. And you cannot easily model those approaches. In that world of, you know, extreme uncertainty, you have to be humble about what you don’t know as well as what you do. You have to have rival hypotheses about the future. You have to update the probabilities on those hypotheses, and you have to learn from your own mistakes, from speaking and listening to a wide range of people around the economy, from challenge, internally and outside and from comparing yourselves, you know, to other economies. And so in that sense, actually, the speech was a plea, for humbleness, but also for a wide range of diverse views. And as you say, I’ve just returned from Jackson Hole and actually at the end of Jay Powell’s speech, he said the following. He said ‘the limits of our knowledge, so clearly evident during the pandemic, demands humility and the questioning spirit focussed on learning lessons from the past and applying them flexibly to our current challenges.’ And I couldn’t have put it better myself. That was exactly the message I was trying to give too.
Michelle: I just wonder, do you think that, there was an element of Australians resenting a critique from someone who’s come from abroad?
Andrew: Well, look, I frankly speaking, I think Australians would have every right to be bloody annoyed at a foreigner lecturing them to shut up, and agree with the central bank. It would go down like a bowl of sick if an Australian tried to do that in the UK as well. But that wasn’t what I was trying to do at all. In fact, it was the exact opposite. As I say, I was trying to make the case, for humility, but not for a lack of diversity of views. In fact, diversity of views and challenge is essential to what central banks are supposed to be about. All I can say, you know, is I’ve loved my short time in Australia so far, and I’m here to listen, learn and serve. And it’s been quite nice, actually, I’ve had quite a long list of people sending their private support for the messages I was trying to give, in the days after the speech.
Michelle: Well, it was notable that the recent review of the Reserve Bank was worried about the phenomenon of groupthink there. So, do you see yourself in the nicest possible way, as being something of a disrupter?
Andrew: Well, I know Facebook’s phrase used to be move fast and break stuff, didn’t it? And I’m not sure that that model of disruption is really applicable to central banks, were a slightly more conservative breed. But what I would say is, my experience at the Bank of England was one of almost continuous crisis or uncertainty or unease. If you think about what we went through in the last 20 years or so, it was the run on Northern Rock, a bank in the UK, the global financial crisis, which was a massive earthquake in the UK, the euro crisis in 2012. And after that Brexit, of course, COVID, which we all went through in our different ways, but the UK’s experience of it was pretty spectacularly awful. The Ukraine crisis, and then, of course, Liz Truss and the LDI crisis in 2022. And I think, you know what all of that taught me at least, was that having a single view, a single lens on central bank policy just is not an effective way of navigating through that kind of omni crisis world. You have to have mechanisms for challenging yourself. You have to think outside the box. You have to have ways of challenging yourself internally and externally. So, I think the challenge of getting beyond group think is a common one for central banks. What I have been really, really, glad to see and have really welcomed is that the staff here at the RBA are totally up for this. It’s not a question of, you know, me coming in and sort of revolutionising everything. It’s a question maybe of me coming in, having had that experience of a particularly uncertain, complex and ambiguous environment and trying to apply some of those lessons here and I look forward to doing that.
Michelle: Senior figures in the Reserve Bank have become much better known in recent years, but now, under the changes that the government has made, the Governor gives regular press conferences. And while this brings the public more information, it also makes the Bank’s leaders potential political targets. How do you see this trade off?
Andrew: Central banks have been given a big and important responsibility over people’s lives of setting interest rates and bringing inflation down. In the 21st Century, a public authority like central banks have no choice but to get out there and explain themselves and hold themselves accountable to the public, to the press, to parliamentarians, and so forth. And I think, you know, so it’s not negotiable. We have to do it. I think it’s more than that, though. I think it’s actually incredibly important that we do it, for improving what we do. I was at the Bank of England in the early 90s when, to be honest, it was a very introverted and closeted place. And when we began to embrace transparency there as independence came on to us, it was amazing to see how much better our analysis and our arguments had to become as they were exposed to the oxygen, publicity. Things, poor arguments that can thrive in private, die in public, and so you raise your game when you have to explain yourself. I think also, and it goes back to the thing we were talking about a minute ago, it also exposes you to thoughts and challenges that hadn’t occurred to you. And, you know, sometimes that’s unpleasant in the short run. But it does help you improve your game. Does it make us more political figures? I was reflecting on this. If you were to get Paul Volcker here and say, did you feel like a non-political figure in the 1980s, when he raised interest rates so sharply and pushed the US into one of the biggest recessions they’ve ever been in? If you were to think about the central bankers who took the UK back into the gold standard in the 30s and arguably triggered you know, Great Depression at that period. If you were to think about the period here of the Hawke-Keating era and the relationship which I understand was quite lively with the RBA. I’m not sure at this point in the 21st Century central banks are more politicised than they were in the past. We’re intrinsically important organisations. We need to hold ourselves to account. I don’t think we should be afraid of that or complain about it, it’s part of the job.
Michelle: We expect soon to see a deal between the Treasurer and the Shadow Treasurer, which will facilitate the Reserve Bank having two boards instead of the single board it has at the moment. One of these would be a specialist board to set monetary policy, the other a general administration board. But do experts always make better decisions when it comes to monetary policy, or do you need, as well, a good deal of experience of what’s happening out there in the real economic world, and what sort of mix of experts does a monetary policy board need?
Andrew: I think a monetary policy board and monetary policy makers need two main things. They need a breadth of expertise and they need judgement. And when I say breadth, I mean it’s obviously true that you need strong economists in that group. But I think particularly in this world that we’ve been describing, I think the defence analysts call it a VUCA world - volatile, uncertain, complex and ambiguous. You need people with a variety of knowledge. Single point knowledge is just not enough. It goes back to the thing about groupthink that we were talking about. Judgement matters too and, you know, exposure to having to make hard decisions under uncertainty is hardly the, you know, only central banks that have to deal with that. Companies and households and people in their lives will have to make those judgements. And so I think as well as expert economists, you do also need people with that broader experience as you rightly said. I don’t know Michelle if you’ve ever been on committees. I’m sure you have in your life, but it might seem a bit odd, to be told that committees in general make better decisions than individuals. But in the early 90s, we, a bunch of researchers at the Bank of England did an experiment with students at the London School of Economics. We had a couple of hundred students, and we got them in a hall, and we asked them to do two things. One was to make decisions about monetary policy on their own, and then the second was to make it as part of a group. And it was proved beyond all reasonable doubt in that particular experiment that, that committees, groups of people, outperformed individuals. And, you know, it doesn’t perhaps take very long to think why that might happen. The people at the far end of the distribution get crowded out by the people in the middle. People’s views get challenged, you exchange information, etcetera, etcetera. Committees in general, in monetary policy, do better so long as they have a diversity of expertise and they have that judgement. And I think, look, to be honest, I’ve only been here a few months. I think the board here actually does a pretty good job in that respect, and I know the review is encouraging us to go further, so I’m optimistic about that.
Michelle: The Reserve Bank is charged with two things, balancing the tasks of containing inflation and maintaining full employment. But sometimes, of course, these will clash, won’t they? And in those circumstances, which should take precedence? And by the way, how would you define full employment?
Andrew: Well, those are big questions. I think probably firstly what I’d say is I think people sometimes say, well look, they always clash. In fact in many cases, they reinforce each other. And when you either have levels of aggregate demand that are too low in the economy, or too high, actually, a policy decision to tackle inflation will also be a good policy decision to tackle the problems of employment. So, the vast majority of central bank’s relatively short period so far, of doing inflation targeting, has been dominated by the two working in the same direction. As you say, challenges do arise when they conflict. That’s particularly when you have what they in the trade call a supply shock when inflation is high, unemployment is low or maybe or maybe vice versa. In most circumstances, it’s not really a question of which one takes priority. In the long run, in the very long run, as Milton Friedman said, you know, inflation is always and everywhere a monetary phenomenon, central banks have control over inflation and have to focus on that. But in terms of how quickly we bring inflation back to target when it’s above or indeed below. But it of course is currently too far above, we have choices about whether we set policy to bring inflation back slowly, or quickly. And in Australia, we have made a very conscious decision, to bring, to set policy, to bring inflation down, but to bring it down slowly enough that we protect the employment gains. And the employment gains in Australia been quite stunning, actually. Even now, the numbers that are coming through in the monthly releases, where people have been predicting an imminent downturn in the labour market it could still happen. But even now those numbers are coming through, we are creating jobs at a pretty spectacular, rate. I don’t want to claim that, you know, all the credit for that for the RBA. There’s lots of reasons, things going into that. But we are seeking to bring inflation back to target, at a pace that protects those employment gains. So, we try to hit those targets at the same time.
Michelle: In your first major speech in Australia, you talked about the strengths of the Australian economy, and you included the resource base, the pro-growth institutions we have and, our welcoming of foreign investment. But I want to ask you about the flip side. What do you see as Australia’s actual and potential weaknesses? And what does it need to fix to be well set up for the next 20 or 30 years?
Andrew: There’s a big question. I think, as you say, I identify three things I should say. I identified, I actually built this on, in particular, a fantastic book by Ian McLean called Why Australia Prospered, which is very dry, but a great read in terms of analysing how Australia has delivered, you know, continuously really such, incredible outcomes for its people. As you say, the first major strength is its endowments, endowments under the ground, the minerals and raw materials that have generated much of the growth in Australia over the years. And that isn’t, of course, just backward looking, in terms of iron ore and coal and the rest of it. It is forward looking in terms of the rare earths and some of the things that are going to drive the new economy, as well. Above ground, Australia’s people, sun and wind, all are great resources for the future. And you know what I call beyond the seas, meaning our geographical position which is both a challenge, but also the envy of many the, you know, in the Asia Pacific region, but also aligned with the, with the Western economies. So a key part of what Australia clearly needs to do, and I don’t want to come across for fear of being called a manipulator of the male member again. But I don’t want to come across as, as someone who is lecturing Australia, but clearly a key part of Australia’s future is to continue to play to those strengths and to pivot its usage of those endowments to the new economy. The second, as you say, heading, was the strength of our institutions. The RBA is part of that. We have a key job to do, I hope, in maintaining macroeconomic and financial stability with APRA, and the other responsible agencies and we’ll continue to do that. And then, as you say, our attractiveness to external investment. Thinking about the challenges, the Intergenerational Report that the government put out last year. I don’t think you could do much better than look at that list, it is quite a long list. If I were to read the summary of it, I’d say, you know, Paul Krugman had it right when he said, well, you know, productivity isn’t everything. But in the long term, it’s probably almost everything. And Australia faces as does every economy in the developed, in the developed world, with the possible exception of the United States, a real challenge as to how to harness the next wave of productivity growth. The level of productivity in the Australian economy has been roughly flat, since 2016. If you were to show the same data for the UK, where I’ve just come from it’s probably, you know, much the same. But the challenge of embracing the next wave of productivity growth is really the thing facing us and most developed economies is ageing populations. How to harness the next wave of technology. Investing in people in their skills, how to think about the challenges of climate change, and of course, all the issues that come with geopolitical risk, and fragmentation. I am well outside my lane in terms of suggesting, how we do that, but in terms of Australia’s medium term prosperity, the challenges around those headings, are just as they have been, in the past centuries.
Michelle: We are seeing at the moment, much more of an interventionist policy from, the government and of course, not just this government, but governments in some other countries, too. And that’s getting a bit of pushback, even, for example, from the Productivity Commission. How do you see this debate about interventionism?
Andrew: I think that is definitely what Mark Carney used to tell me occasionally, quite aggressively, when I was working at the Bank of England, well, outside my lane of expertise. If I’m honest, Michelle, I think as you rightly say, there have been, a number of changes in the way that not just individual countries, but the IMF and the World Bank have been talking about some of the challenges of driving investment in public goods in the future. But if I’m honest, I’m going to take my injunction to be humble. And so, I’m a little bit too humble to answer that question with any great expertise, I’m afraid. Sorry.
Michelle: Well, I’m going to move right back into your lane and, finish our discussion on interest rates, as you say. You’ve been at this conference in the US. You’ve heard the message from the US Fed. It’s time to cut rates there. We’ve seen rates start to come down in Canada, New Zealand, other countries. What does this mean for Australia? We’ve heard from the Reserve Bank that we’re not likely to get a cut this year, but does this rhetoric that’s come out of the United States and likely quick action in the United States, change that signal from the Reserve?
Andrew: One of the other parts of Jay Powell’s speech at Jackson Hole, which caught my eye, ear rather, I suppose, was he said, look, my confidence has grown that inflation is on a sustainable path back to target. He was, of course, talking about US inflation and the test that he’s applying there to American inflation is exactly the test that we are applying to Australian inflation. Sadly, at the moment, you know, Australian inflation is a bit stickier, than it has been, in, in the US. And there’s a variety of reasons for that. And we are not yet, the board of the RBA is not yet, as Michele Bullock has set out, I hope clearly in a number of, recent speeches and press conferences. We’re not yet as confident, as Jay is about in the US, that inflation in Australia is back on a sustainable path back to target. And therefore we have to hold rates where they are for the time being. That said, we will be as alert, to the potential for changing rates and for easing rates as Jay was when inflation gets back into that confident level of being on a sustainable path back to target. And I think this point gets somewhat slightly lost. We deliberately did not raise rates in Australia as high as other countries did. That was going back to the previous question you asked me, that was a conscious decision, to protect the employment gains, that we have seen in Australia, in the recent period. So we didn’t raise interest rates as high. As a result, you wouldn’t necessarily expect them to come down, quite as far as, quite as quickly, until we see inflation more sustainably moving back to target. I think you are also saying will interest rates fall as far as they rose. I think the answer to that is it’s unlikely that they will fall as far as they rose. And the reason being that obviously they rose from a level of roughly zero, you know, only slightly above zero, which was a function of a truly extraordinary period in Australian and global life after the COVID crisis. And maybe we go back to zero rates at some point. But candidly, I hope we don’t, because it will probably be a sign that we’re in another crisis. So I think the more likely assumption is that interest rates, you know at some future point, when inflation is sustainably moving back towards target, will fall, but they’re unlikely to fall to the levels we saw in previous years.
Michelle: But they would presumably fall in several increments even though they wouldn’t go all the way.
Andrew: Yes. I mean, I suppose I should strictly speaking, say you never rule out, you know, any particular change in either direction of any scale depending on the shot you hit. And obviously, you know, when COVID hit around the world, some central banks had to move very sharply, and very quickly. But as usual, as you rightly say, that interest rates move in increments of usually 25 basis points although it can vary, it varies in different, in different countries. And the reason for that is that central banks are learning. Just as I come back to the theme in my speech at the beginning, you know, the central banks are learning about, well, just how tight is the labour market? You know, just how much stimulus does the consumption sector need, just what is going on in the global economy? And usually the information, on those developments only comes in, in dribs and drabs. And so you move, as you, as you see the data. But as I say, never say never. You can move in larger amounts, if you want to. And we have that flexibility.
Michelle: I just finally want to make it absolutely clear for, listeners, especially those with mortgages. What you’re saying is that the message from the US Fed hasn’t changed the Reserve’s prediction that we shouldn’t expect a cut this year. Although, of course, you remain alert to changing circumstances.
Andrew: By itself, it hasn’t changed. What I would say, and I think this is an important point, perhaps I would clarify this, obviously a significant part of the inflation story over the past 2 or 3 years has been a global story. It’s been related to global supply chains. It’s related obviously, to the fallout from COVID. And, you know, the impact of all of that, on global demand. And so to the extent, you know, that obviously the US is a major trading partner of ours and other parts of the economy, I think global economy as well, to the extent that developments in those economies, you know, have useful and important information for our own economic outlook, then obviously that would be factored in. You know, inflation in Germany yesterday, undershot predictions, as well. That may be telling us, for example, that the level of global demand is somewhat weaker than previously thought. If that were true, and we’d have to wait and see, then obviously that would also have implications for the outlook in Australia as well. So, we keep a very close eye on economic developments in the global economy. But no, the decision on interest rates for the US is for the US to make. The decision on Australian rates, is for the RBA and for Australians to make. And you know, we’re obviously hopeful that in due course we would follow suit. But we have to take account of the outlook for inflation in Australia. And inflation, unfortunately, is still a little bit too high at the moment. And that is our focus.
Michelle: Andrew Hauser, thank you very much for talking with us on the podcast today. That’s all for the Politics Conversation podcast for now. Thank you to my producer, Ben Roper. We’ll be back with another interview soon, but goodbye for now.
Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
