BULLOCK, Ms Michele, Governor, Reserve Bank of Australia HAUSER, Mr Andrew, Deputy Governor, Reserve Bank of Australia HUNTER, Dr Sarah, Assistant Governor, Economic, Reserve Bank of Australia JONES, Dr Brad, Assistant Governor, Financial System, Reserve Bank of Australia KENT, Dr Christopher, Assistant Governor, Financial Markets, Reserve Bank of Australia Committee met at 09:30 CHAIR ( Mr Husic ): I declare open this hearing of the House of Representatives Standing Committee on Economics for the review of the Reserve Bank of Australia annual report 2025. I do so by, first, acknowledging the Ngunnawal and Ngambri peoples, on whose lands we meet today, and I pay my respects to elders past and present. I also extend that respect to any Aboriginal and Torres Strait Islander peoples joining us today. I begin by extending a welcome to the representatives of the Reserve Bank of Australia, to my fellow committee members and to members of the public and the media in the room and watching online. Let me begin as I did last September, by reiterating the value of these hearings in providing an important accountability and transparency platform. They provide an opportunity for the parliament and for Australians more broadly to better understand the conduct of monetary policy and the Reserve Bank's assessment of current economic conditions and the outlook ahead. The period covered by the annual report has been one of continued adjustment for the Australian economy. A new phase in domestic economic activity appears to be emerging, with growth increasingly led by private demand, supported by stronger household consumption, dwelling investment and business investment. The latest data shows a record number of Australians in work and the employment rate remaining low. Against this backdrop Australians continue to face cost-of-living pressures, and it's valuable to emphasise the importance of careful, balanced policy decisions that support price stability while also preserving the gains made in employment and economic participation. Strengthened private demand suggests growing confidence in parts of the economy and raises important questions about productivity capacity and long-term growth. The global environment remains uncertain. Heightened geopolitical tensions, shifts in global trade policy, ongoing challenges around productivity and competition across advanced economies continue to shape the outlook facing central banks. More recently, appreciation of the Australian dollar has added another dimension to that outlook. In accordance with the committee's resolution of 31 July 2025, today's hearing is being broadcast on the parliament's website, and the proof and official transcripts of the proceedings will be published in due course. Given the strong public interest in these matters, I remind all present that these are parliamentary proceedings and must be conducted with decorum and respect. Media are permitted to record the hearing but are asked to report proceedings fairly and accurately to avoid any interference with the committee's work, and they must not film or photograph documents or devices of committee members, witnesses or others. I welcome representatives of the Reserve Bank of Australia. Thank you for appearing before the committee today. I remind you that, although the committee does not require you to give evidence under oath, the hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. With that, Governor Bullock, I invite you to make an opening statement, if you like. Ms Bullock : Thank you very much, and good morning to all members of the committee. It's nice to see you all again. My colleagues and I are pleased to be here today to answer your questions. As the chair has already said, these are an important part of the accountability process for the Reserve Bank of Australia. As you know, our mission is to promote the economic prosperity and welfare of the Australian people now and into the future. We do this by conducting monetary policy with the aim of maintaining low and stable inflation and full employment, and we also support stability of the financial system. But our responsibilities go beyond this. We work to provide a reliable, efficient and competitive payments system, we deliver efficient and effective banking services to the Australian government agencies and we also provide secure and reliable banknotes. Since we last met with the committee, the Monetary Policy Board judged that it was appropriate to tighten monetary policy to help return inflation to target. I'll start with some background to this decision and the outlook for the Australian economy, then I'll make some remarks on the payments system and cash distribution, and I'll finish off with a bit of an update on our progress in achieving the objectives of the RBA review. As I noted, the Monetary Policy Board conducts monetary policy with the aim of maintaining low and stable inflation and full employment. The Statement on the conduct of monetary policy sets out our agreement with the government that an appropriate goal is consumer price inflation between two and three per cent. To achieve this, we set policy such that inflation is expected to return to the mid-point of the two to three per cent target range, but there's flexibility around the timeframe in which we meet our inflation objective to balance this with meeting our full employment objective, achieving the maximum level of employment that's consistent with low and stable inflation in the medium term. On the first part of our mandate, inflation has fallen substantially since its peak in 2022. However, after a period of being within the two to three per cent target range, inflation picked up over the second half of 2025 to be materially higher than earlier anticipated. Underlying inflation, which is our preferred measure—the trimmed mean, which removes the more volatile movements in any given quarter—had been easing and had reached 2.7 per cent in mid-2025 before increasing to 3.4 per cent over the year to the December quarter of 2025. The pick-up in inflation over the second half of 2025 was observed across a broad range of categories, including for services, retail goods and the cost of building new homes. Headline inflation, which has been affected by temporary cost-of-living-relief measures, increased to 3.6 per cent over the year to the December quarter. On the second part of our mandate, various measures continue to suggest that labour market conditions remain close to, if a little tighter than, full employment. After a period of easing, labour market conditions have stabilised in recent months, in line with the pick-up in the growth of demand. The unemployment rate, which averaged 4.2 per cent in the December quarter, is low by historical standards, and the share of population with a job is close to a record high. There are 1.7 million more Australians in employment since the start of the pandemic. This is a very welcome development for those individuals, their families and the wider Australian economy. Earlier this week, the Monetary Policy Board decided to increase the cash rate target by 25 basis points to 3.85 per cent. As I mentioned earlier, while inflation has fallen substantially since its peak in 2022 it picked up materially in the second half of 2025. As recently as August 2025, we were forecasting inflation to be sustainably back within the two to three per cent band by this year. Private demand had picked up but was not growing particularly strongly, labour market conditions were easing gradually and the world economy looked very uncertain, with global growth forecasts revised downwards. But over the second half of 2025 this picture progressively turned around, with a range of data increasingly suggesting that international conditions, domestic demand and inflation were turning out stronger than we expected. The Monetary Policy Board highlighted this evolving assessment in the statements accompanying its November and December meetings. Much of the recent increase in inflation is judged to be temporary, but some of it seems to be persistent. Indeed, our outlook now sees inflation not coming back into the target band until the middle of next year. What's driven this change in outlook? There are a few factors. First, financial conditions have eased. We previously judged monetary policy to have remained a bit restrictive through 2025, but the recent inflation data and the pick-up in credit growth cast some question over this. Second, the world economy has proved much more resilient than expected, so that growth in our major trading partners has been much stronger than forecast. This partly reflects the resilience of the global trading system, which has adjusted faster than expected to tariff changes, but it's also a consequence of the ongoing boom in AI investment, which has spilled over to a number of high-income Asian economies that supply chips and other key inputs. Third, private demand looks to have increased more strongly over the latter part of last year than we were expecting. Household consumption and business investment both drove this strength. Consistent with that strengthening of demand, the labour market has been a bit stronger than expected since November, and we judge that it remains a little tight. We hear from surveys and our own liaison that some firms are still finding it difficult to find staff with the right skills and experience. This is another symptom of excess demand for goods and services in the economy. So, given the inflation outcomes, the board judged that stronger than expected demand in aggregate was pushing against the ability of the economy to supply all the goods and services being demanded. In other words, there was more excess demand in the economy than earlier judged. This means that we need to dampen the growth of demand unless the supply side of the economy can expand a little quicker, and this is where productivity comes in. Faster productivity growth allows for stronger growth in incomes and spending without the emergence of inflationary pressures. Based on its assessment that the economy is more capacity constrained, the board judged that monetary policy needed to be tighter to dampen aggregate demand growth and help return the economy to balance over the forecast period. It therefore judged that it was appropriate to raise the cash rate. There are of course risks to this outlook. Forecasts are always uncertain. One that the board will be monitoring closely is the extent to which the stronger inflation we've observed is persistent or temporary—that is, the extent to which the economy is capacity constrained. The board will be closely monitoring the incoming data and continually assessing the extent of capacity constraints. If growth in demand is stronger than expected and growth in the economy's supply capacity remains limited, it's likely to add to capacity pressures and hence inflation persistence. If demand growth is weaker or supply growth is stronger, inflation may return towards target more quickly. There are also significant uncertainties—I probably don't need to tell you this—in the global economy. With elevated trade and geopolitical risks, circumstances here could change quite quickly. I recognise the challenges the cash rate increase brings for Australians with mortgages, but it's the right thing for the economy as a whole, because we need to ensure that inflation is low and stable so that households and businesses can plan, invest and create jobs. I've said it before: high inflation hurts all Australians, whether you're paying a mortgage, renting, running a business or just trying to make ends meet, and it's especially tough on people with lower incomes and those in more-vulnerable situations. I want to move on now to the payments system, which is another key responsibility for the RBA in our regulation and oversight of the payments system. We're committed to promoting and supporting a modern and innovative payments system in Australia. We're currently completing our review of surcharging and merchant card payment costs. This review has benefited from extensive engagement from a broad range of stakeholders, including more than 170 written submissions to out consultation paper, and the staff have conducted more than 100 bilateral meetings and have gathered additional evidence from stakeholders. The Payments System Board will publish its conclusions on this by the end of March 2026. After the review of merchant card payment costs and surcharging, we're going to consult on the issue that should be prioritised by the RBA under the amended Payment Systems (Regulation) Act. These amendments expanded the RBA's remit to a broader range of payment systems and their participants, including three-party card schemes, mobile wallets, buy-now-pay-later providers, and e-commerce platforms. This consultation is expected to take place in mid-2026. We acknowledge that on 8 December 2025 this committee commenced its inquiry into schemes, digital wallets and innovation in the payments system. The RBA has made a submission to that inquiry and looks forward to your deliberations. We see the committee's work in this area as very complementary and concurrent to the RBA's own consultations in the payments system. The RBA has also contributed to the Council of Financial Regulators' Better Regulation Roadmap, which is promoting streamlined regulation to help drive stronger productivity in our economy. As part of this, the RBA is supporting innovation by exploring how new forms of digital money can support tokenised asset markets, and we're creating a plan for modernising Australia's core settlement infrastructure, the Reserve Bank Information and Transfer System, otherwise known as RITS. I also want to note that on 27 January the RBA experienced a system issue that disrupted some payment and property settlement services. We restored settlement for those services in the afternoon, but a second issue for property settlements meant that full restoration was not achieved until the evening. We apologise for the disruption caused by that incident. We recognise the critical role we play in the payments system and we're conducting a full review of the incident, which we plan to publish before the end of February. This incident, for me, just reinforces the importance of the RBA's active program of work at the moment to strengthen the operational stability of its critical settlement systems. I would also like to update the committee on recent developments in the cash distribution network. Cash remains a critical part of an inclusive and resilient payments system. Although the use of cash for everyday payments has declined in recent decades, a range of indicators suggest cash use has stabilised in the past few years. The RBA remains committed to supporting the Australian government's policy objective to ensure cash remains a viable means of payment for as long as Australians want or need to use it. The cash distribution system has faced significant challenges. These issues are most pressing for rural and regional areas. The industry needs to work together towards a more sustainable distribution system that supports the needs of all Australians. Linfox Armaguard, which is the main provider of cash-in-transit services, and its major banking and retail customers have been working towards a future pricing model. This is aimed at supporting more sustainable and efficient distribution arrangements. Any proposed model would need to be considered by the ACCC. As the issuer of Australian banknotes, the RBA also plays a key role in cash distribution. We provide banknotes to the major banks, who distribute these to the broader community. We are continuing to work with industry so that the RBA's arrangements and incentives support efficient distribution and encourage banks to hold cash across the country. We also continue to work closely with other public agencies to support the long-term availability of cash in the public interest. The Council of Financial Regulators, which I chair, together with the ACCC, is taking an active interest in cash distribution. Last year, the CFR and ACCC consulted on potential regulatory guardrails to support resilience and fair access to critical cash distribution services. The government has also recently introduced a mandate for large grocery stores and petrol stations to accept cash, which aims to support Australians who want to pay in cash for essential goods. Finally, as you know, the RBA review was released in April 2023. The review recognised the RBA's longstanding contribution to Australia's economic success and the professionalism of our staff, while identifying areas for improvement. It focused on a few key areas—monetary policy, governance, transparency and culture—that are central to our effectiveness as Australia's central bank. The findings from the review have shaped our transformation agenda since that time. Some recommendations from the review involved actions that we could undertake ourselves, like changes to the number and timing of board meetings, our board processes, press conferences, and our culture and leadership capabilities. But other recommendations required legislative change, including the creation of a separate governance board. So, in March 2025, the most significant reforms to the RBA since the 1990s came into effect. Our work is now overseen by three boards: the Governance Board, the Monetary Policy Board and the Payments System Board. The Governance Board is now the accountable authority under the Public Governance, Performance and Accountability Act 2013. It is effectively responsible for overseeing the operations of the RBA, including strategy, risk, resourcing, budget and the balance sheet. But there is one important difference with boards in commercial organisations: we are a policy institution and so there are circumstances where policy takes precedence over normal commercial considerations. A good example of this is use of the balance sheet for monetary policy or financial stability considerations. Nevertheless, the creation of the Governance Board has sharpened our focus, strengthened decision-making and improved accountability, supporting our commitment to modernising the RBA. In line with its new responsibilities, the Governance Board published a report on our progress in meeting the recommendations of the review in December last year. To date, the RBA and the government have addressed 41 of the 51 recommendations. Clear implementation plans are in place for the remaining recommendations, and the necessary work is well underway. We will implement two further recommendations in 2026: the publication of a framework for additional monetary policy tools and the convening of an external expert advisory group on monetary policy. The remaining recommendations are ongoing commitments where we have established the structures, processes and capabilities needed to sustain progress in these areas. They include initiatives to strengthen leadership, embed cultural change, enhance analytical expertise and deepen our understanding of monetary and fiscal interactions. We have also committed to conducting future reviews of the monetary policy framework and our institutional capability. Our work doesn't end with the implementation of specific recommendations. In the spirit of the review, we are embracing a mindset of continuous improvement, recognising that the environment in which we operate is dynamic and that our institutional practices must continue to evolve. We remain committed to pursuing excellence in everything we do as we build an RBA that is fit for the future. I will finish on that note. My colleagues and I look forward to answering your questions. CHAIR: I appreciate it. Thank you very much for the opening statement. That's now gone up online as well, if people want to track that down. Picking up on some of the things you said in your statement as well as remarks you've made this week—you've obviously indicated that this week presents challenges in terms of the broader economy, but you also said that we're actually in a good position, the labour market is really strong and domestic demand is recovering. These are good things, but it's just that we're supply constrained. The latest statement on monetary policy noted that private demand is driving growth. On top of that, the latest quarterly estimate of key economic flows in the country indicated private investment grew at nearly three per cent, which is fairly significant given it's been a challenge for some time. It's probably the highest rate of quarterly growth since March 2021. I want to ask three quick questions, if I may: What are some of the factors that the RBA notes have driven that pick-up in private sector activity? Do you view the pick-up as the start of a more sustained investment cycle, and what are some of the factors driving that? And to what extent could this lift in investment translate into stronger productivity, given you highlighted the importance of that in your statement and potentially addressing some of those supply constraints? So the questions are about the factors that drove the pick-up, whether it's more sustained and the extent that it could translate to productivity. Ms Bullock : I'll make a few comments, and I'll ask Sarah to make a few comments as well. The factors driving—I think there are a couple of things that have occurred. The first is that real incomes have been rising for a while now, and that's helping to sustain growth in incomes. Real disposable incomes have been assisted by the decline in inflation. They've been assisted by tax cuts. They've been assisted by interest rate cuts and a rise in nominal wages. All of these things have been contributing to an increase in real wages. That's been helping to sustain our consumption. Investment—you're right—was very strong. I'll get Sarah to make a few remarks on investment. I think our hope is that it will be sustained. It may be that some of the strength we saw is a little bit lumpy. It's lumpy investment. So we expect that some of that may not persist as big lumps, but hopefully it is signalling that there might be a little bit of a pick-up. I'll ask Sarah to talk about the forecasts and investment. I think that's positive. We need investment if we are to get productivity improvements. We need two things. We need investment so that we can get more labour productivity, and we also need businesses to be thinking about how they combine labour and capital in more efficient ways to get productivity improvements. Certainly our analysis of productivity at a high level is that both of those things have not been occurring. That's part of the reason for the slowdown in productivity. I might ask Sarah to make a few comments about the outlook, particularly on investment and consumption. Dr Hunter : Thank you, Michele. For business investment, what we particularly saw in the September quarter was a big step-up in investment in data centres. We weren't actually expecting that. And that investment can be very lumpy, as you can imagine. You build a data centre, it's worth a lot of money and it sort of pops through in one go. But, I suppose somewhat encouragingly, at the same time we also saw that firms' expectations for their capital expenditure over the next year stepped up. So, while we don't expect to see the same again in terms of that jump in data centre investment, we do now think that generally speaking business investment will be higher than we previously thought over the next year or two. CHAIR: Based on capex intention? Dr Hunter : Yes, which is a survey the ABS run, and it's sort of what it sounds like. They ask businesses what they expect to spend in terms of their capital investment over the next year. That gives us a steer on where we think actual spending will go. The bottom line is that investment is stronger. In terms of your question of how it flows through to productivity, we certainly hope to see that having an impact down the track. Clearly business investments, expanding the capital stock and investing in new technologies are a key part of how we can lift productivity in the economy. It does take a bit of time, though. You put that capital investment in place. It might take your workforce a bit of time to learn how to use the new machinery, equipment and whatever else. It could take a bit of time for businesses to take full advantage of the new AI technologies that are enabled by these data centres, but we would hope over time that it would contribute to productivity growth. It might be beyond our forecast horizon, which is only a couple of years, but down the track, yes. We would hope that would be true. CHAIR: Thank you. Mr Hauser : The other factor that we have seen hasn't been the primary driver of the pick-up in demand last year in Australia, but it's an important contextual point. The world economy, although many downside risks—and we're very conscious of those; some of them crystallised last year—has been surprisingly strong, in fact. Whereas many of us marked down our forecasts for growth last year in light of the tariff announcements, in reality world growth has been stronger, not least in the major trading partners of Australia. Commodity prices have held up, and the Asian countries have had surprising booms—surprising to themselves, in fact—because of the AI and tech cycle. That is also part of our story most importantly in 2026 and 2027, but it's another upside surprise that I think nobody had fully predicted six months ago. CHAIR: That brings me to the second area. There are two other areas I wanted to touch on in the time that I've got allocated. That brings me to the global outlook and your references to it in your opening statement, Governor, and some of the comments that Andrew made then. In terms of the risks within the global outlook, given some of the geopolitical instability that we've been witnessing and some of the political uncertainty in advanced economies, what are some of the channels through which this might impact on our economy? How do you see some of these risks playing out in the global economy itself? Do you think you're well-placed to be able to manage some of those risks? Ms Bullock : There are many facets to this. Back in April and May, when all of this was at its height, when the tariffs were initially imposed and the US effectively cut off trade with China—then everything subsided—you might recall that everyone was extremely worried. We did some scenario analysis, which we published in our May Statement on monetary policy, which looked at basically a global trade war. That involved the US following through, lots of retaliatory tariffs by other countries, which would have a big impact on global growth, and that would impact us, and there was an expectation that the US would slow down quite a lot. As Andrew has already said, none of this came to pass, and there are a number of reasons for that. The tariffs didn't end up being as high as they were expected to be, certainly not as high as expected in April. But even now there are so many exemptions and so many uncertainties about where they apply that the actual tariff rate's probably even lower than the headline tariff rates in many countries. The global trading system has managed to find ways to redirect trade. China's still exporting at record volumes to the rest of the world. It's having an impact, as Andrew said, on our other trading partners, particularly in Asia. Everything seems to be rosy, and certainly the financial markets seem to think everything is rosy. I'd say that risk at the moment wobbles, but generally risk premia are pretty low in the world economy. Financial markets don't seem to be thinking that something disastrous is going to happen. So what if something happens to cause this to unravel? Well, I think our exposure is mostly in terms of trade, obviously to China. So, if something implodes in the US and it slows down markedly, that doesn't necessarily impact us as much as if it has flow-on effects to Asia. So that's the first point. The second point is that financial markets are very, very sanguine about all of this. It is possible that it won't be trade but maybe geopolitical events that cause financial markets to go into reverse and start pricing a lot of risk into assets. If that happens, there are potential risks to the financial stability. If that happens, banks and other financial institutions might start withdrawing credit. They might start seizing up in that case, because credit, of course, greases the wheels. If they start to do that then that's potentially presenting financial stability issues, which will impact the real economy, and we've seen that in the past. So they're a couple of the mechanisms through which it might. As Andrew said, everyone is surprised on the upside, and not just us—everyone. When you go to overseas meetings, everyone is surprised on the upside. CHAIR: Thank you very much for that. This is the last issue I want to touch on before I hand over to the deputy chair. Globally, we're seeing a pretty active discussion—that is my euphemistic way of describing it—about central bank independence. You're one of more than 15 central bank leaders around the world who signed a joint statement offering full support to the US Federal Reserve chair. Getting that many central bankers to sign a statement like that is a statement in itself. You clearly feel strongly about this issue, and I just wondered if you're able to expand on your reasons for why you were part of that statement. Ms Bullock : I won't comment on US politics or anything like that. All I would say is that— CHAIR: There's enough of that going on. Ms Bullock : Given the Federal Reserve chair's statement that his independence was being challenged and he felt he needed to stand up for that, we—I and, I know, others as well—also felt it was important to stand up for central bank independence, the reason being that for a long time now—many decades—I think it's been clear that giving central banks independence but also accountability—independence to set monetary policy to keep inflation low and stable—is advantageous. Mandates for central banks differ a little bit, but basically the core of most of them is all about keeping inflation low and stable. That's what it's about, and giving central banks independence from political processes to do that has proved very, very advantageous for the world economy—allowing monetary policy to do that and governments to get on with their things. So that's the reason that I signed it. I thought it was important. You do periodically see countries where the independence of central banks is curtailed, and generally you don't get very good outcomes either for inflation or for the economy, because as we know, if you let inflation get out of control, it's bad for the economy generally, it's bad for employment, and ultimately the cost of getting it down can be very high. CHAIR: Thank you. I'll hand over to the deputy chair. Mr KENNEDY: Thank you, Chair. I'll just pick up where you left off, on inflation and this week's rate rise. I think that, in your statement on Tuesday with the rate rise, you talked about excess aggregate demand in the economy creating inflation pressure. You touched on that. Ms Bullock : Yes, that's right. Mr KENNEDY: Does government expenditure influence aggregate demand? Ms Bullock : Yes. Let me just talk a little bit about what aggregate demand is. When we talk about aggregate demand in the economy, we're talking about a combination of private sector demand, which is consumption and investment, and public demand, which is across federal, state and local governments. So that's what goes into aggregate demand. What we were talking about in the statement was that aggregate demand, we think, is currently in excess of the ability of the economy to supply those goods and services which are being demanded. So the total demand is too high, and that's what's giving inflationary pressures. Mr KENNEDY: I work in parliament, and we do the budget. So we focus much more on expenditure. I guess my question to you was on government expenditure—fiscal policy. Does government expenditure influence aggregate demand? Government expenditure, as I understand it, creates public demand. But there's government expenditure also in private demand. Does government expenditure influence aggregate demand? Ms Bullock : Yes it does, because, as you say, there's some public demand and then there are transfers and taxes, which also flow into that. It's all part of aggregate demand. Mr KENNEDY: When will government expenditure peak—excluding COVID? When will it be highest as a percentage of GDP or of the economy? When is government expenditure peaking? Ms Bullock : Sarah, I'd have to pass to you on that one. Dr Hunter : It goes to a point, actually, of your previous question. It does depend on how you define government in the economy. Mr KENNEDY: As a percentage of GDP, when will it be the highest? Dr Hunter : It depends if you're talking about public demand in aggregate demand, which is the— Mr KENNEDY: Payments; let's talk about payments—government payments. When will they peak as a percentage of GDP? Dr Hunter : I don't have that figure to hand. You can find that figure in Treasury documents. They will typically report on that, and it depends on which government— Mr KENNEDY: I've got them here, since you don't have it. In MYEFO, it's saying it'll peak this financial year at 26.9 per cent of GDP. Does that sound right to you? Dr Hunter : As I say, I don't have it in front of me, but if you're reading it from the MYEFO document then that will be the Treasury's forecast for what they expect for federal government expenditure. That obviously won't include the states, local—which is also very small as well. Mr KENNEDY: Sure. I'm in federal government, so I'm just talking about federal government and the federal government's actions. We've got excess demand creating inflationary pressure, which you've just said. According to Treasury's documents, we're seeing government expenditure that, excluding COVID, will never be higher than this year—as a percentage of the economy. It is the highest it has been, excluding COVID, in 30 years. So if government expenditure, as you've just said, influences aggregate demand—and Keynes would agree—and has not been higher in 30 years than this financial year, is it not then logical that government expenditure is putting pressure on private demand and putting pressure on interest rates? What is wrong with the logic that I have just laid out? Ms Bullock : Mathematically, you're right; public demand expenditure and private sector—all of that—adds to demand. That's logical. It's mathematical. That's what happens. Mr KENNEDY: Good; I just want to make it clear. Just for the record, government expenditure peaking this year—the highest it's been in 30 years excluding COVID—is adding to aggregate demand, creating inflationary pressures. Dr Hunter : It's a component of aggregate demand. As the governor— Mr KENNEDY: It's the largest it's ever been as the component of—is that fair? Dr Hunter : I think, as the governor's outlined, what we're really concerned with is what's happening to aggregate demand. Mr KENNEDY: Me too. Dr Hunter : That's what matters for inflation. I say that because what we've seen over the last few years and what we've seen throughout history is that the economy will adjust, and you get different spending patterns at different points in time. But it is aggregate demand that matters. The economy will adjust to where the demand is coming from. If one particular sector or region is growing more strongly, you'll tend to get people moving to that sector; they'll move into jobs, they'll meet that demand and so on. What we care about is aggregate demand, and I stress that because it doesn't just matter what the federal government does; it matters what the states do, what local authorities do—even that small component—and it matters what's happening in the private sector. It's that total— Mr KENNEDY: But all this government can control is what it does. Is that fair? Dr Hunter : The federal government sets federal government policy. Mr KENNEDY: That's what we're here talking about. That's what I want to talk about. Ms Bullock : The government is responsible— Mr KENNEDY: On Tuesday, Treasurer Chalmers said this: If you look at the Reserve Bank statement today, it doesn't mention government spending. Well, that part was right. But then he goes on to say: It's not a factor in the decision that they took today. Ms Bullock : Where we were surprised, and I said this in my opening statement—let's just go back to the facts here. And they're facts. They're not judgements. They're not opinions. Mr KENNEDY: I just want facts too. Ms Bullock : Over 2025, if you look at our forecasts—which are the relevant things for inflation forecasting; it's about aggregate demand and aggregate supply, and we've already established that in aggregate demand there is public and there is private—the contribution of public demand to growth, and you can see this in our Statement on Monetary Policy, has declined, and private demand has— Mr KENNEDY: I'll just interrupt you there. I'm talking about government expenditure. I know you're going back to private and public demand, but isn't it the truth that in private demand there's government transfer—so government expenditure? What I'm focused on is government expenditure. I know you want to go back to private and public demand because, yes, public demand has come off a little bit, but what that obscures is that government expenditure actually shows up in private demand, does it not? Ms Bullock : Yes, it does, because what it often does is transfer money to people and give them money to spend, which is— Mr KENNEDY: Why I don't like that—and I'm just being honest—is because I think what the Treasurer is trying to do, though I'm not accusing you of this, is be a little bit tricky here. He doesn't want to admit that government expenditure is the highest, excluding COVID, it's ever been in 30 years right now. By him talking about private demand and public demand, that obscures the fact that government expenditure is in public demand and private demand, with electricity rebates and all these other things that don't show up in public demand, and it tries to give him a political out to obscure. What he said here was: If you look at the Reserve Bank's statement today, it doesn't mention government spending. He's not talking about public demand; he's talking about government spending. He said: It's not a factor in the decision that they took today. I want to talk about the Treasurer's words, not your words. Ms Bullock : I don't have a view on the Treasurer's words. My point is— Mr KENNEDY: The question is: is that statement correct? Ms Bullock : It is correct to say that, if you look at our forecasts, what has driven the rise in inflation? And you see this is—and I know you're talking about spending. We've been saying that public demand has declined as a share of the contribution to the growth in spending, in growth in GDP. That is a fact. That's the way we forecast. We're not Treasury. We forecast based on aggregate demand and what we think that means for the supply gap and what that means for inflation. That is our focus. If we need to put up interest rates to slow the growth in aggregate demand, then that's what we will do if that's what's required. Mr KENNEDY: That's your job, and I don't want to— Ms Bullock : That's our job. Mr KENNEDY: I'm not trying to challenge you on your job, but my job in opposition and in government is to look at how the government spends all the taxpayers' money that they get. Ms Bullock : Correct. Mr KENNEDY: That's my job in opposition. Ms Bullock : That's your job, and it's the job of the government and the parliament. Mr KENNEDY: And I think government, when it spends in its fiscal policy, creates settings which monetary policymakers need to take into account. Is that fair? Ms Bullock : We need to take into account what is happening in aggregate demand relative to aggregate supply. And, yes, all that feeds into aggregate demand. But, as I've said before, fiscal policy decisions are decisions for the government and the parliament. They are not for the Reserve Bank of Australia. Mr KENNEDY: And I don't want you to influence or make those. I'm just trying to understand in my role, which is separate to your role—and I need to scrutinise government spending—whether that affects monetary policy decisions. I think what I heard in the testimony earlier is that government spending affects aggregate demand, which is how you set interest rates, so it must. Ms Bullock : It does, as does private. It's part of aggregate demand. Mr KENNEDY: I'm relieved to hear you admit that because when I was listening to the Treasurer in parliament here on Tuesday, when he said that, it didn't sound right to me. So I'm very relieved to hear you say that. It has been such a contentious point, and I'm not sure why the Treasurer has had such a hard time doing it, so apologies. I know that felt a little laboured, but we've had a week like that, so at least you've only endured 10 minutes of it. Ms Bullock : It's factual. It is not an opinion. It is not a judgement. It is a fact. That's all it is. Mr KENNEDY: I might turn to the economy. I see that you have revised down your predictions for growth on the economy. This is a quote from the ABC: 'Following up on yesterday's rate hike, the RBA has slashed its forecast for economic growth. In November, the central bank thought GDP would be 1.9 per cent this year and two per cent next year. Now it thinks it will fall to 1.8 per cent this year and 1.6 per cent next year and the year after. This is a shocking downgrade in Australia's economic performance.' So are Australians at risk of getting poorer at the moment with this downgrade? Ms Bullock : I'll defer to Sarah on the specifics of the outlook and the downgrade, but there are a couple of things. Previous forecasts basically had further interest rate cuts in them because we thought that the economy was slowing and that inflation was coming down. The new forecasts actually have a technical assumption where the interest rate is going up. That's part of the explanation. Mr KENNEDY: So continued interest rate rises? Ms Bullock : It's a technical assumption. It's not our forecast for interest rates; it's a technical assumption, but that is part of what's driving the forecast. Sarah can talk to that in more detail. The point about people's incomes, going forward—that's a story about productivity. Unless we can get the economy growing more quickly, unless we can get potential supply and productivity growing more quickly, we can't grow any more quickly than that. We need supply to respond. We need productivity. That means that we need to produce more for the capital and the labour that we are investing in to produce things. Unless we get that, in the future we're not going to see a lot of growth in people's incomes. Mr KENNEDY: And so what are you forecasting in productivity growth? Ms Bullock : We have an assumption—I think it's about 0.7 for the next couple of years. It's only a short-run assumption. It's not a long-run assumption, but for the next couple of years we see it as relatively subdued. I might pass to Sarah. Mr KENNEDY: With that growth assumption and with that productivity assumption, should Australians expect to get poorer, on average? Dr Hunter : No is the answer to your final question. The productivity assumption that Michele just mentioned—about 0.7, year on year, for our two-year forecast horizon—gives us a trend growth rate of around about two per cent, year on year. That's stronger than population growth. So, on average, over the medium to long term, if that's what came to pass, GDP per capita would be rising and real household income would be rising, under that outcome. I'll go back to a bit more detail of the forecast and the forecast revisions from November, to answer your earlier question and give a bit more colour. In November we were actually expecting the economy to grow at about that two per cent mark for the next couple of years. As a baseline we were thinking we would get around trend growth. What we think now is that the near term is going to be stronger than that. We have upgraded what we thought for the back half of last year, as Michele has already talked about, and we've upgraded a little bit what we think is going to happen for the first bit of this year. But, as Michele said, with our new technical assumption for the cash rate and some other factors easing away, we do get a slowdown to below-trend growth in the back half of the forecast. It's more of a cycle now, around that trend growth rate. So, yes, the out year—2027 and into the first half of 2028—is weaker than we had it in November, but the first half of the forecast is actually, if anything, stronger. So I wouldn't quite characterise it the way the quote that you read did. It's more of a cycle around that trend growth rate. CHAIR: The member for Wentworth. Ms SPENDER: Apologies for not being there in person. I'm afraid I had committed to things before we arranged this date. I just want to pick up on the deputy chair's questions. It's really about managing risk. I've been on the economics committee for a bit, and it seems that it's not a complete science; it is also an art, and it's about how you manage the risk of inflation as well as the risk of unemployment and the risk of big hits to growth. I want to come back to government spending. I note that, in the Statement onmonetary policy, graph 2.12 shows that the collective Commonwealth and state budgets have been in deficit for the last couple of years—one per cent or two per cent—and are expected to get to three per cent, I think, this year. As we're starting to think about the next budget, how can fiscal policy reduce the risk of sustained higher inflation at this time? Ms Bullock : Did you say 2.12? CHAIR: What page is that on, Allegra? Ms SPENDER: It's on page 27. Ms Bullock : Do you want to talk about the underlying cash balance? Dr Hunter : Sure. I can talk about what— Ms SPENDER: I'm talking about government spending and asking, as we think about how to manage budgets going forward, how we reduce the risk of inflation in fiscal policy, particularly in the level of government spending. Ms Bullock : I'm not going to talk specifically to that graph, but government spending, as we've already established, is part of aggregate demand. So, mathematically, if government spending declines—if public demand doesn't grow as quickly, if you like—then that will bring down aggregate demand unless the private sector picks up the slack. At the moment, if we think we're pushing up, which we do—we think we're not just pushing up against supply; we think we're in excess demand—then, if both public and private reduce growth rates, that will help to close the gap between aggregate demand and aggregate supply. What we've got to do is close the gap. We thought we'd closed the gap; we now think we haven't closed the gap. You need slower growth in aggregate demand, and both public and private could contribute to that. Ms SPENDER: The fact that we expect greater budget deficits across the state and federal governments—is that of concern when you're looking forward in terms of the outlook for the private demand we can sustain over the next period of time without increasing inflation? Ms Bullock : Those numbers that you see are incorporated in our forecasts. We take those numbers, we basically put them through our models and our judgement, and we decide what that means for the inflation outlook. The outlook we have is that inflation peaks, then it starts to come down again, and it gets back down into the target by 2028. That's what those numbers are contributing to. It's not the sole cause; it's just contributing, as is private demand, to that inflationary outcome. Ms SPENDER: The next question is really about where Australia is relative to other countries around the world. It also relates to the dual mandate of the RBA, because I note that Australia's inflation rate is now out of step with those of the euro area, the US and Canada, which are significantly lower than ours. We have a dual mandate in the RBA, which is both to keep inflation low and to keep employment as low as possible. How have those two things been traded off, and do we have the right trade-off at the moment? Ms Bullock : As I said earlier, central bank mandates vary a little bit. The 'Fed' in the US also have a very explicit dual mandate. You will hear them talking about employment as well. It sounds trivial, but it isn't, really: our target is 2.5 per cent; their targets are all two per cent. So, in fact, the 'Fed' is probably as much above their target as we are above ours at the moment, so you can't just compare in that way. It's sort of trivial, but I think it's important in a way. With our dual mandate—I've said this before—the board took a very explicit strategy of trying to bring inflation down, because we have flexibility in the time we can do it. We decided to try and bring it down without, at the same time, too much resulting loss in relation to the labour market gains we'd had, and we didn't end up—in many ways, the position we're in, although everyone's talking about it quite negatively, is actually quite positive. The reason we're in this position is that the labour market is still doing really well. It's stabilised at a relatively low unemployment rate. This is good news. I think people forget that. Okay, we've got inflation that is still a little bit high, so we've probably got to work on that a bit. We think there are some temporary factors in there, but we think there's a little bit of persistence. Our position contrasts with that of some other countries. I'd probably speak about Canada and New Zealand here. They took interest rates much higher than we did. They got inflation back down, but they've both got very high unemployment rates: Canada's has got a six in front of it; New Zealand's has got a five in front of it. They took a different approach, and now they've got lower interest rates, because they're now trying to bring employment back. They're trying, now, to have accommodative monetary policy so that their economies can recover a bit. That's a different approach. We could have taken that approach, but we didn't. Yes, we've always thought it would be difficult to achieve, but it's something that's worth achieving. At the moment, we think you will see that the risks are probably more on the inflation side, so that's why we're responding to that. We've got an eye on the unemployment rate and the employment market more broadly, but, at the moment, we think the risks are skewed towards the inflation side. Ms SPENDER: You talk about temporary factors, and a question that has been asked—well, it's a question that I've certainly asked. We saw a lot of house price inflation in the last quarter, and the government has a significant policy in terms of expanding the eligibility of loan guarantees, which, by some measures, has driven some house price inflation. Has the RBA looked at that specific policy? It may have a short- and long-term effect, but it may have more of a short-term effect. How do you assess the impact of that policy, if you have assessed it, on the impact on house prices and inflation? Ms Bullock : We've done a little bit of work on that. I think we answered a question on notice for the Senate on this for Senator Bragg. I'm sure that's on the public record. We have done some work on this. Sarah, do you want to speak about it? Dr Hunter : Governor Bullock is correct. We did some ex-ante analysis of it when the policy was announced but before it became active. Our assessment was that it could potentially have a small impact on aggregate house prices. Obviously, it's targeted at just one particular group—first home buyers—and, within that group, it would only make a difference for those that were otherwise constrained by needing to take out LMI. We think it would have a small impact in terms of the established housing market. In terms of it coming through into inflation, house prices are not captured in the CPI, so there's no direct impact there. We haven't seen any impact there. It has the potential via indirect effects—a wealth effect for households coming through or from how it interacts with the housing market and potentially flows ultimately into dwelling construction costs. But we would expect those channels to come through much later, so we don't think that any of what we've seen in the consumer price index is attributable to that policy. Ms SPENDER: My last question is on the point of the housing crisis. What's your perspective in terms of what is really driving this significant part of inflation? What are your concerns there? Ms Bullock : It's construction costs and rent, I think. Isn't it, Sarah? Dr Hunter : That's what is captured in the CPI. Both of those markets are really driven by the basics of demand and supply. We know that there's been a housing shortage in Australia for some time. We've talked about it. Many others have talked about it. You can see it in the rental market. Rental vacancy rates are still very low. That means there are a lot of people trying to find a place to rent, and that then pushes rents up. In terms of dwelling construction costs, we have actually seen a bit of a turnaround in inflation in that category in recent months. What we hear through our liaison program and what we hear reported from the ABS on their website is that some builders have been able to take out discounting that they'd previously offered to get new clients. They feel they don't need to do that anymore, because demand has picked up. That's then coming through into the prices. Those two very basic economic markets are functioning and are indicating tight markets—that excess demand Governor Bullock was talking about earlier. Ms SPENDER: Thank you very much for your time. I'll pass it back to the Chair. CHAIR: Member for Bennelong? Mr LAXALE: I've got some questions following some questions from the Deputy Chair. One word that piqued my interest from the Deputy Chair was that he thought your answers were an 'admission', particularly around aggregate demand. It's just fact that aggregate demand takes into account both public and private demand, isn't it? Ms Bullock : Yes. Mr LAXALE: And as the Monetary Policy Board looks at decisions on interest rates, they take into account aggregate demand. Ms Bullock : Correct. The inflation issue at the moment, we judge, is about excess aggregate demand. Mr LAXALE: Delving into your comments today and your statement, you see public demand easing and you're surprised at the increase in private demand. Ms Bullock : These are facts; they're not judgments. I'm talking about public demand, not public spending. If you look at it—and it's in the statement on monetary policy—public demand's contribution, not public spending, has declined in the first half. And we were surprised in the first half of 2025 that it declined as much as it did. And we have been surprised in the latter part of 2025 by the strength of private demand, on the upside. They are facts. If you look at the graph, you can see very clearly. Mr LAXALE: You mentioned AI as one of the industries that has grown, investment in AI. Were there any other areas of private demand that you were surprised at in the last quarter of 2025? Ms Bullock : I think we were surprised at consumption, weren't we? That was a bit stronger than expected as well. I think partly real incomes had turned out to be stronger than we had thought as well, so that was driving part of the consumption side of things. Is there anything you want to add, Sarah? Dr Hunter : I'll just add a bit more colour and detail, I suppose. You can actually see it in our forecast table as well. If you look at where the revisions to the forecasts have come, they've come in the private demand components. It's actually all three of them. As Michelle has already mentioned, business investment came through stronger, as we talked about earlier, and that's where investment in data centres and other AI technology would show up. Household consumption ended last year on quite a strong note, and, as Michelle has just said, part of our assessment of that is that household income has actually been a bit stronger. We got some data revisions that suggested household income growth had been a bit stronger than we previously knew about. We've also had a bit of a surprise on dwelling investment as well—that's the building of homes. That's very welcome, if that lifts supply, but there's a long way to go on that, and it takes time, particularly if you're building high density. That's a sort of two- or three-plus years solution. It's not something that resolves the problem of a housing shortage in the near term. But all three components have come through a bit stronger. Mr LAXALE: Under the former government, there was near a decade of stagnation on real wage growth. It didn't move that much. I would imagine that citizens would welcome a period of real wage growth, and you're seeing that play out in the numbers towards the end of 2025. Ms Bullock : Real disposable incomes have been rising, yes, that's right. There's another graph in there which shows you the contribution to that. Mr LAXALE: Business investment is obviously an important factor in increasing productivity rates. It's surprising, but it's also welcome. Is that right? Ms Bullock : It's very welcome because, if we want to see decent real wage growth without inflation, we need productivity growth. Real wage growth basically is about rewarding labour for producing goods and services. If they're more productive, then their wage can go up. Mr LAXALE: Ideally, coming into 2026, in future reviews from the board, you'd like to see a continued increase, particularly in business investment, to make sure that productivity increases. Ms Bullock : We would certainly like to see business investment continue to pick up, and we're forecasting some of that. Mr LAXALE: So there was a good outcome in the 2025 numbers. I have a few more questions with regard to Government EasyPay. That's a service that the RBA runs for government agencies. Does the RBA Government EasyPay service use least cost routing? Ms Bullock : If there are specific questions on EasyPay, I will have to take them on notice, because I'm not ofay with details of the banking relationship. So I don't know the answer to that question. Mr LAXALE: I popped on recently to have a look. I noticed that payment options are Visa credit, Mastercard credit, Visa debit, Mastercard debit. We have a domestic debit payment provider in EFTPOS. According to your numbers, EFTPOS is about 20 per cent cheaper in debit that Visa and Mastercard. Why doesn't Government EasyPay offer EFTPOS debit? Ms Bullock : I'd have to ask our provider. We're not an acquirer; we have to contract someone else to offer those for us, so I'd have to understand what the contractual arrangements are with that provider. Mr LAXALE: I think the government made the right call in not charging fees for debit payments when using government payment services. That will cost the Commonwealth and taxpayers $10 million a year by a certain timeframe in the next few years. My concern is that, as the Commonwealth is now absorbing that cost, the RBA isn't using what it knows to be the cheapest provider. Ms Bullock : We don't control how people paying the government choose to pay. They choose credit or debit. I don't know about least-cost routing, but I do know that if someone chooses to front up with a credit card, they should front up with a credit card for that payment. Mr LAXALE: If you least-cost route and they've got a dual-service card, and they pay by debit, it'll go for the cheapest, which will potentially save taxpayers 10, 15 or 20 per cent, which is a lot. Ms Bullock : Potentially. Again, I don't know the details of the Government EasyPay arrangement with our provider. I'd have to go and look at the contract. Mr LAXALE: I know EFTPOS debit has been available online through least-cost routing for a number of years now. Given that, particularly, that the Commonwealth is, rightly, picking up the bill for not charging a surcharge on debit payments, I'm a bit concerned that the cheapest form of debit payment out there is still not available to a very large payment service. ATO runs with that. I think Centrelink runs with that. Ms Bullock : Sure. It's a decision for our customers what payment mechanisms they want to accept. They can accept direct credits as well, which are cheaper again— Mr LAXALE: They are. Ms Bullock : The decision on what to pay with rests in the hands of the payer, but the options they've got rest in the hands of the government departments that are accepting the payments. If they choose to accept credit payments then that's their business. We'll facilitate it for them, but that's their business. They could choose not to. They could choose to say, 'No, we will accept only direct credits.' We've also got a great payments platform that gives instantaneous payments, so they could do that as well. Mr LAXALE: I'll put a lot of those questions on notice. I'd like to understand what plans there are, if any. Ms Bullock : I'll take that on notice. Mr LAXALE: Mr Pike asked a question on the RBA move at the last hearing. I wonder if you could provide us with an update on the progress of that move. Ms Bullock : Of what, sorry? Mr LAXALE: The moving of your headquarters at Martin Place. How's that going? Ms Bullock : We have approved the first development application. That was to remove all the asbestos from the building and, effectively, demolish the building. The problem is that it was supposed to be a renovation but, as we started to renovate, they discovered asbestos—four to five more times asbestos than in buildings of equivalent age—so we had to move all the staff out. We were all planning to stay there and shuffle, but we could do that, we had to move out. We're in the process of moving all the fittings. We've removed the asbestos from five floors—there are another 25 to go—and we're in the process of developing a second development application, which is for the rebuild of the building. That involves preserving heritage, because it has heritage value. That development application is, as I said, not complete yet. We're still working on that. We also have to go to tender for a developer, or builder, to come in and do the rebuild for us. We've got one builder at the moment doing the removal of asbestos and demolition. Then we'll have another tender to select the appropriate party to do the rebuild for us. So that's where it's at. Mr LAXALE: So accurate costs probably won't be available until you go through that tender process? Ms Bullock : The cost at the moment, I think, that we've got that's public is $1.2 million, but obviously we've got to get some costings once we get the tenders done for the second part. Mr LAXALE: And you wouldn't want to forecast that if you're going through a tender process. Ms Bullock : That's challenging, I think, at the moment and what we know about building construction. CHAIR: Thank you. I'll go over to the member for Casey, who apparently follows some football team or other based on his background. Over to you, Mr Violi. Mr VIOLI: I appreciate it, Chair. The 2023 premiership makes me happy all the time, so I appreciate that! CHAIR: You start on a positive note—I love it! Mr VIOLI: I apologise that I can't be there in person. Governor, just very quickly, how many times have you met with the Treasurer in the last six months? Ms Bullock : In person? I met him once in Washington, I think, at the meetings, and I met him once in my office. I have phone calls with him maybe once a month. So maybe half a dozen times. Mr VIOLI: We're very lucky and honoured in these roles to represent our communities. The questions we ask are not just from ourselves or our parties; they're from our communities in the country. So I reached out to my community, asking what they would like to ask you. I just want to read a question from Matt from Lilydale. In fact, he had two questions. He would like to know: how has the government spending affected the economy and has it contributed to the rate rise? Ms Bullock : First of all, I say thank you to Matt for the question. I think we've answered that question, but I could summarise. Government spending is part of total spending and total aggregate demand in the economy. So it, along with private spending, contributes to aggregate demand. And so, to the extent that aggregate demand is above aggregate supply, which we think it is, that's contributing to inflationary pressures. That's why we've decided to raise interest rates just a bit. Mr VIOLI: Perfect. Thank you. As you can appreciate, I'm sure Matt isn't tuning in for the whole— Ms Bullock : I'm sure Matt isn't—I appreciate that! Mr VIOLI: I'll go on to another question. You've used the terms 'capacity constraints' and 'capacity pressures' several times today but also in many of your statements in the last week. In simple terms, that means that there is too much money chasing too few goods and services—is this correct? Yes or no? Ms Bullock : Yes, it is, but maybe it would be helpful to give a concrete micro-example of what that might what that might mean to people. I think if you just say to people 'too much money chasing too few goods and services' it doesn't make a lot of sense. There are two examples I sometimes give to people. One I often give is that, when we came out of COVID—I don't know if some people might have noticed—if you went to get a cup of coffee at a cafe, and people were trying to do that because they hadn't been able to do it for so long, you found that there wasn't enough staff. So there were lots of people trying to get out because they hadn't been able to get out of their houses and spend their money on things that they hadn't been able to spend it on in a while and they found that there wasn't the ability of the restaurants and cafes to actually meet that demand because there weren't enough staff and so on. So that's one example of what you would call capacity constraints. Another one is the construction industry. We heard regularly—and I think there's still a bit of this—that there was a shortage of tradies to actually work. What happens in those circumstances, as you'd expect, is that, because there's lots of demand and the demand can't be met, the price goes up because those who are supplying it can put the price up because there's just so much demand for it. It's not a yes-or-no answer, but I wanted to give you a concrete example of what it means. Mr VIOLI: In that context, when the federal government increases its spending—which MYEFO confirmed is up by billions in new measures this year—does that add to those capacity pressures and capacity constraints? Ms Bullock : If we are at capacity and have got capacity constraints, then anything that adds to aggregate demand adds to those capacity constraints, be it public or private. It's a fact. It's a mathematical fact. Mr VIOLI: As the deputy chair said, we're seeing the highest spending in 30 years. If the RBA is trying to cool the economy by taking money out of the pockets of mortgage holders and all Australians but the government is simultaneously heating the economy through higher levels of public spending, aren't you and the Treasurer essentially running in opposite directions? Ms Bullock : I've said this before: monetary policy is best placed to manage the cycle, and fiscal policy is a much longer-run concept. It's about what governments and, ultimately, the electorate and the people judge is important to them. That is something that goes over a number of years. It's not the cycle. Monetary policy is cyclical. It manages the cycle. I would say that what we do is—I wouldn't characterise it like that. I'd characterise it as the government and the parliament making decisions about what they want to spend their money on. Monetary policy takes those things as given and manages the cycle appropriate to that. That's the way I'd describe it. Mr VIOLI: We've literally just seen the quickest change in cycle ever—six months. From everything we've seen—and the economic facts, as you've said—it very much feels like you and the Treasurer and the government are going in completely opposite directions. Is that complete disconnect the reason we've seen the quickest change ever and the reason Australians are now paying more for their mortgages? Ms Bullock : There have been changes within six months in the past. It's not usual, but it is not unprecedented. The second point I would make—and I made this point in my opening statement—is that the circumstances changed in the second half of the year. The circumstances that changed were the world economy—what we judged to be how easy financial conditions were—and the housing market, which responded, I'd say, more quickly than we thought it would. The third thing is that private demand was stronger than we thought in the second half of the year. They were the three factors that changed the way we thought the economy was going from earlier in the year. For the previous period, we thought we were heading for a situation where inflation was coming back in the band. Unemployment was gradually rising, and the labour market was easing a bit. But the judgement now is that things have changed. They were the factors we highlighted as having changed. Mr VIOLI: I know you've referenced global factors a lot, but globally we're the only economy, among any of our comparable economies, that is raising interest rates and having inflation at this higher level. Why are we so disconnected? This is a unique domestic factor. We're trying to understand—and the Australian people want to understand—whether the error here is from the RBA, whether the government is causing this or whether it's both. Ms Bullock : Forecasts are inherently uncertain. We do the best we can with the facts we've got, and we forecast forward to decide what we think that means for the outlook. What I'm saying is that our outlook for the economy changed after the first half of this year. Towards sort of September, October and November, we were seeing signs that the world economy was stronger, that financial conditions were a bit easier than we thought and that domestic demand was stronger than we initially thought. In particular, consumption and investment were stronger than we thought. Those were the factors that drove us to change—the facts changed. We had to relook at our outcomes and our outlook and decide whether or not they were was appropriate. Were financial conditions going to put enough downward pressure on inflation? That is the process we went through in getting to where we got to today. Mr VIOLI: Given the facts have changed, it would be nice if the Treasurer changed his actions, but I understand you can't comment on that. I have one last question on energy prices. I want to look at the forecast 0.5 per cent increase to headline inflation for mid this year. You've attributed this to the roll-off of government electricity price rebates. As these temporary taxpayer funded subsidies begin to roll off, forecast inflation has increased. Were these taxpayer funded electricity rebates ever a sustainable way to manage inflation or was it simply a bandaid fix that has now fallen off? Ms Bullock : It was a government policy, and I'm not going to comment on government policy. All I would say is that we always knew that the way subsidies would work is they would bring the headline inflation rate down when they were implemented and that, in reverse, they would make inflation higher on the way up. That's why, through this whole process, we have always focused on underlying inflation—to try and abstract from those things. It has made the headline inflation rate very volatile. Our target is headline inflation, but our focus has always been underlying inflation because we understood that that was the most important thing for understanding the underlying pulse of inflation. Mr VIOLI: Fantastic. Thank you, Governor. I appreciate your time. CHAIR: Thanks for that. Mr Violi, can you read out the order of that how-to-vote card you've got posted on the office wall there so I can get in touch with Matt for you? Mr VIOLI: That's my first one: vote 1 Violi! Mr LAXALE: One Nation's second, obviously! CHAIR: Without overlooking the role of caffeination, we'll go for a break. When we come back I'll hand to the member for Reid for questions. Proceedings suspended from 10:51 to 11:06 CHAIR: I'll hand over to the member for Reid. Ms SITOU: Governor, it's good to see you again. Ms Bullock : You too. Ms SITOU: I know and completely understand your reticence in making any judgement calls on decisions by the parliament. There's been a lot of discussion around deficit and the impact that that has on the economy. At the last election, there was a choice between two offerings. Arguably, one of the offerings was potentially going to lead to larger deficits with the nuclear energy policy and the lunches-for-bosses policy. If we were to have gone down that road with potentially larger deficits, what would have been the impact on the economy? Ms Bullock : I wouldn't like to speculate about hypotheticals. I'm sorry. You can't think about things in isolation. You'd have to think about what else was going on in the economy at the same time, what was going on with private demand and where the expenditure was. I wouldn't like to enter into any speculation about what potentially might have been the outcomes. I deal in what I'm facing now and what I think is going forward. That's my focus. Ms SITOU: Fair enough. When we spoke last time, one of the areas where you thought there were opportunities in private investment that you saw as some real green shoots was renewable energy projects. I wonder if you might comment on where you're seeing some of that investment grow at the moment. Ms Bullock : Again, I'm only going by the data here. I'm not an expert in green energy and I'm certainly not an expert in the sorts of policies that should be addressing that. That's for others to get into. What we have been seeing—again, I'm going to defer to Sarah, but I think we have seen some investments. We talked about data centres, but I think there was also a sense in the investment numbers that some of the green energy investments are coming to bear as well. That's my understanding, but I don't know if you have anything to add, Sarah. Dr Hunter : The governor's right—the two areas where we hear reports from businesses of additional new investment coming online and where we actually got some evidence of that in the data are in the data centres that we talked about earlier on and in some of the renewable energy transition projects as well. Both categories are very big and very lumpy, which means that you can get volatility in the investment numbers. You can get a big thing in one quarter and then you don't see it again the next because it's choppy. But, yes, that's right—we're hearing from firms that they are investing in those two areas. Ms SITOU: Productivity has been a big focus of the discussions here as it is a big focus for so many across the country. Can you talk us through how long this productivity challenge has been in Australia? My question relates to how big is the challenge and how long has it been running? Ms Bullock : I'm going to make a couple of comments. Andrew, you might have some thoughts on this. The first thing to note is that growth in productivity has been declining over decades, not just in Australia but in many other countries. The US has been a bit of an outlier recently, but most other countries have seen declines in the growth in productivity over time. Our productivity probably is where it was at in 2016. It's gone all over the place. You can't really look at quarterly changes in productivity; you've got to think about it sort of in a more long-run sense. But basically, it hasn't really grown very much in the last decade, probably, in Australia, if at all. I might throw to Andrew to make a few remarks about the world and productivity in the world context. Mr Hauser : I obviously come from the UK where productivity growth is also extremely weak. The causes of that may be somewhat different. The choice to cut off from Europe in terms of trade is probably part of that story. It is interesting that, whilst each individual country has its own stories as to why productivity growth may be low, it's actually a common trend across many countries. The US is apparently the odd one out. We'll see if that proves to be true once the AI processes work through. But it is a shared challenge. To your question very directly of how long it has been here, it's been here a good while. Any of the policy changes that might be made or any of the broader steps that the private sector might take as well are likely to take years rather than months, possibly even decades, to play through. It's why policy towards productivity needs to be very strongly forward-looking, because the changes that take place often take an extraordinary amount of time. There's a famous economic paper actually, which years after, decades after the move to better computers took place, you can see the IT revolution everywhere except the macroeconomic data. It just takes a very long time for factories and for businesses to adjust their processes to take advantage of new technology. AI is a great example. I don't know how much AI slop, or whatever it's called, you might be getting in your inbox at the moment but we're all thrashing around trying to work out how to make AI work for our organisations. Some people have already managed to work that out. Many are still struggling. It takes a long time and that's why you have to get going. Dr Hunter : Maybe just to add a little bit more colour to that, as a small open economy, most of the productivity improvements that we see coming through in an economy like Australia are from adopting technologies that might have been developed somewhere else. AI is a great example. We've obviously not domestically developed that technology but we have access to it. We can incorporate it into our businesses. As Andrew says, that's going to take some time, though, for us to all learn how to use it and to get the most out of it and not let it degrade the quality of the work that we do—to his comment on AI slop. That's not to say that there aren't parts of the economy that are world-leading here in Australia. There are, such as our mining sector, our agricultural industries. There are parts of high-tech manufacturing and the service sector as well. But the majority of productivity gains that we can generate in Australia will come from adopting technologies that have been developed elsewhere. We're small and we're open, but the open part of that is really important. But it does take time, therefore, for them to germinate and be developed somewhere else, for them to come here and then for us to work out how to use them. That's why you're talking years and years, decades really, to see the full impact. Mr Hauser : There's a famous quote from Paul Krugman that productivity isn't everything but it's almost everything in the medium term, and Australia is a great example of that. CHAIR: You've managed to get Bob Solow and Krugman in the same sentence—very well done! Ms Bullock : He's very good like that. Ms SITOU: I appreciate the points around private investment in technology and AI having productivity gains kind of down the track. Then, similarly, the points that you were making around government policy settings having productivity pay off down the track as well, I just wanted to draw you to a particular capacity constraint that seems to come up so often around labour and skills. Do you think there is a role then for government to be investing in our people, skilling them up? And would a policy that we have in place around providing TAFE free for people who are going to go work in critical skill-shortage areas, to train them up in areas like construction, pay off down the track for improving productivity in construction? Ms Bullock : Look, the bank doesn't I don't think have views on specific policies. We do a lot of work on productivity at an aggregate level to understand the growth potential of the economy and what that might mean for inflation. But with respect to particular policies, I don't think we have any comparative advantage in that at all. I would say, though, that when you look at what's on the Productivity Commission's website in terms of the sorts of things that they see, and they're the experts in this, those educational things—TAFE, university, making sure that we skill up—are the sorts of things that they're highlighting as something that would be good for improving productivity. So I would be very happy to take the Productivity Commission's word for the sorts of things they think are important. Mr Hauser : What I would say, if I may just add, is that the skills that are increasingly going to be needed are right at the top end of the distribution. As you probably know, there has been a lot of debate about how the mining industry in Australia is going to move forward into new minerals and so forth. The processes involved with processing those minerals and getting them to a state where they can be sold directly to manufacturers are very sophisticated. When you talk to some of the companies, as I'm sure you do or colleagues in front of me do, in Western Australia in particular, and you ask them, 'Well, look, can you get hold of those very advanced mineral skills locally?' The answer is often no. And putting those teams together involves going out to the global economy and picking the very best. So Australia's wealth and its sophistication are great positives for the country, but it does also mean that the kinds of skills we are increasingly going to need are not just sort of here; they're right up at the top of the distribution, which is a great challenge to have. But it does mean that any upskilling exercises have to be focused at that top end. Ms Bullock : It does go to a more general point, which is that technology, as history shows you, the structure of the labour market, changes and there are people that will find their skills aren't needed any more. There's a whole lot of skills that will be needed and the economy's got to adjust to that. It does ultimately adjust but there is short-term pain sometimes. Mr PIKE: Governor, was the cycle that just finished the shortest easing cycle on the record? Ms Bullock : It probably might be. I haven't actually done that calculation but it was about a nine-month easing cycle. Remember, though, that we always said we didn't go as high as other people, so we potentially didn't have as far to come down as other countries. It's relevant in that the approach we took was not to push interest rates as high as others. Mr PIKE: Would the fact that the cycle ran for such a short period of time—potentially a record-short period–not point to an error? Ms Bullock : It points to the fact that we have managed to get the economy into a reasonably good place. We always thought it would be tricky when we were sort of in a neutral position—we didn't know whether we were tight or loose or so on—so I think it reflects the fact that we've been trying very hard to bring the economy down on a soft landing. It would have been very easy to bring the economy to its knees. That would have been very easy—just increase interest rates a long way. We tried not to do that. And, as I said earlier, actually it's pretty good. The labour market is in a good position. Inflation is higher than it should be, but it's still not really high. We want it to come down to below three and towards 2.5, but it's not a disaster at the moment. Dr Kent : If you look at the time series of our cash rate, you can see periods in the past where we've been holding it at a lower rate than in the past for a relatively short period because circumstances changed, just like this time. And after the GFC, when we provided a lot of stimulus, when the world economy was heading south, we held for only a short while at those very, very low rates before moving higher, because China surprised us. So, again, external surprises can cause you to change direction, and that's what happened just after the GFC, when China was stimulating its economy so much that terms of trade were taking off. Mr PIKE: Obviously hindsight is 20/20, but would you say that you were premature in initiating and easing the cycle last year? Ms Bullock : No, I wouldn't say that at all. Based on the information and based on the outlook, we thought we were restrictive, and all the information was suggesting that that was exactly what we were. We were seeing that consumption was pretty anaemic. We were seeing inflation come back down into the band. So, I think it was entirely appropriate. Mr PIKE: Okay. You mentioned, I think in response to Mr Kennedy's question, that you speak to the Treasurer potentially once a month, sometimes in person and sometimes on the phone. Do you discuss the economic situation and factors that may play into the direction of monetary policy? Ms Bullock : I discuss a number of things with the Treasurer. I usually discuss the economic situation how we're seeing it. I tell him how we are seeing things. But we would discuss a variety of things. We would often discuss the review—where we are at with the review. I would usually update him on things to do with the building, the cash distribution system, the payments system. It covers a wide range of things but yes, we talk about our own view about the economy. Mr PIKE: Do you discuss the impact of government spending on inflation? Ms Bullock : I don't tell the Treasurer what to do with government spending. As I said, I give him our outlook. Mr PIKE: I'm just looking at it from the perspective of my constituents, who will be receiving increases in their interest rates. I'm just thinking, it would make sense to them that the Treasurer and the Reserve Bank governor would be in discussion about inflation and about the policy settings that would limit growth in inflation. Ms Bullock : We do. We talk about what the Reserve Bank is doing to try to keep inflation low that's within our power. And, as I said earlier, we can use monetary policy in a cyclical sense, and that's what we're doing. Mr PIKE: Okay. Can you explain to me the process of drafting the statement on monetary policy? Obviously it's a big document, and it's produced pretty quickly from the point where decisions are made. How much of it is drafted in advance? How many changes are made in the course of the day? Ms Bullock : Sorry—the statement on monetary policy? Or the press statement? Mr PIKE: Both, but I was asking in particular about the bigger document. Ms Bullock : The bigger document—well, okay. Sarah, why don't you describe how we— Dr Hunter : Clearly we don't write it in between the decision being taken and the announcement. Mr PIKE: No, I wouldn't have thought so. Dr Hunter : It's drafted well in advance. The content within it is provided to board members as board papers. And then this document, which obviously is formatted in this way for public consumption, is published at 2.30, at the same time that the press statement is handed down. So this document is a bank document. It reflects the view of bank staff. A number of people contribute to it, as you can imagine. Dozens of people will work on this document. But it's provided to the board as board papers, and then it gets published at 2.30 with the statement. Mr PIKE: I'm assuming that the board may make changes to it. Dr Hunter : It's a bank publication. It's not a board publication. Dr Kent : The overview at the start, which summarises— Mr PIKE: The board's thinking. Dr Kent : will of course depend on what the board decides to do. Ms Bullock : Yes, it's what the board decides. Mr PIKE: Yes. Obviously it needs to be amended. Dr Hunter : The overview gets an edit because it says what the board's decision is and we don't know that in advance, so that clearly has to be done after the decision is taken up. Mr PIKE: I do find it strange that in the—what was it?—57 pages there's very little reference at all to government expenditure. I think there was one passing reference to it. We've obviously reached the point today where we've established the importance of that on inflation. Is it something that you think should be worthy of further discussion within the statement? Dr Hunter : There are two references to government spending that you'll see in the current statement. There's one on current economic conditions. It's within the section that's discussing demand conditions in the economy. It's one section. Obviously all of the major components get their own section, and you'll see it in there. We actually had a question earlier on that referred to the chart that you can find in that section. In the context of the forecast, you'll find it in the outlook chapter. In there we talk about the major drivers of demand, and you can see it in the numbers that are at the back of that chapter. We don't treat it particularly differently to other components of demand. It sits in the domestic demand section because it's a component of domestic demand. Mr Hauser : It's an interesting question as to what the answer to your question would be if you looked globally at other central banks as well. I can speak best for the Bank of England. The vast majority of the time you would not have seen much more in their own documents either. It is a conditioning assumption. We take what we are told the government intends to do as an input. We don't comment on it; we take it as an input. I'm a veteran of a couple of crises, unfortunately, in the UK, and the only time that changes is when the government—debt stock for example, is unsustainable. That then poses quite material challenges to monetary policy. A number of other countries have had that experience as well, mostly not in the developed world. At that point, central banks, I think, find it hard to only devote half a page to it. But the majority of the time, for the reasons the governor has described, we take fiscal decisions as given and we then judge what the rest of the economy will do as a result. There isn't much analysis to be done, candidly. Mr PIKE: Given what we saw with MYEFO—speaking more generally, I think it's probably become a bit of a growing trend that numbers that we've seen as forecasts within budget papers have been way off in a number of areas. Does it worry you at all to take those numbers as read? Is there risk involved in your forecasts if you are taking what Treasury has said as gospel? Ms Bullock : No we don't. We add our own judgement. I'll let Sarah comment on this—but we don't. We take Treasury's numbers as a starting point and then we work with some of our own judgement over that, given what's happened historically in terms of outcomes relative to forecasts. We don't just take them as gospel. I don't know if there's anything else to add. Dr Hunter : I can add just a bit more colour so that it's really clear how we take these numbers. The start of the process is to take the latest publications from federal government, from federal Treasury and from the state treasuries as well. At the moment, for these forecasts, we had all of the MYEFO statements ahead of time. Those numbers are published on an annual basis and they do a different aggregation to what we need to go into our national accounts framework. That's the framework we use for demand in the economy. We have to do a process which goes from annual to quarterly. We have to go through a process that takes those annual numbers and spreads the spending out not only through the year but over time as well. If we're thinking about, say, a big lumpy investment project and when that will actually get done, it can be a bit lumpy, as you can imagine. Then, as Michele has just alluded to, we also look at how those forecasts have played out relative to actual spending historically. We call these realisation ratios. We, effectively, apply those to the budget numbers as well. The numbers are the starting point that we get from the federal and state treasuries. They're not the end point. There's an awful lot of work that goes on in the background. Just a final comment on what you'll see in the latest numbers. If you look at the November statement—so our previous forecast compared to our current forecast—and you look at that public demand growth rate profile that we have, it has really not changed very much at all. There are little 0.1 and 0.2 adjustments. These are small, actually. We haven't been surprised, in an aggregate sense, by the MYEFO statements, relative to what we knew in November, which was built off the budgets from the federal and the state governments. Mr PIKE: I'm running out of time, but if I can just get— CHAIR: Last question. Mr PIKE: Last one? Thank you, Chair. CHAIR: I adopt the approach of benevolent dictator as the chair, but last question. Mr PIKE: I'll just keep going until you stop me. You're obviously not expecting underlying CPI growth to reach the preferred target until mid next year, but on a scale of one to 10, perhaps, how confident are you of that forecast? Dr Hunter : I'm happy to answer that one. I've been doing forecasting for an awfully long time. I've done forecasting for my entire professional career, in fact. Mr KENNEDY: My condolences! Dr Hunter : Thank you for that! We're never even close to a 10. Things change. Things can change very rapidly. That's what we've seen in the last six months. Things can change even more rapidly than that, which is what happened in early 2020 with COVID. Pretty much everyone's forecast in 2019 got completely blown out of the water. Things change. We're very conscious of that. I'd like to say that we're humble and we're always trying to learn, but this is our view at the moment, given what we know today. It is an upward revision from November—it's certainly a stronger profile than we had in the middle of last year—but we'll be looking at things very closely. We're learning all the time and we're always trying to get better. But we're not perfect by any stretch, so it's nowhere near a 10. Mr Hauser : We actually answer your question in the chart, and I can tell you that there's a 70 per cent chance that, by the end of the forecast— Dr Hunter : On average Mr Hauser : trimmed mean inflation will lie between 1½ per cent and 3½ per cent, with a 70 per cent chance. That's an index of the point the governor made. Ms Bullock : And those fan charts reflect historical errors, so the further out you go, the less certain it gets. CHAIR: Over to you, member for Moreton. Ms CAMPBELL: It's good to see everyone. Thanks for coming in again. This week legislation passed in the parliament basically expanding regulation in the digital asset space, so I thought it was a timely moment to ask about Project Acacia. I know that the RBA's been doing a bunch of work with the Digital Finance Cooperative Research Centre. I wanted to ask how that project is going, where it's up to and what you see as its outcomes and next steps, given that it's in that digital asset space. Ms Bullock : I'm going to pass to Mr Project Acacia! Dr Jones : It's an excellent question! Project Acacia really represents a downpayment on a program of work where we're trying to think about how the financial system might look in 10 or 20 years time. This is just a small step on that journey. What we're particularly focused on at the moment is the question of opportunities to uplift the efficiency, functionality and innovation in our wholesale financial markets. We've heard from industry that they see the biggest scope for potential efficiency gains in the fixed income markets. We currently have about 22 use cases as part of that project. There is a broad church of participants, from the largest banks to small fintechs, which I think has enriched our learning about where the blockages in the innovation ecosystem are in Australia. We're very open minded about what precise innovations, whether it be in financial market infrastructure or in forms of money, are going to get us to that end state of a more efficient, more resilient and more innovative system. As I said, fixed income has been the major focus. Looking ahead, cross-border will also almost certainly feature in subsequent work. In terms of the timeframes, we'll have a report published in April, and that report will not just do a stocktake of what we've learnt with industry and with our fellow regulators but also give a sense of where we see the key priorities going forward. There'll be buckets of recommendations there—basically, things that we think we can do at the RBA to facilitate responsible innovation. There'll be recommendations for the broader regulatory community, the other agencies, and then there'll be recommendations for industry. If we're really going to see a substantive uplift in the efficiency and functionality of our financial system, it really will require all shoulders to the wheel, so the report will document where we see the blockages and some potential solutions to help us get to a better place. Ms CAMPBELL: Understanding the timeframes you're talking about, bringing in recommendations for other regulators, how do you expect the industry to start adopting tokenisation in wholesale markets? Dr Jones : Where we're seeing the most activity globally is in the US, particularly in the US fixed income markets. We're looking at that experience very closely. We're also observing very closely what other central banks and other regulators are doing, paying close attention to the work in tokenisation in places like Switzerland, Hong Kong and the UK. All of that is going to inform both how we structure up our work program internally at the bank and our recommendations for other regulators. A key point, without forerunning that final report too much, is that one very clear message we have heard from industry is that what they're really looking for is a path to commercialisation that doesn't currently exist. We are thinking very hard about what sort of sandbox arrangements, for instance, could facilitate responsible innovation where the regulators and industry can learn and iterate as we go along to help ideas move from the ideation phase into the commercialisation phase. At the moment, the general sense you get from industry is that one of the sandboxes that exists is where innovation goes to die, and so we want to do what we can. Our colleagues at ASIC are looking at that. There's a review of the enhanced regulatory sandbox right now that Treasury has commissioned, so a lot of us are turning our attention to how we can set up a national infrastructure, if you like, to help facilitate responsible innovation in this space. Ms CAMPBELL: Understanding that, obviously, we'll have to wait for the full report and the recommendations, what are the things that you are seeing in terms of the responses from other central banks at the moment? Are there any broad trends that you're seeing from the central banks in other jurisdictions? Dr Jones : Probably the most consistent one across countries is exploring what forms of tokenisation and digital assets and what form of digital money could be required to harness and yield the biggest efficiency gains. I can't really think of a major advanced economy's central bank that's not doing work on the tokenisation of markets. Where things are much more variable across countries is on the retail CBDC side. There, I would say, the ECB and the People's Bank of China are way out ahead, and they are proceeding down that road for very different reasons, for reasons that don't have a lot of resonance here in Australia. The retail CBDC research agenda at the bank is sitting behind our work on wholesale, and that's pretty common across central banks globally. Mr Hauser : If I may, one of the major challenges is that some of the most technologically advanced efforts at tokenisation are actually being developed by individual private sector institutions—J.P. Morgan, HSBC and other large international banks. They obviously have a commercial interest in their token becoming the standard. 'Come and play with us, and you can have tokens.' This so-called 'walled garden effect', whereby you have multiple rival tokenised deposits or other forms of instrument, has some merits perhaps in terms of driving innovation, but it could also potentially undermine the commonality of value across individual currencies which is, obviously, one of our core objectives. That tension between the innovative spirit of the private sector, which is a good thing, versus the potential commercial interest in not standardising is a very strong tension in many countries. If you were to ask me—Brad may have a different view that is part of being open and dynamic—a lot of the real energy is going into that walled garden world, and it's part of our job, therefore, with work like Acacia to try and think about how we make sure that it doesn't just become a free for all. Ms CAMPBELL: While we're talking new technology and changes within the financial system, I also wanted quickly ask about CHESS. Obviously, ASX is replacing the system, and we've seen that a previous program of that was scrapped. That's due to deliver its first release in the first half of this year. Governor, I wanted to ask you: what's the RBA's role in supervising that and making sure that it gets the outcomes that everyone's seeking? Ms Bullock : Again, I'll make a few remarks and then pass to Brad. We obviously have taken a very keen interest in this. At the moment, our focus is on making sure that what is being delivered is going to meet the needs of the market. Also, given the challenges we've had with current CHESS—current CHESS is decades old; it's being maintained, but there have been problems with it—part of our supervisory effort is to make sure that the sorts of operational issues that have arisen in that environment will not arise in the new CHESS environment. That's part of it, but this is a multi-year project for them. This is just the first step that they're going to introduce this year. Then I think—there's a couple of years, isn't there Brad, before the next phase is coming? Dr Jones : Yes, it'll be layered in over a period of years. Maybe I could just make one broad point, and it actually relates to the earlier discussion about digital assets. We're not in the business of telling industry what technology they should build or implement or operate. What we are in the business of is ensuring and interrogating that, with whatever technological solutions industry come up with, they're not going to compromise what we care most about at the bank, which is financial stability. That's what our focus is very squarely trained on—ensuring that, with whatever technical solutions ASX arrive at, the concept of operational resilience is hardwired into the system right from the outset. That's really our central focus. Of course, our colleagues at ASIC have a complementary remit as it relates to conduct for an efficient market and so on, but our focus with CHESS and the ASX is very much ensuring that whatever technology they introduce does not compromise financial stability. Ms CAMPBELL: Given that's your focus at the moment, surely the largest point of risk is at the point of changeover. I'm keen to know what the RBA is doing to make sure that that risk is managed through the changeover and how industry is going to get ready so that that smooth transition happens. Ms Bullock : Well, we can't do that for the ASX. What we can do is make sure they have processes and governance around that. That would be our focus. ASX itself and the industry have to manage that whole operational process, and part of that is making sure that ASX has appropriate forums for engaging with industry and appropriate checklists—just like we do in our own operations. When you're changing things over, you have to make sure you've got all your ducks in a row and you've got a fallback procedure if things don't work properly. These are the sorts of things we'll be making sure ASX have in place, but the actual implementation of it is up to them and the industry. Ms CAMPBELL: I understand that you provide a supervisory role. My last question is: where are you up to in those preparations for that supervisory role, making sure those processes and procedures are in place so it goes smoothly? Ms Bullock : Brad, did you want to comment? Dr Jones : It's ongoing. The teams are meeting all the time with ASX and ensuring that there's sufficient challenge and—as the governor said—most importantly, making sure that there is sufficient oversight and governance-challenge going on within the ASX and with ASX and industry. That work is ongoing and will extend over a multi-year period, because the transition will extend out to 2029. Ms Bullock : The other focus for us is, because of that long transition period, ASX has to make sure that the current CHESS continues operating and is resilient. It's proved sometimes to be not so resilient, and they have issues with it. Have they got the resources devoted to its upkeep? Are they investing appropriately in it? They've got to keep it going until this multi-year process of moving to a new system finishes. That's also a very big part of the oversight effort we've got. Ms CAMPBELL: Thank you, Chair. CHAIR: It was a pity. They were looking to utilise blockchain as a platform, and obviously that spectacularly fell over. But it would have been an interesting transition to that technology—yes or no? Ms Bullock : That's right. They were a very early implementer—an attempt to implement that. They were very early on, and it just didn't work out. So they had to go back to more traditional technology, I think. Mr Hauser : I will tell you Australia caught the international attention when that happened. I remember working on all of these issues in the UK when we were rebuilding our own version of RITS, and, when the news was announced that ASX would be adopting blockchain technology, it really gripped people's attention, and there was a general thought we were way behind the curve and that the Australians must have some deep insight. I can remember that feeling very strongly. That was a while ago. Mr KENNEDY: It turned out not to be the case. CHAIR: But we can't be pro a digital asset and not work out a use case. Mr KENNEDY: We need to do it. Mr Hauser : It's good to be a fast follower sometimes; that's what the management consultants say. CHAIR: Yes, indeed. Member for Deakin, you've been exceptionally patient—so over to you. Mr GREGG: On Tuesday, pretty much every mortgager in Deakin and around Australia received that unwelcome message that their repayments are going up. Far fewer young people saving for a deposit and self-funded retirees received a message saying that they were going to get more interest on their savings and deposits. If you could, briefly say why you think that two-speed approach has been so evident across so many institutions. When I looked this morning, several of the major banks and institutions had not at all increased interest. Ms Bullock : Sorry. You're asking about why they react on lending rates first, rather than deposit rates? Mr GREGG: At rapid pace when it comes to charging us more interest and doing a go-slow when it comes to paying us interest. Ms Bullock : It's ever thus, it would seem, with the banks. It's up to them to decide how they want to manage it. The thing is that it's very visible on the mortgage side, and they pass it on quite quickly. Often they've passed the ups on more quickly than the downs, although in recent times I think, because there's been elevated competition, they have in fact been quite reactive on the down side. On the deposit side, I think it's just because it takes people a bit longer to think, 'I can get a better interest rate elsewhere.' It will come through, and you do see evidence that, as time goes, deposit interest rates rise as well. But I think it's just the behaviour of people. It takes them time to sit back and think: 'I'm earning this. That bank over there is offering a bit more, and I think I might switch.' I just think it takes time. Mr GREGG: So they're doing it because they can get away with it. Ms Bullock : They're doing it because then they don't have to react immediately. Chris, do you have anything to add on that? Dr Kent: The underlying issue here is competitive pressures, and they're a little bit more stark, maybe, on the mortgage side at the moment, including because there are quite a lot of brokers who help people really understand very quickly how to get a better deal on their mortgage. And there's a lot of non-bank competition in that space. In the deposit payment space, there's much less of that, and I think that's the difference in terms of the competitive pressures. Mr Hauser : You have seen some banks, one bank in particular—I won't name it—exploiting that fact, however, and entering into that deposit market and competing quite aggressively. In the context of forcing rate rises to go through as quickly as rate cuts, as the governor and Chris say, that's probably the best thing that could be happening. Ms Bullock : Again, it comes back to that people are always encouraged to look around for the best deal in mortgages, so look around for the best deal on deposit rates as well. Don't just sit there. But people sometimes are a bit prone to inertia. Mr GREGG: One of the things that a change in interest rates is trying to do is influence behaviour. Would it be fair to say one of those behaviours we're trying to encourage is saving? Ms Bullock : It is, and this comes to a point that often gets missed, and we've made this point a number of times. The transmission of monetary policy—everyone focuses on what we call a cash flow channel, which typically is about how you influence the amount of spare cash that people with loans have. But that's actually not probably the most important channel. There are two others. One is this channel you're referring to, which we call the intertemporal channel, which is, the higher interest rates are, the more people are encouraged to save now and consume later. So that sort of dampens demand. And the second channel is the exchange rate channel. As the exchange rate rises, it makes import prices cheaper and it encourages people to holiday offshore and buy foreign goods. So there are these other channels as well which are impacting. It's not just this cashflow channel, which is often the one that gets the most focus. Mr GREGG: When banks are taking the go-slow when it comes to passing on those benefits to deposit holders, they are—not necessarily out of malice but certainly not accidentally—hindering the benefit or any good that can come from an interest rate rise. Ms Bullock : Yes, but the impact of interest rate rises happens slowly anyway. Our judgement is that the impact of interest rate rises, or declines for that matter, often happens 12 to 18 months down the track. There's some immediate reaction, but I wouldn't say that in the scheme of things that it's really impeding things. Mr GREGG: So the message is to shop around quickly because we can't take for granted that the swings and roundabouts are going to be passed on in a beneficial way. Ms Bullock : It does all ultimately work. You see that, as interest rates come down, deposit rates and loan rates come down—not necessarily one for one with each other. And it's the same when it goes up. So it does work. When we move the cash rate, it changes bank funding conditions, and then it is passed on through deposit rates and lending rates. Mr GREGG: With the recent technical outage at the RBA, I think talking about operational stability was the focus. Ms Bullock : Yes. Mr GREGG: I've taken from that language that it was not so much an issue of an external difficulty but the reliability of the system. I know you're going to release the analysis soon, but it was nothing nefarious, just a technological problem? Ms Bullock : No, it was nothing nefarious. It was a technological problem. I'm not an expert in this, but it was to do with expiring certificates, apparently, which caused a problem. It's very unfortunate. As I said in my opening remarks, we apologise for that. It is not acceptable, and we do have to lift our game, just as we, as the supervisor of ASX, expect ASX to lift its game. I'm adamant that we need to lift our game, and we understand that. We have a big program of work going on to lift our game in this area. This was a very unfortunate incident which had big flow-on effects, but it didn't impact the bulk of payments. It didn't impact the real-time payments. It impacted the batch settlements, but they're the ones that often affect people because they're the payrolls, they're the welfare payments, they're the property settlements. So that's why it was so unfortunate and not acceptable. We're determined that we will release the report. Mr GREGG: Thank you, Governor. I'll leave my questions there. CHAIR: Over to the member for Brisbane. Ms JARRETT: Thank you, Governor and everybody, for being here. I really do appreciate it. I'm going to change tack a little bit and ask questions about workforce equality and closing the gender gap. I know, Governor, that you've spoken about this in relation to your experience and the importance of workforce equality and the gender pay gap on economic growth. But, before I actually ask my question, I do want to offer my support for something you said last year. You said that you hope taking on the role as the first female reserve bank governor gives encouragement to women, and I hope so too. That's for sure. In relation to my specific question, why is fixing the gender pay gap and workforce equality good for the economy? What are the economic factors that you monitor and the bank monitors that could be impacted by improvements that may come with improving gender equality? I'm thinking workforce equality and the gender pay. Ms Bullock : It's a very big topic, and it goes broader than gender; it goes to diversity more broadly. What I can say in terms of our institution and what we think of gender equality and diversity more broadly is that it's important we, as a public institution, represent the people of Australia, and that means cultural diversity, gender diversity, First Nations. It's important. Why is it important? I think the evidence shows—and I'm not an expert in this particular facet of research, but my understanding of the evidence is that it's better for performance. In profit-making companies, the evidence is that, if they've got more diversity, they tend to make better decisions and profits benefit from that. In our case, it's all about better decisions, and you make better decisions when—and the evidence shows this—when you have diversity of opinion, and you get that from things like gender diversity. You get that from things like cultural diversity as well. I don't know if anyone else has any comments to make. Dr Hunter : On how it shows up in the macroeconomic data that we're tracking, one of the main ways that we would think about this and incorporate this into our forecast is through the labour force and labour force participation. Obviously, if we're thinking about women's participation in the labour force and the things that can enable that, it's a historical fact that women's participation has generally been lower than men's. It's still a little bit lower than men's today. But what we have seen is that it's increased over time, and that's gone generation by generation as well. The generation that entered the workforce in the 1980s—fewer women participated than the men, and the gap has sort have been closing. It's actually more likely since the 1970s. For us, we see it coming through in that participation rate. That means more jobs and more employment. That does have a role to play in terms of household income as well. Obviously, people should be making the choices that they want to make, and we're not advocating for one choice over another, but it is an important part of how we understand the economy evolving over time. In fact, in the last couple of years, we've seen fairly substantial increases in the participation rates. It's fallen back a little bit just recently, but not very much. Part of that has been the long-run trend of women being able to work part time or full time as they choose. Ms Bullock : It goes to the point that you want the skills from all of your population, not just from a portion of them. Ms JARRETT: Yes, and I think—you may agree or disagree—it's therefore fair that everything that we can do to support making sure everyone in our economy who wants to participate is participating with the skills that we actually need for growth is particularly important for women who have fallen behind at the moment. That's how I look at it. What's the bank doing itself in terms of addressing workforce equality and the gender pay gap in the bank? Ms Bullock : We have done a number of things. We do have a gender pay gap. It is basically driven by the fact that the higher paid, senior roles and a lot of the overtime tend to go predominantly to males. What have we done? We set a target for women in leadership a number of years back of 40 per cent. We've achieved that, and we continue to achieve that. Our target in leadership is 40 per cent women, 40 per cent men and 20 per cent any gender. Our overall workforce is about 43 per cent women, and the rest are men. If you look at the skew, the women tend to be in lower paying roles than the men. Notwithstanding our 40 per cent female leadership, that tends to be the case. What are we doing to address that? Obviously, we've got targets. We are looking for instances of where there looks to be people doing the same job with similar experience and similar skills and they're not being paid quite the same. We're looking for instances where we might be able to address that, but the bigger issue for us is that we need to get more women into these higher-paying roles, and that takes time. That's our focus. Ms JARRETT: I appreciate that it does take time, and it's not a problem that's unique to the Reserve Bank. That's for sure. If I could just switch gears a little bit, I think it was Mr Hauser—it might have been the other gentleman—who talked earlier about the importance of resilience being embedded in the operations of the bank. I want to go back quickly to scams and the scam prevention framework. I understand that the bank doesn't regulate consumer issues, but scams do pose a threat to financial stability and the RBA does engage in payments, which obviously can be subject to scams. In fact, I think I understand also that confirmation of payments is not offered at the bank as well. So, with all of that, my question is: how are you progressing your preparedness for the introduction of the scams prevention framework, and are there plans to consider confirmation of payment or other activities that will continue to increase the resilience and security of the payments system? Ms Bullock : We're not like other financial institutions, obviously. We receive payments on behalf of government customers, and we pay on behalf of government customers. Interestingly, in our banking department for payments to people—so unemployment benefits or family welfare benefits and those sorts of things—a lot of that used to be done by cheque and there were scams even around those. So we have long been alert to that. Now, we make electronic payments rather than cheque payments, but we do have processes in place to make sure that we are paying to the right accounts. It's a slightly different context in commercial banks with the scam issues because that's often people using commercial banks to pay away to other people. We have, as I said, a fairly narrow remit. We are dealing with one government department and we're making payments to recipients. So, yes, we have processes in place there, but it's a little bit different for us than for commercial banks. Ms JARRETT: Just so I'm clear, does that mean that you don't need that sort of payment information or you've just got different processes? Ms Bullock : What we do is we take the details from the government departments, including the accounts that they payments are going to go to, and we pay away. The government departments have to make sure of that. There's a secure process in the communication between the government department and us. The government departments make sure that the bank account details that they have are the correct bank account details for the people they're paying away to. Then our security is that people can't get in and alter the file to pay away to the wrong accounts. That's the layman's way I would describe it working. Ms JARRETT: I want to move on quickly. Just following on from the discussion around technology, we have what I call the evolution of the financial markets. We've got digital assets, we've got blockchain, we've got tokenisation et cetera. Do you incorporate that financial technology revolution into your modelling now? Given that area is changing so rapidly, how do you think about that and keep track of it all to bring it into the modelling? These changes will affect financial market confidence et cetera. There's an upside and a downside. Ms Bullock : The bottom line, I think, is that our models don't really take into account financial innovation in any sort of structured way. To some extent, we're only developing financial market inputs into our models. But Sarah can talk more to the models. Dr Hunter : Yes— CHAIR: Sorry to jump in, but just before you do, some of that work you're doing is looking at that too, right? Dr Jones : Indeed. CHAIR: Sorry, Dr Hunter, I didn't mean to— Dr Hunter : I can come back on that. Dr Jones : Just to be clear, the work that we're doing has a very long-term orientation. The work that we are engaging in with industry and other regulators is really designed to understand how financial market infrastructure and new forms of money and payments could change the entire financial ecosystem. That type of work will resonate over 10 to 20 years. In terms of the implications for financial conditions that might be reflected in the forecast, they're quite distinct programs of work. Dr Hunter : The way we would see that showing up in the macroeconomic data, ultimately, is in productivity. As Brad said, if you go back decades and decades, 20 or 30 years, we were in the world of cheques, before ATMs even. Paying for anything just took longer. I remember going to the post office with my grandma to get her pension every week; she had to queue up for 20 minutes to get the money— Ms JARRETT: Now we can get instant payments, right? Dr Hunter : No-one does it that way anymore. It's much more efficient. People get the money instantaneously in their account and then they can use it straightaway. That's a productivity improvement. And that's where it shows up in the macro data. To Brad's point: it doesn't really have an impact on a one- to two-year horizon, but you'd hope that we would start seeing the benefits from it in maybe five, 10, 15 or 20 years. Dr Jones : Just to give you a sense of potential timeframes we could be talking about, the last epochal change in the financial system was really the dematerialisation of securities. That process started in the 1970s, accelerated in the eighties and nineties and really took hold in the 2000s. Who knows how quickly, or actually if at all, tokenisation is really going to scale, because there are a lot of issues that are still yet to be resolved, and we are stress-testing those with some vigour. But that change—the dematerialisation of securities from paper certificates to electronic forms—actually took decades to unfold. So it's possible that—even though we are seeing tokenisation take off in some small areas of the financial ecosystem—it just takes a long time because of the interoperability challenges and a whole host of other issues. CHAIR: What was the name of that 'epochal change'? It's the ultimate barbecue-stopper! What did you say it was? Dr Jones : The last epochal change in the financial system was that move—the dematerialisation of securities— Dr Hunter : From paper to electronic. CHAIR: I'll remember my history better! Mr Hauser : One of the challenges of being a central banker, unfortunately, is that, particularly where you're setting monetary policy, the numbers that tend to move the dial are in the hundreds of billions or even the trillions, and so lots of issues that are highly relevant to people in the high street, in a micro sense, don't show on the radar of monetary policy. If you plot—and you know this, probably—the currency composition of these new assets, globally, they're almost all in US dollars, and the project in the US is a little different. I'm not quite sure, actually—we were debating it earlier—where the Trump administration has got to on this, but the thought that it might be possible to generate a large increase in the volumes of US-dollar-denominated assets is thought of by some as a means of financing the various deficits in the US more cheaply. Now, if that works—and I'm not sure we've seen the detail on that yet; we may never do, or we may—US interest rates may fall somewhat as short-term financing in the US picks up. That is the sort of thing—so, if you were a US policy-maker and you thought that this project actually was getting off the ground, which I don't think it has yet, that might move the dial for the federal reserve. We are a long, long, long way from numbers of that scale in Australia. We may never see it. We are certainly not seeing it at the moment. Ms JARRETT: Thank you. CHAIR: Terrific. We are going to close at 12.30. I'm going to come back to questions for the committee members, for me and then the deputy chair, and then I will call on people if they've got a quick question. Artificial intelligence has been referred to a number of times through today's discussion, and obviously it is being talked about quite a lot. I'm interested in knowing how the bank is utilising this. How are you using machine learning, artificial intelligence or advanced data tools in your core functions? Where are you seeing improvements, if you are using it? And how do those tools complement expert judgement? Also, how are those technologies potentially improving the bank's visibility over things that you are tracking, from household spending to business conditions? Are you able to offer some insights there, please? Ms Bullock : Sure. I'd have to say that we're not as advanced as, particularly, some commercial entities in this space, but I'd have to say that we, central banks around the world, are conscious of risk and we want to be cautious about how we're adopting it. But there are a couple of things. The first is: how can we use AI to address our processing—to make our processing more efficient and do things in a more efficient way, and give people back time from processes that might be taking up their time that they can do more quickly using AI? So there is that sort of approach. The second thing is: how can it help us in our policy processes and information? I'll open it up and people can give examples, I think, but examples in the first block are things like coding. We have a lot of coders in the bank—people in the policy areas who do coding for policy purposes. We've opened up that, so people are using it in those circumstances. People are using it in some of our support areas to try and find ways to do things more quickly and automate processes. It's all about making sure that people use it in a way that helps them but they are also conscious of the drawbacks and the potential biases and also potential errors. Andrew referred to AI slop. Some people are saying, 'Well, I'm getting stuff in my inbox, and it's clearly written by AI, and it's just annoying, thank you very much.' So we've got to find a way. People have got to experiment. But, at the same time, how do you make it useful in your processes? On the policy side, we have some people who are working hard on AI techniques to utilise our wealth of internal information more effectively. One simple example is that we have 22 years of liaison notes. CHAIR: That's what I was thinking of, yes—not only liaison, but I was thinking about all that data that the RBA possesses. Ms Bullock : Yes. How do we use AI to quickly harness some potential insights from that stuff, rather than people having to go through and open every single note? We've had a lot of progress there. We've got a little program that actually allows us to do that. You can go into the liaison notes and say, 'Draw me the insights over the last 22 years from X.' So they're two examples. Does anyone else have any examples they want to highlight? Dr Hunter : Just to— CHAIR: Also, in answering it, could you—I'm very grateful. Sorry, I have had a terrible run in interrupting you, Dr Hunter, and I'll make up for this at some point. On those two points about the way you use it on a daily basis and on a policy basis, is it organic or is it a structured program that you're using to start using AI more within the bank? Ms Bullock : We have a policy. We have a governance framework. CHAIR: That's what I was going to ask too. Ms Bullock : We're building up all of those guidelines. There are guidelines. We don't use public-facing AI large language models. We have an internal process—an internal language model, if you like—because we're cautious about a lot of the information that we have. Some of it is restricted, so we've got to be quite careful about that. So we have governance and policies around all of that, but we are encouraging people, within those guidelines and guardrails, to use it and see how it can help them. Did you want to talk about that? Dr Hunter : Yes, just to add to the governor's example of using it on our liaison data. The public now have access to what we learn from that, because it's now incorporated into the liaison box that gets published every quarter in the Statement on monetary policy. So that analysis is actually making use of the large language model that we use and that we've built. We're calling it Warrior. It's making use of that technology to draw out those insights. It might not be obvious, but everyone has access to that, including us. The other point I would add is particularly thinking about what we get our analysts to do with their time and the fact that they can now do coding and other types of data analytics much more quickly because the technology enables them to do that. It means they can just do more of it. So we've been exploring, for instance, what we can learn from our forecast errors, which we were talking about earlier on. We're very actively trying to look at where we've been wrong in the past, interrogate that from a lot of different perspectives and learn from that. What can we learn from our previous internal research? We are using an LLM that's been built within the bank to really interrogate our internal information, so it's secure and we don't have to worry about stuff going up into the cloud and being insecure. What can we learn from that to make sure that we don't repeat work or repeat efforts—things like that? So we're very active in taking this technology on, because we do think it will enable us to do our jobs better. Ms Bullock : Do you want to add something to that, please, Andrew? Mr Hauser : Yes. I'm a huge advocate for AI. Enthusiasm counts for a bit as well—and Sarah and others have as well. We have a very small I think what Xerox would call a skunkworks team of some of our smartest people, who do things that they probably don't tell us too much about on safe computers. But one of the things with AI, when you get to know it, is what it can't do as well as what it can do. A little anecdote—I hope this isn't going to fall the wrong way. Before I came here, I thought I'd ask ChatGPT what members of your committee had said about the RBA and the Australian economy over the past year, and it said— CHAIR: And you were overwhelmed by all the positive statements! Mr Hauser : It went away for some time and came back and said that none of you had said anything. I'd already done some research and I knew you had. Chair, I think it was you who talked about gas, didn't you, on the eastern seaboard? So I said, 'Well, Ed Husic did talk about this,' and ChatGPT said, 'Yes, you're right. Now that I go and check again, he did mention this.' Then I said, 'What else has Ed Husic talked about?' and it said, 'There's nothing else.' Then I mentioned that Simon—I think it was you—had mentioned something about us and possibly not in the wholly positive way, and it said, 'Well, yes, Simon said that, but there's nothing else.' It's not meant to be too much of a joke, but it is important that as people get to know what it can do they also know what it can't yet do. Some of it maybe makes you question whether it's going to be the absolutely dramatic technological epochal change thing that Brad mentioned. It still has its limitations. Ms Bullock : It does, and I think that's part of the thing that, in setting up our guidelines, we're trying to make people question. There was an example, I think, of one of your team who asked for a literature review on a particular topic and it came back with things that didn't even exist. So— CHAIR: So there are quality issues. Ms Bullock : you've just got to be very— CHAIR: Okay, thank you very much. That was a very comprehensive answer. Over to the deputy chair. Mr KENNEDY: It's great to see you doing all the work in AI and blockchain. I think it's fantastic. I always find Grok better for economic stuff than ChatGPT. I don't know why, but it's much better with numbers. Mr Hauser : Grok does have some biases. Mr KENNEDY: Yes. Well, I hope I haven't been critical of the RBA, but I have been very critical of Treasurer Chalmers, and that's where I'm going to return. Mathematically—earlier, Governor, you said 'spending affects aggregate demand and aggregate demand affects inflation' or something to that effect. The mid-year economic fiscal outlook shows over the past two years that Jim Chalmers budget has deteriorated by 1.9 percentage points of GDP, with 1.8 percentage points of that being due to higher spending. So my question is, all other things being equal, doesn't the 1.8 percentage point of additional GDP in government spending put upward pressure on inflation? Ms Bullock : Mathematically, if you have a limit on the extent to which demand can go because of supply and if one bit goes up, then it will put pressure—whether that's the public or the private. Mathematically, that is correct. Mr KENNEDY: Great, thank you. To move on to another point, your current forecasts assume rate rises. Based on that—I think it's one to two rate rises—inflation won't even hit the midpoint of your target. So, noting all of this is subject to change and noting the inherent uncertainty—at the moment I just want to check I'm understanding it—on that basis, is it that the RBA forecasts were going to need at least one to two rate hikes if not more to bring it back to the midpoint? Ms Bullock : That's what the central forecast—which as we know is very uncertain. The central forecasts suggest that, according to our models and our judgement, in order to get that particular inflation outcome, because this is a technical assumption, we'd just use the market path. If we put that in, this is what pops out. That is what pops out. So we've used our models, we've used our judgement, and we've used the market path. What that generates in terms of forecasts is, I think, a number of 2.6 by 2028. Mr KENNEDY: I respect and appreciate how apolitical the RBA, the full RBA, has stayed. Given government spending is at a 30-year high and the notes to the monetary policy statement only mention it once, and given the Treasurer, on Tuesday, said something like: 'If you look at the Reserve Bank's statement today, it doesn't mention government spending. It's not a factor in the decision they took,'—I appreciate that, today, you've gone to lengths to say that 'I don't comment on fiscal policy; I don't comment on the Treasurer's words'—I worry this verballing puts pressure on the RBA board. Have any of the members of your board expressed to you that they feel pressure from this government? Ms Bullock : No, absolutely not. What I can say for myself, staff at the bank and the board is that we are just focused on delivering inflation back in the target band with as strong an employment market as we can get. That is our focus. We are not pressured by political statements. Mr Hauser : Can I add to that. Having seen a couple of other policy boards as well, the pressure we feel is the pressure that comes from not hitting the targets we've been asked to get. That's our credibility. If we cannot tell a clear story about our policy settings and the way we think they will bring inflation back to target, we're all—and I think rightly, actually—open to questions by you, as delegates of the public, as to whether we're doing our job properly. It's an odd situation where I might say: 'Well, do you know what? I might get a verbal from XYZ, so maybe I won't do what is directly going to damage our credibility to deliver the goals that we've been set. From time to time, you'll have different pressures upon it, but the thing that really weighs on me, as a relatively new voting member of the board, is the thought that I may not have done what it takes to keep inflation at the target. Mr KENNEDY: Do you see the target as the band, or do you aim for the midpoint? Ms Bullock : We're quite under our statement on conduct of monetary policy. There's a target band, but we required to aim at 2.5. That's the target. Mr KENNEDY: To take what you said, Dr Hauser— Mr Hauser : I'm actually a Mr, but, yes, thank you. Mr KENNEDY: Mr, sorry. I upgraded you. You sound very impressive, so I thought you must be a Dr. We've got Dr Acacia. Based on the fact that we're not hitting that midpoint—and if that's your goal—even in the current projections, noting it's all subject to change, we're not even hitting your goal with those forecast rate rises. Does that add to that pressure you're feeling, Mr Hauser? Ms Bullock : Yes, it does. The board wanted to give the message, and they've been giving this message—that they are uncomfortable—since November and December. They are uncomfortable with inflation sitting above three per cent. We don't think it's running away, and the forecasts show that. But, if it's going to take us till 2028 to get it back, it's going to be out of band and above target for six years. Mr Hauser : There was a time when the— Mr KENNEDY: Above target for six years? Ms Bullock : It went out in 2022, and it will have been— Mr KENNEDY: It will be out of target— Ms Bullock : 2028. I have to say that, prior to COVID, we were outside the band in the other direction for quite a few years—below target. Mr KENNEDY: If the projections are right, we will have been out of target for six years? Ms Bullock : I think it will be six years. Dr Hunter : If it comes to pass. There's also the question of headline versus underlying inflation, of course, because the target is specified on headline inflation, and last year, headline did sit within the target band for some time. But, as the governor has already talked about, there were temporary measures that were resulting in that. I'm not trying to move the goalposts, but it does depend a bit on what you look and what happens. Ms Bullock : Yes, that does weigh on the board's thinking. That is the big reason why they decided to raise the interest rate on Tuesday. They are not happy with what the inflation rate is at the moment and what the prospects for getting it back down are. Mr KENNEDY: Thank you very much for what you've all done. I know you've got a lot weighing on your shoulders. Thank you for how you've acquitted yourself and handled yourself today. CHAIR: I'm conscious that, Member for Deakin, you had some spare time, and you ceded it. Do you have a follow-up question, and then I'll ask the member for Bowman if he's got a question. If we've got any extra time, I'll try and open it up. Mr GREGG: A lot of discussion around inflation today has been around the balance of aggregate demand, or total demand, and supply capability. We've talked a lot about demand today, but, in terms of supply capacity, if I interpret your remarks correctly, the main aim is productivity, which kind of sits more in the fiscal policy portfolio than the cyclical monetary policy portfolio. When we talk about government spending, would it be fair to say that it's what it's spent on that really matters? Is it increasing productive capacity? Are we creating healthier, more trained and skilled workers that can get to where they need to go quickly and things like that? It's not just as simple as numbers, because government spending contributes to both supply and demand. Ms Bullock : Well, yes. What things are spent on clearly matters, and if you look at some of the Productivity Commission's recommendations for ways to increase productivity, some of them—not all of them, but some of them—require not just federal government but state governments to spend money. So there is a sense in which some of that matters. CHAIR: Member for Bowman. Mr PIKE: You mentioned the pressure that you feel in trying to reach that inflation target, and that inflation pressure is certainly felt by Australian households. Are the fiscal decisions, are the expenditure decisions that are being made in this building making your job harder? Ms Bullock : No. At the moment, our focus is simply on what we can do to get inflation down. It's basically a product of the fact at the moment that, as I said, the private sector demand and government demand, altogether the aggregate demand, is too high. That's our focus. CHAIR: Okay; lightning round questions! Member for Bennelong, I know the member for Moreton has a question and I think the member for Brisbane does too. If you ask them quickly, I think we'll get through—maybe with the forbearance of the governor. Mr LAXALE: My understanding is you used the NPP during COVID for quick payments. What plans do you have to switch RBA payments from BECS to NPP? Ms Bullock : That is actually an ongoing conversation with the industry. NPP payments work really well if you need to get money out fast. For routine payments, there is a debate about cost versus benefit of doing it that way. That's a conversation we're having with the industry at the moment. For some payments—for example, regular welfare payments—it might be that they are just better off continuing to go through a BECS batch-like process, which is cheap— Mr LAXALE: It's better to have two systems, is that what you're saying? Ms Bullock : Well, that is a question that we are asking at the moment. The Reserve Bank has done a risk assessment of this, and we think that industry hasn't thoroughly thought out the implications of completely getting rid of a system and making sure that there is enough resilience. If you're just relying on one system and it goes down, then what happens to all the payments that are necessary for welfare payments, child support payments and all those sorts of things that are really important to people. So there is an ongoing discussion about that, but no decision has been made. CHAIR: Thank you. Just so you don't chide me on my productivity in this committee, I will now move onto the member for Moreton and then the member for Brisbane. Quick questions and quick answers and then we'll be done. Ms CAMPBELL: Thank you, Chair. I want to move back to the ASX. Obviously, the ASIC inquiry into the ASX is ongoing. We saw some pretty damning shortcomings outlined in the interim report that came out at the end of last year. What role does the RBA have in that? Given that ASX outlined a bunch of practical things they were going to do to rectify it, what role does the RBA have in doing that and in playing a part to make sure that those things get done as soon as possible? Ms Bullock : Quick answer: it was ASIC's inquiry and ASIC's report. There are some implications for the way we do supervision with ASIC, making sure that we are working together much more closely. We do work together closely, but there could be some improvements there. But, because it was ASIC's inquiry, it's going to fall to ASIC to make sure that it is all undertaken. As Brad said, our focus is financial stability. CHAIR: Member for Brisbane. Ms JARRETT: Thank you. We've covered a lot of ground today. What are a couple of big issues, big opportunities, you see for the role of the bank going forward—not just financial market resilience and stability in Australia but also looking to global financial stability? Ms Bullock : We're a small, open economy. We don't have a lot of opportunities to set agendas internationally in these sorts of things. Chris, any thoughts? Dr Kent : The thing that has served Australia very well for a long time is the strength of our institutions, broadly based. We saw that very much during the GFC. One aspect of that is a lot of automatic adjustments in things that move quickly when needed, when there are stressors coming from offshore. Some of that is the automatic fiscal stabilisers that work pretty well. The Australian dollar being flexible is another really important aspect of that. It often moves because it's an important part of the transmission mechanism, but it can move in response to pressures coming from offshore. It has long played a largely stabilising role. So I think we have a lot to be grateful for just in the way our institutions and set-ups work. Mr Hauser : It isn't something that necessarily would have come out in this hearing today or out of the recent discussion domestically, but however bad the problems may seem in Australia, when one compares it with our colleagues overseas—you think about Canada right next to the US; you think about New Zealand having overtightened—very often our colleagues will say in private, 'I wish we had your problems.' CHAIR: Thank you. On that note, on behalf of the committee I want to extend sincere and warm thanks for your appearance today. The committee secretariat will be in contact in relation to any matters arising out of today's hearing. You will be sent a copy of the transcript of your evidence and will have an opportunity to request corrections to transcription errors. I want to thank all of the witnesses and all of my colleagues for their time today. Committee adjourned at 12:31