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 Committee met at 09:30 CHAIR ( Mr Husic ): Welcome. 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 want to begin by acknowledging the Ngunnawal and Ngambri peoples, who are the traditional custodians of the lands on which we meet today, and pay my respects to elders past and present, and I also extend that respect to any Aboriginal and Torres Strait Islander peoples joining us today. The hearing comes at a consequential time for the Australian and world economies. Our economy has continued to grow in difficult global circumstances. The latest national accounts show that real GDP increased by 0.4 per cent in the June quarter and 2.1 per cent over the year, with growth increasingly supported by private demand. While unemployment remains low by historical standards, at 4.5 per cent, real wages grew by 0.2 per cent in the quarter but fell by 0.8 per cent in unrounded through-the-year terms. Even with those figures, annual real wages have grown for eight of the last 11 quarters. Notably, the challenges confronting Australia are the same challenges confronting economies the world over, including productivity growth, the impact of rising global bond yields and the effect of geopolitical instability. The RBA has increased the cash rate by 75 basis points during 2026, taking it to 4.35 per cent, and held the rate unchanged in August. The conflict in the Middle East has imposed a serious human toll and remains a major inflationary pressure. Disruptions to energy production and shipping have generated substantial volatility in oil, gas and other commodity prices, with higher costs flowing into transport, production and consumer prices. Yesterday the US Federal Reserve raised interest rates for the first time since 2023. The European Central Bank raised rates last week. The Treasurer has pointed out this week that the market is now pricing in an interest rate hike in every major advanced economy. Australia's gross debt as a share of our economy is much less than half that of the US, less than half that of Canada and the UK and less than a quarter of the gross debt to GDP in Japan. Meanwhile, artificial intelligence presents Australia with pathways to lift productivity, business investment and living standards. However, concerns remain around higher end risks of AI and potential employment impacts. Additionally, questions remain in some quarters about the prospect of a rupture of the AI bubble and its economic repercussions. The speed and scale of the investment boom in data centre construction in Australia has been considerable. Having said that, questions have also been raised about the pressure this might place on energy and water supply, along with the effect of competition for skilled labour in the construction sector. Against that backdrop, today's hearing is an opportunity to better understand how the RBA is balancing these global and domestic forces, and how it sees the outlook for inflation, growth, productivity and interest rates in the period ahead. In accordance with the committee's resolution of 31 July 2025, this hearing will be broadcast on the parliament's website. The proof and official transcripts of the proceedings will be published on that website. I remind all present that as chair I'll ensure that proceedings are conducted in an orderly, respectful and courteous way. Those present are advised that filming and recording by the media is permitted during the hearing. However, we ask that members of the media present or listening report the committee's proceedings fairly and accurately. Media present are also asked to conduct themselves in a way that doesn't interfere with proceedings and must not encroach on the committee's work area or film or photograph documents or devices of committee members, witnesses or others. I remind you that, although the committee does not require you to give evidence under oath, this 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 a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. With all that, I now invite you to make an opening statement before we proceed to questions. Ms Bullock : Thank you very much, Chair, and good morning to other members of the committee as well. My colleagues and I are very pleased to be here today to answer your questions. I think these hearings are an important part of the accountability process for the Reserve Bank. As you know, our purpose is to promote the economic prosperity and welfare of the Australian people now and into the future. One way we do this is by setting monetary policy to achieve low and stable inflation and full employment and by supporting the stability of the financial system, but we also promote the prosperity and welfare of Australians across the full range of our responsibilities, which include supporting a reliable, efficient and competitive payment system, delivering efficient and effective banking services to Australian government agencies, and providing secure and reliable banknotes to Australians. Since the committee's previous public hearing with the RBA in February, the Monetary Policy Board has tightened monetary policy by increasing the cash rate target by 50 basis points, with the goal of returning inflation to target. This has taken the cumulative increase this year to 75 basis points. I'm going to start with some background to these decisions and the outlook for the Australian economy, then I'll provide an update on the payment system and cash distribution, and I'll finish off with some remarks on how we're strengthening the RBA to position it to meet the challenges of the future. As you know, the Monetary Policy Board sets monetary policy such that inflation is expected to return to the mid-point of the two to three per cent target range. There's flexibility around the timeframe over which we meet our inflation objective to balance this with meeting our full employment objective. Turning to the first part of our mandate, inflation fell significantly from its peak of 7.9 per cent at the end of 2022 to be within the two to three per cent target range for a period in 2024 and 2025, but inflation picked up over the second half of 2025 and has remained above targets since then. Over the past year, both headline and underlying measures of inflation were around or a little above 3½ per cent. The increase in inflation partly reflects capacity pressures in the Australian economy, and the conflict in the Middle East has added to these inflation pressures. Higher oil prices have increased inflation directly through their impact on petrol prices, but they've also had an indirect impact, as many firms have passed input cost pressures arising from elevated fuel prices through to the prices of other goods and services. Because of these capacity pressures and the Middle East conflict, inflation is likely to remain elevated for some time. I'll turn to our policy response shortly. First, I wanted to update you on the second part of our mandate. Various indicators continue to suggest that labour market conditions remain close to but a little tighter than full employment. The unemployment rate at 4.5 per cent is low by historical standards, and the share of population with a job is close to a record high. This is a welcome outcome for those individuals, their families and the wider Australian economy. As I mentioned earlier, the Monetary Policy Board has increased the cash rate by 75 basis points this year to help reduce inflation. Inflation is too high. We're focused on getting it back down and making sure that it does not become embedded into price- and wage-setting decisions. Our latest forecasts, which were published with the August statement on monetary policy, suggested that inflation will not return to around the mid-point of the target range until late 2027. At the time of the August board meeting, we assessed that the risks to that outlook were skewed to the upside. Developments since then suggest that, although growth in the Australian economy is slowing, some of these upside risks to inflation appear to be materialising. Global cost pressures have increased. The Middle East conflict, the AI boom and extreme weather events are contributing to upward pressure on a range of energy, agricultural and technology related prices. There is little sign of resolution in the Middle East conflict. Oil and related prices have increased sharply again and will add directly to inflation. Through our liaison program, we're hearing that many firms are passing on higher input costs. This was expected. But it is important that these effects remain contained and do not become embedded into wage and price setting decisions otherwise inflation could prove more persistent and require a stronger policy response. We're not alone in being concerned about this. Central banks in many other advanced economies are responding to this global inflation shock by increasing their policy rates or signalling they will do so if needed. The global AI boom is driving stronger growth in economies that are key parts of the AI supply chain. It's also driving higher global prices for some AI related technologies that are supply constrained. So far, global demand pressures have largely been concentrated in AI related supply chains. Domestically, while labour market conditions have eased gradually as expected, some capacity pressures remain. There is a risk that this could exacerbate the degree of pass through of rising input costs. In terms of domestic activity, recent data has been broadly consistent with our expectation that demand growth would ease in the first half of 2026 following a period of above trend growth late last year. Because monetary policy works with a lag, the full effects of recent rate increases are yet to be felt. The impact of the Middle East conflict on economic activity has been relatively modest so far despite the decline in confidence, with household spending growth moderating gradually. Business investment growth has picked up strongly, driven mostly by spending on data centres and renewable energy projects, though investment in other areas has also increased. A period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably. Continued weak productivity growth means the economy cannot grow strongly without putting pressure on inflation. This is a fundamental challenge for the Australian economy over the next few years. Conditions in the housing market have softened, and a larger than expected easing could be a downside risk to economic activity. The softer conditions partly reflect the usual transmission of monetary policy as well as tax policy changes and the broader economic environment. Housing prices have fallen in most capital cities, and new housing loans have declined. But these falls follow a period of strong growth. Housing prices are still around 50 per cent higher than they were in early 2020. Fundamentally, there is a structural undersupply in the housing market which has underpinned prices over recent years. Despite recent falls in housing prices, the share of borrowers in negative equity remains very limited, and only a small share are facing severe difficulty with their loan repayments. This isn't to downplay that for those affected. These circumstances are deeply challenging. But it does indicate that financial stability risks are contained, including because borrowers in aggregate have built up considerable savings buffers over recent years. I want to emphasise that while we expect housing prices to be affected when interest rates rise, monetary policy does not target housing prices. Rather, what matters for monetary policy is how changes in housing prices affect economic activity, the labour market and, ultimately, inflation. Lower housing prices can weigh on consumption by reducing households' net wealth. Turnover also declines when prices are falling, reducing consumption of goods that people tend to buy when moving house, such as furniture and appliances. Lower housing prices can also affect incentives for residential investment and activity in the construction sector. The reduction in demand via these channels helps to reduce inflation. The monetary policy board will meet in just over a week's time. We'll discuss our assessment of the flow of data and how the risks are unfolding. A key question is whether the tightening in monetary policy to date will be sufficient to bring inflation back to target in a reasonable time. Monetary policy is well placed to respond to developments, and we are focused on our mandate to deliver price stability and full employment. I recognise that higher interest rates are difficult for Australians with mortgages who are also facing cost-of-living pressures, but reducing inflation is essential. High inflation hurts all Australians, and it is especially tough on people with lower incomes and those in vulnerable financial positions. Another key responsibility for the RBA is the regulation and oversight of the payments system. We've completed our review of surcharging and merchant payment costs. Following extensive consultation, the payments system board concluded that a package of reforms to remove card surcharging, reduce interchange fee caps and improve transparency of payment costs would be in the public interest and promote greater competition and efficiency in the payment system. With card surcharging set to be removed from 1 October, we are monitoring the payment industry's implementation and we're working with industry stakeholders to support merchant awareness of the changes. Following amendments to the Payment Systems (Regulation) Act 1998, which expanded our regulatory remit, we started a broader review of payment system regulation, with the publication of an issues paper in June. This review is considering how regulation should respond to rapid innovation and change in the payments landscape, including opportunities to improve competition, efficiency and safety. The issues paper invited stakeholder views and evidence on which payments policy issues should be prioritised by the RBA. In the submissions, stakeholders frequently raised issues relating to mobile wallets, three-party card schemes, account-to-account payments and agentic commerce. We recently published the stakeholder submissions, and we intend to release regulatory priorities by the end of 2026 and start further consultation on prioritised issues by mid-2027. Many of the issues raised in these two reviews were also considered by this committee in its inquiry into schemes, digital wallets and innovation in the payments sector. We welcome the committee's report A level paying field. The report made 16 recommendations, including six directed wholly or partially to the RBA, which we will address through our ongoing work program and regulatory reviews. In May we published the Project Acacia final report, examining how new forms of money and infrastructure could improve the functioning of Australia's financial markets. In recognising that many of the barriers to financial innovation in Australia stem from coordination challenges, Project Acacia involved extensive collaboration with industry and engagement with ASIC, APRA and the Treasury. The report found that asset tokenisation, combined with innovations in money and settlement infrastructure, has the potential to enhance the efficiency, functionality and resilience of Australia's financial system. Since then we've launched consultation on the role of our own settlement infrastructure, RITS, in a tokenised ecosystem and, with the Treasury, reaffirmed that there remains no clear public interest case for a retail central bank digital currency in Australia. We're working alongside ASIC and other regulators to explore a potential thematic sandbox focused on tokenisation, which was a Project Acacia recommendation and is aligned to the recommendations of the Enhanced Regulatory Sandbox review. Together with the government's Financial Innovation Strategy, this work is helping to ensure that Australia is well placed to harness the benefits of financial innovation while managing the risks. I'd also like to update the committee on recent developments in the cash distribution system. Cash remains a critical part of an inclusive and resilient payment system. Although cash now plays a smaller role in everyday payments, it is still widely used and valued by Australians. Around half of Australians use cash in a typical week. The RBA remains committed to supporting the Australian government's objective that cash remain available for as long as Australians want or need to use it. The cash distribution has faced significant challenges. Lower transactional cash use over recent decades has challenged the economics of providing cash services, particularly in rural and regional areas. Industry participants are working on new arrangements to support a more sustainable and efficient system. These will require approval by the ACCC. As the issuer of Australian banknotes, the RBA also plays a key role in wholesale cash distribution. We provide banknotes to the major banks, which distribute these to the broader community. We're continuing to work with industry so that our distribution arrangements, programs and incentives support the efficient distribution and availability of cash across the country. The RBA welcomed the Cash Distribution Framework Act 2026, which provides crisis readiness and resolution powers to support the continuity of critical cash distribution services. The ACCC will oversee pricing, access arrangements and service-level standards. The RBA recently designated Linfox Armaguard Pty Ltd under the new legislation, reflecting that company's significant role in Australia's cash distribution system and making it subject to the framework's obligations and requirements. Designation does not mean that the RBA will exercise crisis readiness or resolution powers in relation to Linfox Armaguard. It means that we have the ability to act if we need to. The work to operationalise these new powers and responsibilities is being undertaken in close coordination with the ACCC. Finally, our vision at the RBA is to be an open and dynamic central bank that is trusted for the quality of its analysis, policy and service delivery. We believe that provides the right foundation to promote the economic prosperity and welfare of the Australian people, as parliament has tasked us to do. Over the past three years, we've undertaken a significant program of transformation to achieve this vision and position the RBA to meet the challenges of the future. This has spanned many dimensions of our operations, including governance arrangements, policy and analytical frameworks, operational resilience, risk management, culture and leadership. Last year, the Governance Board reported that we had largely implemented the recommendations of the RBA review. Since then, we have completed the remaining recommendations, publishing a framework for additional monetary policy tools and commencing regular meetings of an external expert advisory group on monetary policy. Nonetheless, we recognise that the world is evolving rapidly and that we must continue to evolve with it. A mindset of continuous improvement is shaping all our work, from shoring up the resilience of critical infrastructure such as RITS to our risk management, governance and ways of working. We are operating in a high-risk environment, and we believe these changes are strengthening the RBA's ability to promote the economic prosperity and welfare of the Australian people now and into the future. Thank you for listening. My colleagues and I look forward to answering your questions. Thank you, Chair. CHAIR: Thanks so much, Governor. In my opening statement, I referenced the US Federal Reserve decision to raise interest rates by 25 basis points yesterday. It appears to be an important moment to obtain the observations of the RBA about what's happening in the global economy, particularly as it affects our trading partners. I wonder if you could reflect on any implications of that decision and, additionally, what the re-escalation of conflict in the Middle East has meant for global interest rates. Ms Bullock : Sure. I might start with the second part first because I think that's what's influencing a lot of what's going on overseas. When the conflict first started, there was, I think, if you like, a baseline assumption—certainly on our part and amongst many other countries—that it would be short-lived and that the rise in oil prices and associated fuel prices and other energy prices would be short-lived and they would ultimately come back down—maybe not to pre-conflict levels but that they would certainly come back. We, along with others, did scenarios in which prices did stay elevated for much longer, and, in those circumstances, what central banks were focusing on, I think, was the implications for inflation being more persistent. I think it's fair to say that that—maybe not the most extreme scenarios, but certainly scenarios where we're seeing much-higher-for-longer oil prices, fuel prices and those sorts of things—is sort of more the world we're in now, and I think you're seeing a realisation of that in the response of overseas central banks. There was a tendency to wait and see, but, now that fuel prices have been much higher for longer and you are seeing that reflected in inflation overseas, central banks are responding. You've seen that in the responses, as you highlighted, and particularly in the US and Europe and some other countries being on high alert. We started from a slightly different position to many other countries. We started from a position of excess demand, and so we had already started raising interest rates before the conflict started. We raised in February; the conflict started; we raised two more times. Then we paused to see how that would pan out. I think we're now in a very similar position to other countries, in the sense that we've still got a bit of excess demand and now we've got this extra impetus from a prolonged Middle East conflict. That is putting pressure on prices in Australia to the extent that businesses thought that maybe it would be short-lived and they could perhaps wait and see whether they would pass cost increases through. Now that they're seeing a prolonged period, I think there's much more of an inclination to think, 'We need to pass through these cost increases because it's going to be much more persistent.' So they're the sorts of things that are shaping our views, I think, and shaping the views of overseas central banks. CHAIR: Do you think the market's pricing in rate hikes in other countries as well? Ms Bullock : Yes. Certainly, over the past period since the conflict started, we have seen expectations for interest rates to rise in all countries. Initially at least in the US it was a bit different. They priced in falls and then they just priced in no falls, whereas other countries started to price in rises. With the prolonged Middle East conflict, what we're seeing now is that even in the United States there are predictions by markets for increases in interest rates. We're seeing the same thing in Australia. Mr Hauser : Could I add one thing, Chair, and you can tell me to shut up if you don't want me to, but— CHAIR: I would never be that blunt. Mr Hauser : I believe you. I'm just back from the US. In addition to these downside risks—or the upside risks to inflation from the Middle East—what is also very striking is how strong the AI and tech boom is and has been. That's not just true in the US; it's true in the Asia-Pacific region as well, and they're of course our closest trading partners. Our forecast for global growth has been repeatedly surprised on the upside while we've all been focused on these downside risks and remain so. In fact, one of the perhaps slightly less well told stories about the global market economy at the moment is that in addition to these negative supply shocks, we're obviously also seeing in at least some countries quite a strong positive demand shock. Kevin Warsh talked about that at some length in his own description of where US policy was going. So it's a more complex picture than just the Middle East or just these downside risks. We are also seeing some real strength, as you said in your opening remarks. CHAIR: Can you expand on that a bit more? When you talk about the upside in what's happening around AI, how is that playing out in a way where you see stats that make you extrapolate— Mr Hauser : There's a lot of talk about AI and obviously its impact on the supply side and on productivity. I'm sure we'll come back later to talk about that. Actually the dominant feature of the AI and technology cycle at the moment is a much more straightforward investment boom. It's about building the data centres in the US and here and obviously elsewhere as well, but, just as important, it's about creating the products that fill those data centres. That of course is what Taiwan, Singapore, Korea and others are all working as hard as they possibly can to produce—the memory chips, the servers and all of the kit that goes into those things. What's quite interesting, as we all debate what AI will mean for the future, is that the initial wave of the AI boom has been very much more a conventional investment boom, and the numbers are huge; they're not only huge in the US but huge here and huge in Asia-Pacific as well. Everyone knew it would be big, but I don't think anyone had put quite the sorts of numbers on it that we're seeing at the moment. CHAIR: Are there any other key risks that the RBA is keeping tabs on in the global economy that we should be mindful of? Ms Bullock : On the AI boom, there are certainly some issues around financial stability that some are concerned about. Globally, if you look at some of the things people are concerned about, they're concerned about the possibility that asset prices have run up quite quickly. We can talk about financial stability. I could call on Brad to talk about that a bit. The second thing that many overseas economies are worried about s private credit and the run-up in private credit. I think it's less of an issue here. Brad can talk a bit more in detail about that. Overseas, that's one of the issues that that we're watching. I think initially when the Middle East conflict broke out, everyone was worried about the impact on the global economy. For many countries—not all—that's been swamped by the AI demand side. There is still a risk that with a very prolonged Middle East conflict and very high fuel prices—and not just high fuel prices but if it turns out that there is a shortage of supply—that might well have big implications for the world economy in terms of growth. To Andrew's point, there is this demand and this supply side, but there's still this risk sitting on the supply side which needs to be taken into account. CHAIR: Everyone's looking a lot at global bond markets and trying to figure out what's gone on and why they're behaving in the particular way they are. What are some of the factors, from the RBA's perspective, that are driving the pick-up in yields, and how important was the Fed decision yesterday in terms of global bond markets? Ms Bullock : Longer-term bond yields have been rising. We would say it's not been disorderly. There's still liquidity in markets. We'd attribute it to a number of factors. The first is inflation. There is an expectation that inflation is higher and central banks are going to have to keep interest rates higher in order to address that. Overseas, there's quite a lot of pressure on longer-term funding markets because there are fiscal issues and quite high debt levels in a number of countries. There's also increasing issuance into the longer-term end of the bond markets, the corporate bond markets by the hyperscalers—so they're competing for funding. CHAIR: I was hoping you could expand on that as well, because that seems to be quite unique in terms of this point in time. Ms Bullock : Up until fairly recently, it's fair to say that a lot of the investment by the hyperscalers has been funded by equity. Increasingly, recently, it's been funded by borrowing. They're issuing at a similar tenor—around the 10 years, the longer end—and, at the same time as a number of European countries and the United States, they're running large fiscal deficits. They already have quite elevated debt levels. They have to roll over those debt issuances, so when you've got more issuance into—so it's the supply/demand equation. The more supply you have, the more compensation investors require for holding those debt instruments—so yields are rising and prices of the bonds are falling. That's what's going on in that part. It's important to note that, if we look, to the extent we can, at the breakdown of nominal bond yields into real yields and inflation compensation, inflation compensation is staying reasonably steady. That's telling you that the markets think central banks will do what is necessary to keep inflation stable. But the nominal yield is a real yield, and it's reflecting a couple of things. It's reflecting a rise in the term premium. Investors require more compensation to hold those bonds. It's also possibly reflecting the fact that what we call the neutral real interest rate—the interest rate that is neither inflationary nor disinflationary—is rising, and it's rising because of the very strong investment side of the equation. More investment with a fixed pot of savings means you need interest rate rises in order to equilibrate those things. There are a number of things going on there. It doesn't seem to be inflation compensation, which is a good thing for central banks. That doesn't mean we can relax, because it's a necessary condition but not a sufficient condition to make sure that we keep inflation expectations anchored; that's important. Andrew might have a few extra things to say. Mr Hauser : It is worth saying, as the governor has already said, that this adjustment has been quite orderly. It's been a reasonably large adjustment over the last few months, but it has happened in a way that markets have continued to function and governments have continued to be able to issue both in Australia and overseas. I would say it's the market working, to be absolutely honest with you. There is a view in the market that yields prior to this pick-up were on the low side, particularly in terms of the compensation for the risks that holders of longer-term debt might be required to hold. I don't want to sound complacent, that everything's fine and this is not a problem, but markets are sending a signal to those who are borrowing that if they wish to keep borrowing they're going to have to pay up for it—and that will have incentive effects as well. I was in the UK when the LDI crisis happened. A very sharp increase in long rates caused disorderly market conditions. This has not, so far, been an example of that. Ms Bullock : One other thing I would add is that, to Andrew's point, we're not complacent. We are watching it closely. We obviously are very well positioned in the Reserve Bank. We have a dealing team. We have offices in London and New York. We're well connected with markets. We are watching closely, but so far it has been orderly. CHAIR: How have Australia's yields moved, especially in comparison to other advanced economies? Ms Bullock : Our yields have moved up as other yields have moved up overseas and have reflected very similar factors: inflation, expected interest rates and the neutral interest rate. I think it's not unexpected that everything is moving up together. We're part of a global capital market, so there's nothing unexpected, I don't think, in that respect. CHAIR: Thank you. Over to you, Deputy Chair. Mr KENNEDY: The chair is a very good chair, but he runs a tight ship, so apologies if I cut you off and squeeze in a couple of extra questions. I want to start with the comment in your opening statement that inflation is too high and then dig into some of the things under that. Given I'm in parliament I want to focus, firstly, on public demand. I see that, in the August 2026 forecast I have here, for the year through to June 2027—so the same as the budget year—the RBA forecast public demand going up 3.1 per cent while the economy grows at 1.5 per cent. Am I reading it correctly that public demand is growing, or is forecast to grow, twice as fast as the overall economy? Ms Bullock : I'll hand to Sarah for the details. Dr Hunter : That's 'public demand' as it's defined in the national accounts, so that's government spending and government investment for all levels of government. That's direct spending in the economy on services, infrastructure projects and what have you. It doesn't include transfers to households. That would be social security payments and things like that. For clarity, they get counted elsewhere. But the forecast numbers that you've quoted are correct. It's 3.1 per cent for growth in public demand through the year to June 2027 and 1.5 per cent for GDP. Mr KENNEDY: You just enunciated, which was helpful, that public demand is driven by not only payments, public payments, but investments and all those things. Dr Hunter : To be clear, 'payments' is transfers to households, which is counted in household income, so that doesn't appear in that public demand series. It's direct consumption of services and goods. So, if you're building a bridge, for example, you've got to pay the workers and you've got to buy all the resources and things. That would count. A government's services that are provided—direct payments for health care, for example—would appear in there. But transfers to households, such as pensions and other social security payments, appear in household income. Mr KENNEDY: So public demand is growing twice as fast, but then payments are coming in— Dr Hunter : They come out somewhere else, yes. Mr KENNEDY: in household income, and they're also in there as well. Dr Hunter : Yes, we have income further down the forecast page. The other side of the income equation is obviously tax. Tax is what households pay to the government. Mr KENNEDY: So that I understand this, public demand is growing twice as fast as the economy, then payments are at about a 40-year high outside of the pandemic at 26 per cent of GDP? Dr Hunter : I don't have that figure to hand. I think the 26 per cent of GDP— Mr KENNEDY: It's 26.2 per cent of GDP, I think. Dr Hunter : I don't have that figure to hand. I'm not sure if that's the figure for government spending, public demand as a share of GDP, or if that's the figure for— Mr KENNEDY: That's federal payments, I think. Dr Hunter : I don't have that figure to hand. Ms Bullock : That number is also states. Mr KENNEDY: Yes. Ms Bullock : It's not just federal; it's the states as well, which account for— Mr KENNEDY: Public demand is states; federal payments is federal. Dr Hunter : No. Ms Bullock : No. Dr Hunter : Public demand in the national accounts is federal, state and local altogether. Mr KENNEDY: It includes states? Ms Bullock : Yes, which I think account for about 50 per cent of— Dr Hunter : They do. The states are really quite substantial. I know that's not your focus, but it is a focus for us because we have to look at the aggregate. Mr KENNEDY: Sure. So public demand is growing twice as fast as the economy. I'm focused on the federal government, as you guys just pointed out. I note that your monetary policy statement recognises the role fiscal management plays in achieving your board's objectives. So how we spend our money plays a big role in whether you can achieve your inflation objectives. Is that a fair assessment? Ms Bullock : The way I would describe it is that what we focus on is demand and supply of the economy. Aggregate demand is made up of public and private. Anything that adds to aggregate demand and keeps it above supply is contributing to that excess demand. It doesn't matter whether it's private or public. So mathematically, yes, if public demand is lower and you don't get an offsetting increase in private demand then that lowers demand and that decreases the demand supply. So, yes, the answer is that it has a mathematical relationship. This is the way it works. I've said before and I'll say it again: it is not my job to tell the government, any government, how they choose to spend their money. I appreciate they are elected representatives and they make those choices. Mr KENNEDY: Yes, and that's what I'm focused on. But just to understand how your forecasts work and the models, all other things being equal, if government spending—which you have no responsibility for—was, let's say, 26 per cent of GDP and fell to 24 per cent of GDP, if we on this side of the House came to government and slashed two per cent of it, what would that do to inflation in your models and forecasts? Ms Bullock : It would depend. Well, if you just do that and nothing else happens, something else would happen. Mr KENNEDY: I appreciate you don't have control of it but, all other things being equal, I just don't understand how your models work. If we were to cut public spending federally by two per cent of GDP, how do your models work? How would they compute that? What would happen to inflation? Dr Hunter : The way all general equilibrium models work is that they have a series of assumptions that you put into them, and one of them for us is government spending. We take the budgets. It's an exogenous assumption. It doesn't change. They come in. Then the model itself has a number of feedback effects and loops, if you like, that will then churn through. We economists call those endogenous responses. Things respond in the economy on the ground. Then out the other side, obviously, you get GDP, inflation, what happens in the labour market and so on. So if we put in a lower profile for government spending, whatever that might be, that would flow through and reduce aggregate demand in the first instance. But what would come out the other side really does depend on how the economy responds to that. I'm afraid it's not just a mechanical— Mr KENNEDY: But my question is to inflation. If you changed that assumption in your model from 26 per cent to 24 per cent with all other things being equal—leave all the inputs; we did that—what would your model say happens to inflation? Dr Hunter : It would depend on— Mr KENNEDY: Would it go up or down? Dr Hunter : It would depend on how everything else responded. For example, it would depend on whether the Monetary Policy Board chose to adjust the cash rate in that example. Mr KENNEDY: All other things being equal— Dr Hunter : But we don't think about it that way because it's never all other things equal. That's never the world. The world is not linear in that way, unfortunately. There's always other things responding and changing and shifting. Mr KENNEDY: So would inflation go up if we cut government spending by two per cent, in your models or forecasts? Dr Hunter : It would depend on whatever else happened. Mr KENNEDY: I'm just asking you how your model works. Let's say you modelled it and went back there now, what would occur? You don't know what would occur? Ms Bullock : We haven't done that scenario, let's put it that way. But it does depend on how the models treat things like what would happen. So it might even depend on where the spending was cut. If the spending, say, for example, was cut in some areas which the private sector was being crowded out of then the response might be the private sector responds by increasing activity, in which case it might mean demand doesn't respond at all. If it's cut in other areas which directly impact consumption then it might be that demand falls and inflation falls as well. Mr KENNEDY: Would demand go up in any scenario if we cut government spending by two per cent? Dr Hunter : We've not run that scenario. You cannot run an infinite number of scenarios. No-one can. We don't have the manpower to do that. Mr KENNEDY: So you've never run a scenario of if we were to reduce government spending in your models—never? Dr Hunter : It would depend on the type of scenario we're talking about. To the government's point, it would depend on the composition of demand. It depends on where the economy is in the cycle—if we're in a position of excess demand, if we're in a position of there being slack in the economy. Mr KENNEDY: But have you ever run a scenario where we reduce government spending? Have you ever looked at that scenario? Dr Hunter : We've not run that. Mr KENNEDY: You've never looked at a scenario where we've reduced government spending? Dr Hunter : We've not run that scenario recently because we take it as given that— Mr KENNEDY: Ahead of the next hearing it would be really helpful for us. Because I'm the assistant shadow finance minister, I look at government spending. Given our mandate is: how do we both work together to manage your objectives? We control the government-spending arm, this arm of the executive. It would be helpful ahead of the next hearing if you could say, if we did reduce government spending, what that would do to inflation. If we could have that ahead of the next hearing it would help me in the parliament when we're cross-examining the Treasurer and shadow treasurer to know what that would do. Do you appreciate that would be helpful for us? Dr Hunter : It may or may not be helpful for you guys, but it's not necessarily a helpful exercise for us because we don't control that lever. It's not in our— Mr KENNEDY: I'm just going back to your statement on monetary policy, where you say, 'We recognise the role government fiscal management and government spending'—which is the biggest part of that—'plays in achieving the board's objectives.' So I'm just trying to understand, if we're not modelling what we on this side do with spending, how that achieves your objectives and how we actually both play that role to achieve your objectives. Ms Bullock : Again, I would suggest it's the Treasury's responsibility to look at those sorts of issues. Our responsibility is to take what is given by the parliament and then use that to generate our forecasts on what we think is relevant for monetary policy. It's not our responsibility, I don't believe, to make assumptions about what we think fiscal policy should do in order to help us and tell fiscal policy what to do. Mr KENNEDY: We're not asking you to. I just want to model scenarios. There are obviously a number of versions of the future that could play out. Ms Bullock : Again, Treasury is well placed to do that. Mr KENNEDY: Got it. I'd like to move to productivity. Do you model different productivity scenarios? Dr Hunter : We put out a paper just over 12 months ago, in August 2025, where we talked through what had happened to productivity in Australia over the last couple of decades or so. As part of that, we downgraded our medium-term productivity assumption. Just to be clear, for us, that's an assumption on where we think productivity growth is trending over the next one to two years. We don't go beyond that, because our policy horizon is one to two years. In that paper we had productivity coming down from one per cent to 0.7 per cent, year on year, as our assumption. As part of that work, we obviously considered a number of— Mr KENNEDY: Can I just ask a question on that, if that's okay? When you model that productivity and you revise it down—just to go back to inflation—what does that do to inflation? Dr Hunter : I suspect you're going to get a bit frustrated with me on this answer! It really does depend on how the economy and how people in the economy respond to that fundamental. When we looked at household income and household spending, for example, there were two observations that we noted in that paper. One was that real wages—so wages taking out inflation—tend to grow in the long run, over decades, in line with productivity. So real incomes are very closely tied to what happens to productivity. The second observation that that paper made was that household spending is very closely tied to household income, as you might imagine. So what happens to spending as a result of how productivity evolves? It depends on how people see and understand what's happening in the economy. Generally, over time, people understand and see what's happening to their incomes and they adjust their spending accordingly. So what happens to productivity and how it drives inflation really does depend on the time horizon that you're looking at. What we're saying at the moment is that, because we think productivity growth right now, in a trend sense, is weaker than it has been in the past, that puts a speed limit on the pace the economy can grow without generating inflationary pressures. We think that speed limit at the moment is around two per cent a year. Mr KENNEDY: I want to pick up on what you just said—that it puts a speed limit on the economy. So, all other things being equal, that would make me think lower productivity could put— Dr Hunter : It depends. It depends on where the economy is right now. Mr KENNEDY: Where is the economy right now? Dr Hunter : To take a step back into an abstract, if the economy is in balance, if aggregate demand and aggregate supply are in line with one another, then what we're saying is that, if you start from that position, we think right now the economy can grow at around two per cent a year without generating inflationary pressure. Right now, as the governor said earlier, we think the economy is operating with excess demand. We think demand is sitting slightly above supply, and that's manifesting as domestically driven inflation. Mr KENNEDY: In the situation we are, where aggregate demand is above aggregate supply, lower productivity increases inflation. Is that correct, from what you just said? Dr Hunter : It doesn't necessarily increase inflation. It just means that, when we look at what's happening in the economy right now, if the economy is growing materially faster than two per cent a year, we would expect that to be a situation where demand growth is outstripping supply growth. In that situation, inflationary pressures are going to build. If the economy is growing materially lower than two per cent a year, then that's a situation where we would expect demand to be growing more slowly than supply. That's our assessment. In that situation, domestic inflationary pressures would be easing. And then, if you're in the middle, you're in the middle. Again, it depends on where you start from and where you're going to. It's not a mechanical, straightforward situation. We could be in a very different situation today, and telling you, 'Well, actually, demand is growing a bit quicker than supply, but we're not generating inflationary pressure, because we started from a position where demand was below supply.' That's not the position today, but I used that as an example to illustrate that, unfortunately, it's not a mechanical one for one, I'm afraid. Ms Bullock : I'll try and distil this down to one or two lines. At the moment, we think demand is above supply and that low productivity growth means the economy can't grow very fast, so, therefore, demand has to grow more slowly than what we think the supply side of the economy is, in order to bring those inflationary pressures back down. So, in some sense, starting from this position, if demand growth still continues to grow much more quickly than supply, then that will be inflationary. Mr KENNEDY: To flip the deputy chair's approach to the cause and effect, when making interest rate adjustments, whose spending are you trying to reduce and what behaviour are we looking to change when we increase interest rates? Ms Bullock : Andrew, you might like to talk about transmission of monetary policy. Mr Hauser : It's widely discussed—and this may be where your question is going—that the burden is all on mortgage holders. Clearly, there is a significant burden on mortgage holders, but monetary policy affects every part of the economy. That's why it's effective. I would draw out four separate channels—and we publish research on this. The biggest single channel is actually the exchange rate. That's true. We're a small, open economy. The exchange rate has risen by six, seven, eight per cent on a trade-weighted basis this year. That's quite a lot. You might think, 'Well, the exchange rate only affects people who are going overseas,' so, great, you get a cheaper holiday; it can't be very important. It's much more pervasive than that. Every company importing products, which is almost every company in Australia, gets cheaper products if the exchange rate is higher. That's quite a powerful effect. Actually, in economic models, it's the biggest single effect of interest rate effects, and that is true in Australia as well. The second is on asset prices. Again, people might say, Oh, well, great, if you're a rich guy with loads of equities,' but that's not most of the economy. But almost everyone has a superannuation fund and many people own or live in houses, and those effects are very important. They're probably the second most important channel of monetary policy transmission. The third has the ugly term 'intertemporal substitution'. I'm sorry about that. But what that means is that higher interest rates increase the incentive to save and decrease the incentive to borrow. That's not a cashflow effect. That's not the effect that we typically talk about when saying, 'Oh gosh, I've suddenly got to find higher mortgage effects.' It's an incentive effect. It's the one that you normally learn about in your textbooks. And when you're talking to companies, for example, about the incentive to invest, it's the most important factor. It's real. It's possibly the third most important. The fourth is the cashflow effect that dominates public discussion around mortgage servicing. That's an important effect. We're very sensitive to the implications that that has for individuals, particularly those who are facing challenges, but it's by no means, in economic terms, the most important part of the economy. Sometimes, when people talk about a blunt effect or a very unequal effect, this certainly has distributional effects when we introduce interest rates. It undersells how pervasive an increase in interest rates actually is across all elements of the economy. Mr GREGG: With the distributional effects, we saw some spending data from NAB that indicated that there's very robust spending across age brackets but particularly in the under-25 and over-65 age demographics, which seem to be less sensitive to interest rate changes. Is the distributional effect of interest rate changes itself changing? And will that impact the effectiveness of these levers long term? Ms Bullock : Yes, it does have different impacts. But one point that's always worth making is that, overseas, different economies have different sorts of demographics, they have different sorts of mortgage arrangements, and monetary policy works in all of them. I think Andrew spelt out very clearly the four areas we think it works through. And yes, it might have different distributional impacts, and maybe that impacts the way it flows through in terms of intertemporal and mortgage. But there's still the exchange rate channel as well, and the asset prices. So it might mean that the way it flows through in terms of the different channels changes and it does have distributional impacts, but it's still effective. Dr Hunter : I might just add that we did pay a lot of attention to transmission. It's obviously very important for us to understand. We haven't got any evidence of the degree of transmission, the speed of transmission, changing in recent times, despite what you're talking about. So there isn't any empirical evidence. And I think that points as well to what Andrew was saying about the relatively small size of the cashflow channel, because it's got a positive and a minus. It might be that you're getting changes within that, but, because its net is small, it's not changing materially in terms of the size of transmission through the economy. Mr GREGG: That's good! We were talking earlier about AI data centres. You were pointing out, Mr Hauser, that it seems to be a very conventional investment at the moment in a lot of inputs. Obviously in Australia we don't make a lot of those inputs—chips and things like that. So, for us, is this going to be, in the short term, more inflationary because it's mostly construction work, which is kind of low-productivity at the moment, and already has supply issues? Are we likely to see this boom being more inflationary in the short term and the long-term productivity benefits being more, I suppose, predictive than right now? Dr Hunter : I wouldn't necessarily describe it as being more inflationary than in other countries. It is certainly true, because we import the machinery and the equipment that goes into the sheds, that it appears as an investment, but it appears on imports, so it's not adding to domestic demand. So, in the context of how it flows into the domestic economy, you're right: it is largely through that construction channel. But I don't think that necessarily makes it more inflationary. In fact, one thing we're observing in economies in Asia, for example, is that the cost of those chips and those products that they manufacture and produce has risen very rapidly, because demand for them is so strong. That's having two effects. First, it means we're having to pay more. In fact, Apple recently increased their prices and noted that it was because they were passing through the increase in those chip costs, and if you've bought an Apple product in Australia recently you probably would have experienced that. Second, it means the economies that are the centres for the manufacturing—Andrew mentioned South Korea, Taiwan and Singapore—are experiencing this boom on the ground themselves, and that is causing them to have to adjust monetary policy, and they can see it in their data. So I don't think we're unique in how we're experiencing it, but we do look a bit different to some of our Asia colleagues. Mr Hauser : They're quite impressive, the East Asian centre construction projects. I don't know whether you've been to one. I went to one recently. It really is the modern world in action. To your point, these places are going up at enormous speed. The kit that's going into them is genuinely high-tech. The cost per square foot, as I understand it, is higher than for a top-end luxury flat. And the place is rammed with tradies who have quite nice-looking trucks that they're working with. These are definitely big and real contributions to growth, and it's part of Australia getting ready for the modern world as well. So, is it inflationary? Any activity is potentially inflationary if it isn't met by a supply-side response. I'm not sure that it is a normative question as to whether we should or shouldn't be doing it. Ms Bullock : The only other point I would add is that this is a conversation going on among central banks around the world, this discussion about the potential productivity improvements, which is good for the supply side of the economy and the immediate demand-side implications. For many countries, the sequencing is quite important. They're experiencing a big demand side now. They see the potential productivity in the future, but it's putting pressure on in the short term, and that's what central banks are focusing on now. It's not for every country. Some countries haven't got the demand side happening, but many countries do. So we just need, again, to be cautious that we can see the productivity improvements and the supply side of the economy, potentially, out there, but the focus at the moment is that, to the extent the demand side is rising and outstripping supply, we have to be very conscious that we don't let the inflationary pressures become persistent and embedded. Mr GREGG: That makes sense. I could talk about that a lot longer, but I'm mindful of time. Operation Claw related to some bank mortgages being based on some false information, as I understand it. I note that in March the bank's financial review was expressing confidence in the robustness of mortgage lending. However, AUSTRAC identified suspicious, inflated incomes and misrepresented employment and business information in a lot of lending. Given those outcomes, and reports that there could be quite a few major bank loans based on false information about incomes, is the bank confident that lending standards remain sound in the banking industry, and will that be something you're looking at before the October report? Ms Bullock : I'm going to a give a brief answer—yes—and pass to Brad. Dr Jones : I think the proof of the pudding really is in the eating. By that I mean that we pay very close attention, along with our colleagues at APRA, to loan arrears, both very high frequencies and more medium-term frequencies. We do have a range of metrics that we review that speak to lending standards. That comes from information from surveys, but also more quantitative information. There's not much evidence at all, across a broad swathe of indicators, to suggest that bank lending standards have deteriorated much, if at all, in recent years. In fact, frankly, I think there's been increasing discussion about whether bank lending standards have tightened to such an extent that other parts of the economy have had to look for alternative sources of financing. That's where we've seen, for instance, very strong growth in non-bank lending in recent years. Our assessment is that, on the whole, the non-bank lending activity we've observed is helping to, for instance, provide the financing that's important for greenfield construction, but we don't have a strong sense that there's been a systematic weakening of lending standards. There's been some activity around private credit, where you could make a case that lending standards have eased, but private credit is a very small part of the overall ecosystem of business credit in this country. Our assessment there would be that any weakening in lending standards in that segment are primarily going to be a problem for investors who invested in those funds. It doesn't speak to a systemic issue. Ms Bullock : One other quick point. It's fair to say that we're well aware—not across the details of the individual cases—that, yes, there is an increase in fraud. AUSTRAC is obviously onto it, but there's certainly no evidence that that is going to, in some sense, put the banks in a precarious position. They are very strong. CHAIR: Mr Caldwell. Mr CALDWELL: Governor, I have a couple of questions around the intersection of housing prices and your monetary policy. You made a statement today again, which is that conditions in the housing market have softened. From what I understand, you don't expect that you would set policy to target house prices—that's understood—but that house prices would be a consideration in monetary policy. Given what's happening at the moment, I guess that will be top of mind when you have your next decision come out. You have also previously said it's not your area of expertise, you rely on Treasury modelling et cetera. I can only presume you were provided with the Treasury modelling. Has what has occurred in real life aligned broadly with the Treasury modelling that you were provided in that sense? Ms Bullock : On the specifics of the modelling I'd have to defer to Sarah. I want to clarify one thing upfront: you're talking about Treasury modelling on the tax changes, are you? Mr CALDWELL: Yes, that's right—post budget. Ms Bullock : In our models, we have some ideas about how housing prices might respond to interest rate rises, and that factors into our forecast for growth and inflation and those sorts of things. But you're talking specifically about modelling in the respect of— Mr CALDWELL: That's correct. Sorry, I should have clarified. Ms Bullock : I will defer to Sarah on that. Dr Hunter : Our understanding of the Treasury modelling that was put into the budget was that they were looking at the long-term implications of the tax changes. I don't have the numbers to hand, but we understand that that's what they were reporting. To pick up on what the governor just said, we're much more concerned, and primarily concerned, with what's happening in the housing market in what you might call the short term, the here and now, over the next couple of years. It's impacted by a number of different factors that the governor mentioned in her opening statement. We consider everything together, because we're concerned with the aggregates—what that means for dwelling construction activity, for wealth effects, and for churn in the housing market. That's what really matters for us in the context of monetary policy. They're two different things. That's my understanding of the Treasury modelling. Mr CALDWELL: We had the budget in May, and in August you'd come out and identified the interest rates, the tax changes and weaker sentiment as what the factors were feeding in. Has your thinking evolved around what those inputs are and the weighting that could be given to any one of those factors? Ms Bullock : It's very challenging. We think all of those factors are in there somewhere. Normally, we would expect a response to interest rate rises, and not just actual interest rate rises but also expectations of interest rate rises. If you look at what was happening to the housing market, it had already started to ease at the end of last year, and that was partly reflecting the fact that there were expectations building that interest rate rises were in the future. We do expect that. How much is owing to tax changes, how much is owing to interest rates, and how much is owing to households being concerned and worried about the conflict in the Middle East and what it might mean for other things is very hard to dissect. I wouldn't like to put weights on any of it; I think they're all impacting. Mr CALDWELL: The Treasury modelling was much more of a long-run forecast. It was pretty modest; it was actually a very low dip off business as usual. Given that we've seen some pretty sharp softening, is that more of a contemplation for you now in terms of your thoughts on interest rates than it was in August? Ms Bullock : I wouldn't say 'more', and I wouldn't say 'less'. It's always part of our thinking about what's going on in the broader economy, and how the housing market impacts consumption and housing construction. One point I would make, though, is that there is still a structural undersupply of housing. Although housing prices have fallen, they are still up substantially from where they were six years ago, and the falls are not that big in the scheme of things. And with a structural undersupply of housing, ultimately supply and demand is going to reassert itself. So yes, people seem to be standing back a bit from the market at the moment. Buyers are thinking prices might fall further, and sellers are a little reluctant to sell, because they're getting less than they thought they would. There's a sort of uncertainty in the market. Ultimately, though— Mr CALDWELL: Is that playing out in the rental market? Is that baked-in undersupply actually underpinning the constant rises in rentals, regardless of what the values are doing? Ms Bullock : Again, vacancy rates in rental are very, very low, and there are these short-run impacts about what might happen with investor housing and what that might mean for renters. But does that ultimately mean, in the longer run, that people who were renters can now be first home buyers? So there are these short-run impacts and then, once things settle down, where is it going to settle down? Is it going to settle down with a different mix of investors, first home buyers and owner-occupiers? That's the question. Dr Hunter : On the rental market, that market is generally a lot less volatile than the established housing market. Rents don't go up and down the same way house prices do. They don't have the same kinds of cycles. As the governor was saying, rental market outcomes really are driven by demand and supply today. If the fall in house prices that's currently taking place dissuades some construction activity because a developer might find that a project is not viable now whereas it might otherwise have been, that new supply into the rental market—if that was where it was going—is one to two years down the track. So the project not getting off the ground today has implications for the rental market into the future. The rental market today is a product—an outcome, if you like—of what has happened to supply in the last few years and what has happened to demand. Mr CALDWELL: I have one last question in relation to interest rates generally. We got to 4.35, we cut, and we've now gone back up to 4.35. We're back to where we were at the previous peak in this cycle. Is it your estimation that the next 0.25, or whatever rate rise could be, would actually have a greater impact? It's over what people have previously had to budget in their expenditure. Would we see that as having an even more magnified effect at that point? Ms Bullock : Not necessarily, because the cash rate is only one thing that determines what we'd call financial conditions, and financial conditions is really what we're trying to influence here. There's a question about the fact that we've got the same cash rate, but our financial conditions are similar. One thing that's a little bit different now is that central banks overseas are raising interest rates. To Andrew's point about the exchange rate being quite an important way that monetary policy filters through the economy, when we were at 4.35 last, other central banks were lowering interest rates, so that sort of meant supporting the exchange rate. To the extent that others are raising rates this time, it means that financial conditions—same cash rate—might actually be a little bit looser than they were at the same cash rate. It's complicated. What we have to do is set the rate—because we've got excess demand at the moment—at a rate that we think means tight financial conditions to bring demand or slow demand enough to bring it back into line with supply. It may be that the same rate is enough to do that; it may be that it's not. That's really where, at the moment, we're thinking about where those upside risks lie and whether we've got tight enough policy to deliver inflation back to target. Mr CALDWELL: Thank you. CHAIR: Ms Jarrett. Ms JARRETT: I want to go back to the discussion around bond yields, particularly the movements in the Australian bond yields, and obviously wholesale funding costs. You talked earlier about the impact of developments overseas on that. Can you provide a little bit more colour and a little bit more detail on what's happening overseas and where it's really impacting us here in Australia, particularly in relation to our bond yields? Ms Bullock : I'll make a few remarks and then I'm sure I'm going to pass to Andrew, because he loves this subject. What's going on overseas at the moment is we've got the Middle East conflict. Andrew's also highlighted the increase in demand arising from the AI boom. That's all leading to inflationary pressures. And so what bond yields are reflecting are a number of factors. They're reflecting that inflation is higher and the expectation that central banks are going to have to raise interest rates to address that. Now, I mentioned earlier that the compensation for inflation in those longer term bond yields has remained reasonably steady, so it's not suggesting that markets think that inflation is going to be higher; it's suggesting that markets think central banks will respond to that. Then there's the demand side that we were talking about earlier. There's a lot of issuance. It's coming from fiscal. It's coming from hyperscalers. That's feeding into the supply of bonds, and that means that there's more to be absorbed. That means that people might need more compensation. There's uncertainty. If things are very uncertain, which they are at the moment geopolitically—and let's not forget the whole trade frictions thing hasn't gone away either. I think the Middle East has dominated things, but there are still random announcements coming out about tariffs and trade restrictions, so that's adding to uncertainty as well. So investors need some sort of compensation for the fact that they don't know where we're going to be in five to 10 years time. So they need compensation for that as well. That's all going on overseas. We're part of a global capital market, so we're competing for similar investors. You would expect that those factors—and some of those factors are present here as well—would be leading to increases in compensation that investors are requiring for bond yields. Mr Hauser : Let me give you two reasons why it's good for Australia and two why it might not be. One reason why it might be good is that, to the extent that it means that overseas and particularly the US is getting on top of inflation, that should make the growth cycle globally longer. It means there's less likelihood of a sharp upward movement in interest rates and economies overseas can continue to grow. That's a hypothesis. We don't know yet whether that will be the case, but it's better to be on top of inflation than not. That should be good for Australia if it means a longer global growth cycle. It's good, clearly, to have higher interest rates if you're a saver as well, and we have plenty of savers in Australia. As for two reasons why it may not be as good, obviously, if you're a borrower, higher interest rates aren't quite such good news, particularly at the long end of the curve. The Australian economy is much less sensitive to long interest rates than, say, the US economy. Obviously, mortgages in particular are mostly based on very short term interest rates, but corporate borrowing has a somewhat shorter maturity as well. Nonetheless, higher interest rates at the margin will increase the costs for borrowers. If you're a long-term property developer, for example—I was talking to someone the other day—some of the net present value of your projects may be somewhat lower as a result of higher interest rates. That effect, as I say, is probably rather smaller in Australia than it is in some other economies. And, as we talked about, if there were to be a disorderly movement in long interest rates globally and a financial stability event occurred, that would obviously be bad news, frankly, not just for Australia but for anyone. That we don't see happening at the moment. We are on alert for the possibility. Ms JARRETT: That actually brings me to the second part of my question, which was going to be: Where do you see this all going? What are your forecasts for this? How will it impact future monetary policy? Ms Bullock : Well, needless to say, we don't have a crystal ball. We don't forecast long-term interest rates. We don't even publish forecasts for where we think short-term interest rates will go. We what we try to do is set out our thinking on the economy—our reaction function—and we let the markets interpret where they what they think that might mean for interest rates based on the sorts of data and so on that are coming out. Having said that, we are conscious of it. We're not complacent. We are alert. We do have a financial stability review coming out on 1 October, I think. These are the sorts of issues—we don't have forecasts for them, but we raise what we call risks. We say, 'Here are some of the risks that might arise.' As Andrew already said, one risk is potentially that there will be a disorderly adjustment in asset markets including bond markets and more risky asset markets. If there's disorderly adjustment there, will banks start to pull back on their financing to the real economy? That's where we start to worry about financial stability risks. They're not forecasts as such. To your point about our thinking about long-term interest rates and those sorts of things, we probably think about them more in terms of risks and scenarios on the financial stability side. Our monetary policy deliberations are much shorter term. But, having said that, if it were to eventuate that things were to have a disorderly outcome overseas which impacts on Australia, we would have instruments that we can use to address those sorts of things. We have a balance sheet. We have foreign reserves for the exchange rate if we need them. We have a balance sheet to address issues if there's disorderly bond markets. Andrew has direct experience in this sort of thing at the Bank of England. So we do have tool kits, not just the interest rate. Mr Hauser : Can I make one final comment? Sorry to eat in on time. I was at the Jackson Hole conference a couple of weeks ago—that's obviously where the fed goes every year—and Ken Rogoff was speaking. Ken Rogoff's long-term theory has been that this decline in long-term interest rates that we saw particularly around the time of the GFC and COVID was the anomaly, not that, somehow, we were in a new dawn where real rates would be near zero, where there would never be any innovation again and where we would be in so-called secular stagnation. In actual fact, that was the aberration. On that argument, we're now getting back to a level of long-term rates which is much more normal, frankly, in the long-term than where we had been. I think the interesting question is: have borrowers adjusted to that new reality? There are public sector borrowers and there are private sector borrowers. Interest rates were never going to be zero or near zero for a long while. We all thought maybe they'd normalise a year ago. I think my personal view—this is a personal view—is that we're probably rather closer now to a more sensible level of long-term global real interest rates than we were a year or two ago. That doesn't necessarily mean everything's going to be fine, but I do think it's not, 'Wow, how do we explain this anomaly now.' The more interesting question is: how do we explain the anomaly in the past? Ms Bullock : There's quite an active debate, again, among global central banks about this neutral real interest rate and whether it has risen. I think there's a general consensus that it has risen, which means that interest rates, in normal times, are higher than they were, as Andrew said, prior to, particularly, COVID and that period up to 2019. Ms JARRETT: I have one quick question as we've only got a minute. What overseas developments are you watching carefully other than the war and AI and exchange rates? Ms Bullock : We're watching what's going on in the Middle East. We are still watching trade. It seems to have been playing second fiddle, but it's still there. We're obviously watching developments in financial markets overseas. Some of the things that we're watching from a financial stability perspective include—you mentioned AI—this issue of whether it is a bubble that will have a disorderly unwind. That's another issue that's on the financial stability side. What else are we watching? Mr Hauser : China. Ms Bullock : Yes, China. We should say China. Dr Hunter: The only other thing I would add that we haven't mentioned yet is that we are very conscious of El Nino and the impact might have on agricultural products and prices, farm-gate prices and, obviously, food. There is a lot on the list, as the Governor has already said. Ms Bullock : El Nino is an interesting one because a number of countries, particularly in our region, are very focused on El Nino. CHAIR: Thanks for that. Proceedings suspended from 10:54 to 11:05 CHAIR: I'll hand over to Allegra Spender. Ms SPENDER: Thank you, Chair, and apologies for not being there in person. I'm afraid I already had things in the diary before this was rearranged. I want to start off with inflationary expectations, because I know there are some concerns that you have mentioned about embedding those inflationary expectations. And we've had above target inflation for most of the last almost five years. My question is: in your conversations with business in particular, are you starting to see higher inflationary expectations already embedded in the economy? Ms Bullock : I wouldn't say 'embedded', but I would say that we do have some concerns, in talking to businesses in our business liaison program, that there is starting to be a bit of a bubble up of a view that we're not getting inflation back down under three. I wouldn't say that businesses are explicitly saying to us that they're expecting inflation to be three point whatever, but there is this sort of feeling, and that is worrying. As I said earlier, long-term inflationary expectations overseas and in Australia do seem, from what we can tell, particularly from market measures, reasonably anchored at around 2½ for us. But that's necessary; it's not sufficient. And short-run inflation expectations have risen, and that's expected; they do rise, because people tend to reflect on what's happening now. But the fact that businesses are starting to sort of ask the question 'Is inflation coming back down?' is a bit of a concern to us. I don't know whether there's something you would add form the business liaison perspective, Sarah? Dr Hunter : Yes, just a couple of points, really just to reiterate what the governor was saying. What we are hearing generally when we talk to businesses is that sense of inflation over the next 12 months. They tend to think on that type of horizon. They are saying to us that they can see cost pressures coming down the pipe at them. Some cost pressures they are already facing today, but they're also anticipating that those cost pressures are going to remain and even build over the next six to 12 months, and actually that's something we've heard in recent weeks with the lift in fuel prices and the re-emergence, if you like, of concerns around what's happening in the Middle East. And they're talking to us about how they're going to pass those on—or not—and how they're thinking about that, but they're certainly talking about them as pressures, and also about how they're thinking about that in the context of wage discussions with their workforce. So it is definitely showing up. It's definitely becoming a theme we're hearing. And it's all very consistent with the statistical measures we have for short-term inflation expectations. Ms SPENDER: I think we're in this world where there seems to be a continual wave of exogenous shocks, and it doesn't feel like it's coming to a time when we're going to have fewer of them. So one of the questions is: is this idea of gliding to a narrow path over a longer period of time on inflation realistic now? Do you think that narrow path and that more gentle path is really open to us as much as we thought it was perhaps even a year ago? Ms Bullock : It is a good question. The first thing I would say is that we have a dual mandate, so we do have to care about what happens to the employment market. And the board has consciously been trying to balance bringing inflation back in a reasonable time with the employment outcomes. But the longer we're above the target, the more concerning it is that inflation expectations will start to adjust. As we highlighted after our most recent decision to hold the interest rate, we think the risks are skewed to the upside in terms of inflation at the moment. Part of that is the worries about inflation expectations. Part of it is the supply shocks coming downstream at us not only from the Middle East but also, as we discussed, from weather related events—and, on top of that, the demand things that Andrew spoke about. The risks all seem to be sitting on that upside there. The other point I would make is that these supply shocks—the Middle East shock in particular—have worsened the trade-off between inflation and unemployment. That's just a given. For any level of unemployment now, inflation is higher. That's not something monetary policy can do much about. A typical textbook response, people say, is, 'Well, it's a temporary shock; you look through it and then it will come back.' The trouble is, with consistent supply shocks—and persistently; that's what we're seeing—it's harder in those circumstances. I think most central banks would acknowledge it's much harder to look through when there are persistent shocks because of the risk that it will flow through to inflation expectations. We have to acknowledge that the trade-off has got worse, that this particular Middle East shock has made us poorer. We can't respond to that by letting inflation get out of control. In fact, it's more important than ever that we bring inflation back to target. Mr Hauser : Can I just underscore that point. This is a very obvious point to make, and I apologise for doing it, but the board is totally committed to hitting the target it's been given. The fact that it is hard and the fact that, for some of the reasons you've described and the governor has described, it's harder does not mean we're sitting there thinking, 'Well, gosh, maybe three, 3½ or four per cent is good enough.' We are charged with hitting two to three per cent, and, in doing that, to hit the midpoint—and that's what our policy settings are designed to do. Perhaps it doesn't serve occasionally for us to reinforce that point—we will do what it takes to get there. Ms SPENDER: I have a question on government spending—and I know there have been some questions already on this. I know Chris Richardson has made the argument that $7 billion worth of government spending is about 0.25 per cent interest rate movement. Do you agree with that? How do you think about that? Ms Bullock : We don't think about it in those terms at all. We are focused on actual aggregate demand. We've been through these questions before, about what, if you just had an exogenous decrease in government spending, that would mean for interest rates. That's not a scenario we go through, and we don't have any quantitative metrics around what we would think would be impacts. Ms SPENDER: Thank you. I want to move on to private credits. There are concerns from a financial stability point of view around what is happening to the private credit market not just locally but overseas. On that question of financial stability, how are you thinking about the challenges in this space and how much of a topic is this at the Council of Financial Regulators? How much concern is there? Ms Bullock : I'm going to make a few remarks and then I'm going to pass to Brad, because his team's been doing quite a bit of work in this area. As I said earlier, private credit overseas has been much more of an issue that central banks have been focusing on in terms of financial stability risks. It's much bigger in the United States and Europe than it is here, where we still think it's relatively small. Nevertheless, it's opaque. People don't understand it—and that always worries people. Ms SPENDER: Do you have the data you need to assess the private credit market—or does the bank? Ms Bullock : The answer is, no, we don't. I'm going to pass to Brad to talk very briefly about what we do know about private credit. Dr Jones : The two major issues here are, firstly, very uneven standards across the industry, and ASIC has explicitly called that out. That relates to governance, risk management, disclosure to investors and all sorts of questions around the reliability of valuations and so on. Those have principally been framed as first-order issues for investor protection. The other issue, though, that the governor touched on is data gaps. It is a challenge for regulators all over the world, including in Australia, that there are holes in the ability of regulators everywhere to fully get their arms around and have a line of sight into everything that's going on in that space. There's some active work, here in Australia but also internationally, to try and close some of those visibility gaps so everyone has a better sense of where the vulnerabilities may be rising. The last point I'll make is that one area where we do have some visibility is the upper bound on linkages between banks and private credit funds. On the analysis that we've done, we don't see that as being anywhere near as large an issue in Australia as it could be in some other jurisdictions. CHAIR: Over to Jerome Laxale. Mr LAXALE: Nice to see you all again, Governor and others, and sorry for not being here earlier. I've just had a quick look at your opening statement, which was emailed through to us, where you touched on surcharging, and—surprise, surprise!—I've got a few questions on payments. You mentioned you're monitoring the payments industry's implementation and stakeholders. You're dealing with them. Could you expand on that a little bit. What steps are you taking in the lead-up to 1 October? Ms Bullock : We're talking, obviously, to the schemes. That's a very important thing, because the 'no surcharge' is actually based on their rules, so we're monitoring that they're putting it in place. We've been talking to the ACCC. We've been talking to the banks. We've also had contact with a lot of the merchant associations to find out how they're dealing with it and also how the banks are getting these messages through to their clients, as acquirers—and the non-bank acquirers as well. They're the sorts of people we're talking to. Brad, is there anything you want to add? Dr Jones : Yes. We're also engaging with the acquirer universe to make sure that they are fully aware of their obligations—their transparency obligations, for instance, to be posting on their websites the pass-through of the interchange reductions. We think that's really important. Of course, they've also got responsibilities to publish data now on merchant service fees. We just want to get more sunlight into this ecosystem. We think that's really the best disinfectant when it comes to excessive charges. Mr LAXALE: Are you satisfied with their responses to you to date? Do you think they're doing enough? Ms Bullock : So far we are. This is a personal opinion, I suppose, but I would be surprised if there weren't some hiccups after 1 October. I wouldn't be surprised if there were some merchants that are not aware, and maybe the acquirers haven't got to them. But I would expect that there might be instances where consumers are struck with a surcharge, and we're making sure that it's clear who they should be reporting these things to. Obviously, the ACCC is in charge of misleading pricing, but these are scheme rules. So people should be taking it up with the merchant, and the scheme should be dealing with it. Mr LAXALE: So, in the example where the surcharge isn't automatically added by either the point of sale or the terminal, that's where you think there might be a hiccup in some of that manual application of the surcharge? Ms Bullock : That should have all been addressed. Mr LAXALE: Yes. Ms Bullock : The acquirers should have all addressed that. Mr LAXALE: Yes—software updates. Ms Bullock : They should have updated their terminals and software and so on to make sure that surcharges were not being added. But I'm not brave enough to say there mightn't be the odd hiccup. Mr LAXALE: Dr Jones, you mentioned the pass-through of the saving. What measures are you taking to monitor that? Dr Jones : As I said, the large acquirers are going to be required to publish, by the end of the year, the degree to which they have passed through the upstream savings. Apart from the interchange reductions, the other piece we heard very strongly about in our review but also came through strongly in the review that members of this committee helped drive was that merchant service fees and the lack of transparency were also an issue—basically, merchants have no idea what they're being charged. So we're also requiring acquirers to publish that information on their websites, and merchants will have a better ability on their statements to see exactly what they're being charged. All of those measures are designed to create more transparency and sunlight. Our sense is that that will help empower merchants to shop around, because they'll actually know what they're being charged for. Mr LAXALE: You said 'by the end of the year', so they don't have to publish on 1 October. They have to publish by the end of December. Is that right? Dr Jones : That's right. Mr LAXALE: Will it be published in a way for merchants to easily look at before and after, or will they have to dig out their contracts and see what it was before and what it will be on 31 December? Dr Jones : There are two things going on. There are the aggregate merchant service fees that will be published on websites, but then each individual merchant will have a much higher level of visibility on their statements of what they're being charged. That piece comes in early next year. I think it will be in April. Mr LAXALE: Is it your expectation that that reduction of interchange flows through? Dr Jones : Yes. Mr LAXALE: At its maximum? Ms Bullock : Yes. Mr LAXALE: What if it doesn't? Ms Bullock : We'll be asking questions about why it's not being passed through. We're already seeing the banks pass through the reduction of interchange to their customers, so I would expect to see it being passed through. There is a second question here—and this committee highlighted this point about scheme fees. You might get the reduction of interchange passed through, but, to the extent that schemes raise their fees to offset that, that's another issue. We're very conscious of scheme fees as well. There needs to be much more transparency about scheme fees. Mr GREGG: Yes, 100 per cent. Ms Bullock : That's another part of what we're working on. Mr LAXALE: Are you looking at scheme fees in your priorities next year? Ms Bullock : Scheme fees were part of what came out of the most recent review. The new review we're talking about is focusing on other things, but scheme fees might well come up there as well. Mr LAXALE: You mentioned in your opening statement that you'll have prioritised issues by mid-2027 and you'll be looking at digital wallets, scheme fees and other things next year. Ms Bullock : Yes. The plan is to take something to the Payments System Board at the last meeting of the year, isn't it, Brad? Dr Jones : Yes. By the end of this year, we expect to have a first cut of the issues that are going to animate this work. By the middle of next year, we would expect to have a consultation out on our prioritised issues—basically, how we're inclined to respond. That will run for a while, and then 2028 will be the final bit. Ms Bullock : It's worth noting that a lot of issues have come up. We can't address everything at once, so the prioritisation process is going to be quite important. Mr LAXALE: So you'll be looking closely at scheme fees to make sure they don't eat up those interchange savings? That's happened abroad. Ms Bullock : We are going to be keeping our eye on scheme fees, yes. Mr LAXALE: How long do I have, Chair? CHAIR: You have another two and a half minutes. Mr LAXALE: In February, I asked some questions about EasyPay and your ability to least-cost route to the cheapest debit service, being EFTPOS. You mentioned in your response that you had capability for merchant choice routing in December 2022, and, in December 2025, you completed a multi-transition of customers to the new platform, and then you were starting a technical discovery workshop with your acquirer in a few weeks with a timeline to route to the cheapest available on market, which would then save the Commonwealth money. How's that going? Ms Bullock : I'll have to take that on notice. Mr LAXALE: Really? Ms Bullock : I haven't been briefed by the banking department on where they're at with that. Mr LAXALE: My concern is the Commonwealth has been funding debit since 1 January 2025 perhaps and you've had the capability to have merchant choice routing since December 2022 with your new acquirer. Does this acquirer provide EFTPOS routing for other clients? Ms Bullock : I don't know the answer to that either, I'm sorry. These are banking details which I am not across and I will ask our team. Mr LAXALE: Going back to questions from February, MYEFO allocated $35.5 million of costs to absorb debit fees. You've got the capability to save money here by routing through EFTPOS. It's been four years. I want to understand why it's been a bit of a delay. Ms Bullock : I'll come back to you. It's, as I said, for the banking department. I'll speak to the banking department. Mr LAXALE: A question, depending on what the answer is, is: if your acquirer doesn't have this capability, are they a the right acquirer for the RBA, because the Commonwealth will be paying more than they need to given that there's a cheaper routing option out there, according to your own analysis, right? Ms Bullock : Yes. Ms CAMPBELL: Governor, in your opening statement, you talked about unemployment rates being low by historical standards. I was just wondering whether you might be able to take us through how current labour market indicators for both unemployment and participation compare historically as well. Ms Bullock : There is a number of other things like the underemployment rate, which takes into account people who are working but perhaps might want more hours. That's at reasonably historically low levels as well. Employment participation levels are very high as well. I would also say that, in terms of forward-looking indicators, which is what we often focus on, employment's a bit of a lagging indicator. All the current forward-looking indicators like vacancies, quit rates, those sorts of things, are all looking stable-ish. They're not looking like employment is going to downturn quickly in the near term. As the unemployment rate has risen, it's worth pointing out that employment has continued to grow. It's just that the labour force supply, if you like, has grown more quickly, so the unemployment rate is rising. But as I say, at the same time, employment is still growing. It has still been growing and a lot of jobs have been created and filled, even as the unemployment rate has been rising. Is there anything you want to add, Sarah? Dr Hunter : I can just give some statistical context to some of the governor's comments. For example, the unemployment rate, as you said, is currently at 4.5 per cent. It's lifted a little bit recently, but in the 15 or even 20 years from GFC through to COVID, it was generally speaking at or above five per cent through that period. So when we talk about it being 'historically low', what we mean is that, in that long period before COVID, it was generally speaking at or above five per cent. Ms CAMPBELL: And that employment growth that you both refer to, what's been the major driver of that? Are we talking market or non-market sector? Ms Bullock : Well, it's a bit of both. If you look at the previous six months, I think it's probably been more market than non-market. Earlier on it was more non-market than market. Dr Hunter : The labour market in terms of its composition tends to reflect what's happening on the demand side. So over the last 12 months or so, the market sector, private economy, has been the main driver of growth, and that's been reflected in the employment numbers, so it's been private sector parts of the economy that have grown faster in terms of jobs growth than the non-market sectors. Ms CAMPBELL: In terms of that jobs growth and unemployment, I think at the outset you said that we're not alone in the challenging global economy. How does our jobs growth over the past four years compare to major advanced economies across the world? Ms Bullock : I don't know if I can answer that specifically. What I would say is that, in terms of unemployment rates, our unemployment rate has remained much lower than for countries we typically compare ourselves to—for example, Canada and New Zealand, whose unemployment rates, following their increase in interest rates back in 2022-23, went to five or six per cent. Ours has remained much lower than theirs. The United States, I'd have to say, have had very strong growth in their labour market. Their unemployment rate is sitting at 4.1 per cent, I think. It's something like that. I couldn't speak for growth and employment, but certainly our unemployment rate has been much better than many other countries'. Ms CAMPBELL: In New Zealand and Canada, what have we been seeing there? Ms Bullock : Much higher unemployment rates, but they put interest rates up much higher. This goes, I think, to the point that we've talked about before, which some people have disagreed with, which was the board's strategy. We got to a point where the unemployment rate was 3.5 per cent. The labour market was too tight at that point and that was inflationary. But, nevertheless, we did try, in raising interest rates, to raise them to the extent that we thought we could bring inflation down while preserving as many of the gains as we could in the employment market. The approach taken by New Zealand and Canada, in particular, but some other countries as well, including the UK and the US, was to put interest rates up much higher. At least in some of those countries, the response was that the labour market softened much more than it did here. Ms CAMPBELL: Earlier you talked about participation levels being up. Can you talk about recent trends in the participation rate and what it means for aggregate supply in the economy more broadly. Ms Bullock : Do you want to take that one? Dr Hunter : Yes. I'm happy to talk to that one. Generally speaking, the participation rate has been trending higher for quite some time actually. It's not just been over the last couple of years. It's actually been more like the last few decades. What's been underpinning that has been an increase in women's participation in the workforce and more women that are working and also a lift in the participation rate of older people in general. So people are perhaps working for a bit longer. But also for women, as they may have entered the workforce 20 or 30 years ago, more of them have stayed in the workforce and so now they're still working in older-age brackets. In terms of what that does for the economy, it does add to our supply. Labour is needed to produce just about everything that we consume—all goods and all services. So, if you do get an increase in the participation rate for any given population, you will get an increase in aggregate supply. Ms CAMPBELL: So women's participation is essentially having a good impact on the economy at the moment? Dr Hunter : It's certainly expanding supply. And there's the context of women being able to choose to do that and to be able to participate. I'm a woman myself, obviously, and I'm a mother. I very much appreciate that I can balance home and work. Ms CAMPBELL: In terms of the housing market, can you tell us when it started to soften? Ms Bullock : The growth in housing prices started to soften towards the end of last year. Prices were still rising, but they weren't rising as quickly. So that was when we started to see it. I made the point earlier that we think that was at least partly in response to people starting to see that perhaps interest rates were going to rise. So it wasn't just when interest rates started to rise; it started to get factored into people's expectations. There's another thing going on here too. There was a sense in which affordability was just getting very, very challenging. There was a limit to how much further house prices could rise—established housing prices in particular—because people just couldn't afford to buy them anymore. That was when it started to soften. There's been a lot of focus on actual price declines. You've seen that, certainly, heavily in Melbourne and Sydney, and, if you look at price growth in some of the other capital cities and in the regions, it's come off as well, but there was a very big run-up in prices in those and it hasn't come off quite as much as in Melbourne and Sydney. Ms CAMPBELL: You've talked about a few of them here, but obviously you believe that there are multiple factors impacting on that softening in the housing market. Can you take us through any others? Ms Bullock : I think probably I've highlighted the ones that— Dr Hunter : I think we've covered the three main ones. Ms Bullock : The three main ones—interest rates, tax changes and general uncertainty from buyers and sellers. I can't think of any other factors. Dr Jones : For a bit of cross-country context, the run-up in Australian house prices relative to all of our global peers has been very material. In fact, if your starting point for that comparison is prior to COVID, the run-up in Australian housing prices exceeds that of large advanced economies and also the smaller open economies. The governor referenced the statistics in her opening remarks, but it's been a very material run-up. We've seen five to six per cent declines in Sydney and Melbourne and one to two per cent in the other states. In that context it's not been overly material. Ms CAMPBELL: It's long running and multifactorial. Thank you. CHAIR: Governor, I will get a graph circulated to you because I want to talk about the incomes of everyday Australians. This is a longer term look at what's happened in the economy and what will happen in the future. This chart, based on the work of economist Greg Jericho, shows that from March 2021 to March 2023 the average Australian's real wage dropped more than five per cent in value. I know you're aware of this because back in May you observed that, in the immediate aftermath of COVID, people got higher wage rises than they had been getting but they weren't keeping pace with inflation, so there were real cuts in income. I think the RBA's estimated that, by the end of 2028, a wage that was worth about $90,000 in 2021 will still be worth just under $87,000, and it won't be till 2036 that it gets back to 2021 equivalent. If profits go up above inflation, people will cheer that on. The senior management running those firms will be remunerated well and probably pocket a bonus out of that too. But the minute that workers push to repair that drop to their incomes above inflation that will be perceived, no doubt by the RBA and others, as problematic. Is it the case that Australian workers will have to continue to wear that financial dent for the next decade, while others will be able to enjoy better circumstances in the meantime? Ms Bullock : I assume this is the wage price index. Dr Hunter : Yes. Ms Bullock : It say that does say WPI, yes. Let me just make a couple of general points and then I will pass to Sarah to talk about how we think about real wages. The first point is that, clearly, people are feeling the pinch, and they're feeling the pinch because inflation has been high now since 2022, and that eats into their spending ability. One thing that I like to point out to people is that that is a bygone now—that is a new level of prices—and the level of prices is not coming down. What we can do is ease the rate at which prices are increasing, but we're not lowering prices. This is a step-change in the price level. The second point I would make is, to the extent to which the inflation has been as a result of the recent oil shock, that is a shock to real incomes. It makes us poorer. Yes, it does. So it's no surprise that people are feeling that they're hurting and that they are not able to buy as much as they could with their incomes. Having said that, I think it's worth thinking about this measurement. I think this tells us a story, but this isn't telling us what people are actually earning. I want to pass to Sarah to talk a little bit about other measures of real wages. Real wages are in fact higher than they were—not a lot, but they are higher. Do you want to talk— CHAIR: I've seen other figures that don't suggest that. Dr Hunter : Apologies, it is quite technical statistical information, so I will try and be as brief as I can, but I think it is important to be absolutely correct on these kinds of questions because, as the governor said, this really matters to individuals, and we don't trivialise that or take it lightly. This particular measure, the WPI, that this chart uses as the measure for nominal wages—it then deflates them with the CPI for inflation. The core WPI measure that we track and that others track is a measure of wages that strips out a number of components of wage growth that people do get and do come through. That's how you can get differences between this particular measure and the other core measure that we track, which is the national accounts measure. I'll walk through what it strips out so we can get from A to B. CHAIR: If you could do it quickly—I've got some follow-up and I've only got 10 minutes. Dr Hunter : It strips out, importantly, things like superannuation and bonuses—anything that's not part of your core wages. I understand that you're not getting super, in particular, today if you're a worker, but it is a part of your wages. You do get to it eventually as you age, but it's not part of today. I understand that. But that is counted in the sort of complete measure of wages because it is a payment that's made to the worker as an individual. This measure also only looks at wages growth on what we call a like-for-like basis. If your job has not changed at all since five years ago—you haven't had a promotion, you haven't moved to a different company, you haven't taken on a different type of role—and you're in exactly the same job as you were in the past, then this measure is the right one, but most people are not in that position. Most people do change their job. They might get promoted. They might get a bonus payment. That's also stripped out of here. CHAIR: I get that, but labour mobility is not as great in this country as it is elsewhere— Dr Hunter : I'm not suggesting that's for everyone. I'm just explaining why, when you map this measure across to the national accounts measure, there is that gap. Finally, this measure of wages growth also strips out about half of the wages gain that might come from productivity growth. Now, productivity growth has been relatively weak— CHAIR: I'll come back to that too. Dr Hunter : but, nonetheless. So when you put all of that together—if you go from this measure to the national accounts measure, as the governor said, you do actually close the gap. The national accounts measure that we look at hasn't fallen in real terms. It's not growing quickly, but it hasn't fallen, so— CHAIR: Sorry, I have to jump in. Let's look at a number of things. I get that for you, Governor, and your colleagues—and it's understood from the points that have been made here and elsewhere—the fight is absolutely on in terms of inflation, and you've got a target of between two and three per cent. There is a point at which this will be an easier fight to have, in terms of repairing the financial position of low and middle income earners. My issue is this. The RBA suggested unemployment could go up. That means someone losing their job. They can't push for higher wages because, if they do, and it is above inflation, that's problematic. The productivity issue—if you look at the 10 years between 2010 and 2020, productivity jumped by just over 16 per cent. Real wages only went up by five per cent from 2010 to 2020, but private sector real wages fell by five per cent, so that gets wiped out. So my issue is this. I don't think the RBA will ever be comfortable with wage increases well above inflation to repair that loss of earnings. There are a lot of us here that represent people on $90,000 in their electorates. The mantra of 'if productivity goes up, that'll reflect in better wages'—the numbers don't suggest that. Unemployment's got to go up to make the RBA comfortable. I don't think there will ever be a time when the RBA will be comfortable if wages are going above inflation—not just you but a lot of economic commentators. As they say, change my mind! Ms Bullock : We won't be comfortable while unit labour costs are rising by more than—our target was 2½ per cent— CHAIR: Yes, I get that. Ms Bullock : At the moment, unit labour costs are rising by about 3½ per cent. They were rising by about five per cent, but they're consistently rising by about 3½ per cent. That's got inflationary pressure baked into it, and while that is the case we're going to have to be concerned about bringing inflation down. As I've said before, we have one instrument. We have the interest rate. I acknowledge that it's tough for people— CHAIR: It is. Ms Bullock : and I acknowledge that their real wages and what they're seeing in terms of what their wages can buy is nowhere near what it was. But, as I also said, this recent shock—and there are probably more to come. These supply shocks make us poorer as a country, and this is one reflection of that. I acknowledge that it's tough, but this is why we have to get inflation back down, and that's all we can do. All we can do is keep inflation— CHAIR: Governor, I totally appreciate that. But say we get to the point where inflation hits mid-range and we need to find ways to repair the earning capacity of low- and middle-income earners. If it goes above inflation, the orthodoxy will be that it's just not healthy. We need profitable firms. We need investors that are happy with their returns. I get that. That's important to an economy. But how do we ensure that everyone shares in that in terms of the uplift and that they can go back to what they used to have instead of waiting till 2036 for that to happen? Ms Bullock : Wages can increase more quickly than inflation. This was my point with the unit labour costs. But productivity needs to be there. You can have wages increasing by 3½ per cent and inflation at 2½ per cent if you've got productivity. I'm not saying that you can't have wages increasing by more than inflation. Certainly, the board's view is not that the minute wages are rising by more than inflation we have to tighten monetary policy. It's not as simple as that. This is why it comes back to productivity and the issues we talked about earlier. We can't grow much faster. We can't have faster growth in wages unless productivity picks up. That is the bottom line. CHAIR: I'm not a believer in the direct, automatic movement of productivity flowing through to wages, because the evidence doesn't show that. But that's probably a debate for another time. I'm well over time, so I'll hand over to the deputy chair. Mr KENNEDY: The ABS shows that GDP per capita has been flat over the past four years. Is there a time you can recall ever in Australia's history where we've had GDP per capita flat for four years? Dr Hunter : I don't have a full statistical table in order to answer that question. Ms Bullock : In history, I don't know. Dr Hunter : To carry on the conversation about productivity it's certainly the case that all of these per capita metrics, when you strip out inflation from them, anchor back to productivity. That applies, we do think, to real wages growth, as we were just talking about. It also applies to household income per capita. It applies to GDP per capita. These relationships are all—if you chart them on a very long basis, so go decades and decades right back to World War II and even before that, you can see that relationship on that very long-run basis. In the context of the question that you're asking, on a long-run basis, you'd expect to see that kind of outcome when productivity growth is relatively weak. Mr KENNEDY: Have we ever in your—charting that back to World War II. You said you don't— Dr Hunter : I don't have the chart to hand. That's why I can't tell you the dates. Mr KENNEDY: So you're not sure if there has ever been a period this bad? Dr Hunter : I'm not sure. Ms Bullock : We don't know the answer. We'd have to go back and look at the long history. But I think the point of Sarah's intervention was that given that productivity now is so weak relative to history it would be surprising if there had been previous episodes of flat GDP per capita like this in history, given what we know about the history of productivity. Mr KENNEDY: So this could be the worst ever in history of GDP per capita, possibly? Ms Bullock : We don't know. Dr Hunter : We don't know; I don't know that. Mr KENNEDY: We don't know, but we can't remember a worse time. Dr Hunter : Someone else will have that chart, I've no doubt, but I don't have that to hand. Mr KENNEDY: If output per person is flat—I'm seeing output per hour is down five per cent. Can you explain to me how that works? We're not producing any more per person, but, per hour, we're producing five per cent less— Dr Hunter : Can I just get clarity on what time period you're talking about in relation to per hour having fallen? Mr KENNEDY: March 2022 to today. Dr Hunter : Okay. It's certainly the case that, when you're looking particularly through the last couple of years with COVID and the impact of COVID and coming out of COVID—which is obviously early 2022—you have to be really careful with how you measure productivity. The economy went through a substantial shock—a really substantial shock. We shut parts of it down. We then reopened. Different parts reopened at different times. March 2022 in particular is very impacted by that, so I wouldn't ever use that as an anchor point for looking at any sort of metric to try and get a long-run sense, because it's wrapped up in that COVID period. But, more generally, how can you get differences in GDP per capita versus GDP per hour worked— Mr KENNEDY: Not more generally—let's take December 2022. It's probably down about three per cent. In that time, output per person's flat. We'll take December 2022. It's down three per cent—three per cent per hour. My question is: how are we in a circumstance where output per person is flat but output per hour worked is down? What's happening in the economy? Dr Hunter : In a substantive sense, based on the number of hours worked and output, the amount of output that we're getting per hour worked has fallen. I'll have to take your statistics as correct, because I again don't have them to hand. How can that happen? Well, a number of things can be playing out. We know that, over this period, we have had some what we think are probably temporary effects coming through at a sector level that are distorting some of the aggregate productivity measures. For example, the mining sector is going through a period at the moment where output per hour worked per person in that sector has been declining quite sharply. Mining is still, in an absolute sense, a very, very productive sector—a very productive sector. But what's happened over the last few years is that they've had to extract from parts of their mines that are harder to get at. The ore is harder to get at, and so output per hour worked has gone down. We think that's going to be temporary. There can be other structural shifts that are playing through as well. Over the longer term, we would expect that output per hour worked and output per worker would probably broadly track in line with one another, and that comes back to our medium-term productivity— Mr KENNEDY: But, in answer to the question, would a way to interpret that be that Australians are working more hours for the same output? Dr Hunter : I think that, in a mechanical sense— Mr KENNEDY: What's wrong with what I just said? Dr Hunter : In a mechanical sense, that's correct. But I do think that the context matters, and that's why I use that mining sector example. I don't think that necessarily most Australians outside the mining sector would think about what was happening in the mining sector and relate it to their day-to-day experiences. Mr KENNEDY: Governor, I have one question going back to something you said to the member for Wentworth. I think you said that we've worsened the trade-off between unemployment and inflation. Does a narrow path still exist for us? Ms Bullock : Well, I retired the narrow path a while ago. But this idea of retaining as many of the gains in employment as we can while bringing inflation back down—I think we can still have that as a target. The question is: how many of those employment gains can we retain? I want to just be clear that the unemployment rate going up does not necessarily mean people losing jobs. In fact, the unemployment rate has been rising while jobs are continuing to be created. So I think we still can have that goal. But the bottom line, and the deputy governor said it earlier, is that we need to get inflation back down because, if we don't, that is a worse outcome across the board. If that means that we need a bit more slack in the economy than we thought we did, then that's going to be the case. Mr KENNEDY: I know you're being a bit playful, but, when you say you retired the narrow path long ago—why? Ms Bullock : I retired it back at the end of 2025 when we were experiencing a second bout of inflation. I felt it was unhelpful to talk about this narrow path 'now'. I thought it was much more constructive to talk about how we can bring inflation back down while preserving gains in employment. I thought it was actually a much easier way to explain what the board was trying to achieve. Mr KENNEDY: Okay. That's helpful. I guess what's underneath my question is that, given that we've had such persistent high inflation and we're having these large inflationary shocks, there's far less room—that we are much more likely to bake in price and wage expectations that will be higher, from these external shocks—meaning that we therefore have to adjust more aggressively, therefore hurting the economy. We're in this period where output per person is flat. We have high core or trimmed mean inflation. We're now having these exogenous shocks. And I just worry now that movements we do will further hurt economic growth, be it absolute economic growth or economic growth per person. That's what worries me as a policymaker as I'm thinking through that. Am I understanding that correctly? Ms Bullock : You're understanding that correctly. It is a well-known fact that supply shocks are very difficult for central banks to deal with, and every central bank around the world is dealing with this problem. Mr KENNEDY: Are they more difficult to deal with when we have underlying high inflation, if our trimmed mean— Ms Bullock : The starting point I think does matter, and for us the fact that we already had demand outstripping supply, so we already had inflationary pressures in the system. I think that does make it a bit more difficult for us to deal with. That's why we in fact were the first central bank to start raising interest rates. Mr KENNEDY: I have one more maybe slightly out-of-the-box question. What does a super guarantee do to consumption and demand? Ms Bullock : What do you mean? Mr KENNEDY: If we are guaranteeing super or extending how much we spend on super, as a percentage of wages, what does that do to demand—if we're going from nine to 12, or 12 to 15, or 15 to 18? Ms Bullock : Well, it's a bit hard to know, really. But if you thought, for example, that in the block of wages if you increase super it means you get less in terms of your income now, then it might mean there's a shift in consumption—so, less consumption now and more later in life, when you get your super. But I'm not sure there's much more I can say about what it might do. Dr Hunter : That's right. It's how it comes through into how the total wage packet, if you like, adjusts and what component of that workers receive directly today versus what component is put into an account for tomorrow. Mr KENNEDY: Thank you. CHAIR: Terrific. Mr Gregg. Mr GREGG: I'm going to go to the slightly nerdy subject of the Phillips curve. Your research says that the inflation benefit of higher unemployment diminishes as unemployment goes up. We've obviously had a slight increase in unemployment recently. Where are we sitting on that curve at the moment? Ms Bullock : Um, well—okay! Dr Hunter : It's an empirical observation. It's not a theoretical fundamental, actually; it's an empirical observation which we think captures some of the fundamentals of the economy. If you estimated at the moment, to the earlier discussion, we are in a situation where we have inflation that is above our target, and we do think that our inflation expectations in the long run are anchored, so we're above that expectations point. And the unemployment rate is low by historical standards. That puts you on we think the steeper part of the Phillips curve. The steeper part of the Phillips curve is where we would think the economy is operating, with demand at least above supply, as the governor was talking about earlier. So it's an empirical observation that captures much of what we've been talking about today. Ms Bullock : But to the question, when we were talking earlier about the trade-off worsening with the supply shock, that means the Phillips curve has shifted up and out. So for every inflation number now the unemployment rate is higher. Mr GREGG: Thank you for that. I'm going to jump around topics because of limited time, so I apologise if it seems—non-linear! Ms Bullock : Ha ha! Mr GREGG: With the surcharging changes and the like that obviously we're looking to implement over the coming months, is there a program reflecting the recommendation in our report to monitor the impact of those changes at a small business level to see what that impact is? And is there a research project or a program of review to ensure that this is working? Ms Bullock : The answer is: yes, we are reviewing. Brad, did you want to expand a bit? Dr Jones : Yes. It will feature, ultimately, in the analysis of pass-through that we do, because we know that small businesses are the ones who are facing the higher fees, so the reduction in the caps will feed more through to them. So it'll be wrapped up principally in that analysis of pass-through. It may well also surface in the review that we're about to embark on with respect to reforms to the PSRA, if there are issues that have come through. I think we got 75 submissions. If we hear more issues being surfaced that we didn't address in the first round of reforms then we're very open to looking at that. Mr GREGG: Thank you. Going back to the questioning from the chair around productivity and wage increases, would it be a fair statement to say that productivity enables wage increases but it doesn't make them a certainty? Wage increases come from a variety of factors—industrial relations laws and all sorts of things. But does it mean that we have an economy conducive to real wage increases if we can get productivity right, making it a worthy endeavour? Ms Bullock : Let me make the point that productivity and real wages quarter to quarter—well, first of all, quarter-to quarter productivity is very volatile, so you need to think longer term, and I think you need to think longer term about the relationship between wages and productivity. I accept the chair doesn't think there is a relationship there, but I think we would think that the— CHAIR: That's what the stats are saying. Mr Hauser : Overwhelmingly, across time and across countries, countries with higher productivity growth have higher real wages. That is a very robust economic fact. Over shorter periods of time, you can have changes in profit margin—which I suspect, Chair, is where you're going—and companies in less competitive sectors may try to hold on to more of the gains from productivity. It is a particularly interesting question in the high-tech sectors, where there may be very little competition altogether. But over the long run, assuming competition, it's very hard to break that link. Mr GREGG: And that competition would link to productivity. Mr Hauser : Correct. Mr GREGG: So, when you have more competitive sectors, you are more likely to have productivity, but if there's no competition— Ms Bullock : Correct. Mr GREGG: Thank you for that. In terms of the global risks that we're taking into account, are there any assumptions that we've made so far in all of our projections that we're not so confident about globally? Dr Hunter : I think the one I would probably say in the context of our August forecasts—and to be clear, it's a technical assumption for us—is the profile for oil prices. We use the market futures curve to anchor that profile, and we don't do anything to it. We flagged this in the August SMP, and, as the governor mentioned earlier, we were quite concerned that that profile implied or was consistent with a relatively quick resolution of the conflict, and we could see plenty of ways that that might not play out. It does appear now we're in one of those worlds. If you look at the futures curve today, it is certainly the case that it's quite a bit higher than the curve that we anchored our August forecast to. We were aware of that at the time, but it is a technical assumption and a technical approach. We're pretty transparent about it. That's probably the one I would highlight where it's a realised difference already. Mr Hauser : But by far the biggest assumption in the market, as opposed to in our forecasts, is what the ultimate returns from AI will be. It is such a completely unknown variable, but the valuation not just of AI stocks but of most of the nexus of risky assets relies on that valuation. How much will AI people be able to charge for their product in the steady state? Well, China competed away. The difference between the highest valuation level and the lowest is absolutely enormous. We're all subject to that uncertainty at the moment. CHAIR: Mr Caldwell. Mr CALDWELL: Governor, I know this is only very recent, because it happened yesterday, but, in the new migration announcement from the government, they basically announced new migration measures, but the migration measures are designed to deliver the same net overseas migration forecasts that were in the budget, which was 245,000 this financial year and then 225,000. As I understand it, you'd already incorporated those May figures into the August forecast. So, if there's no underlying change in those overseas migration numbers, is there any need for you to change your forecasts based on that announcement? Dr Hunter : Not in the context of the population projections, no. We will update our projections as we get new forecasts from the Centre for Population. That's our standard approach. So, if they altered their projections, that's when we would incorporate and make a change to ours. Mr CALDWELL: In terms of where the reality is different from the forecast—is that what you mean? Dr Hunter : Yes. They're doing forecasts too. I believe they'll put new forecasts out as part of MYEFO, the next budget and so on. We will wait for that information and incorporate that information when we get it. Mr CALDWELL: Further, in relation to growth in the economy, which has been heavily reliant on immigration, growth per person is very flat. What's your view about migration numbers and the growth that we've seen in the economy? Ms Bullock : Well, it's as you've already highlighted. The reason we're seeing aggregate growth in the economy is that we've got increasing numbers of people in the economy. GDP per person is flat. If your question is going to the impact on inflation, we have often said and we do believe that it adds to supply. It adds to the supply in the labour market. So it adds to demand, yes, but it also adds to supply. It's probably reasonably neutral for inflation overall. Having said that, where it does have an impact are areas where supply can't respond, and the housing market is the very obvious place there. That's where you tend to see the impact. Correct me if I'm wrong, Sarah, but, in terms of aggregate forecasts, what we see is that, yes, you have higher migration and it adds to demand but it also adds to supply. So probably the net impact on inflation or the demand gap is reasonably negligible. Mr CALDWELL: But you're pretty satisfied with your observation that the housing market particularly has been impacted by immigration because it's got a chronic undersupply? Dr Hunter : It tends to materialise in localised rental markets. Migrants, when they come into the country, usually rent, rather than buy. So they're in the rental market. They can be quite concentrated in certain rental markets—inner-city Sydney and Melbourne, for example, because that's where students live. You can see the impact there. We saw that, particularly, coming out of COVID, when lots of students came back and those rental markets saw particularly large rental increases. So that's where it tends to show up quite specifically. But, as the governor said, on a very broad basis and over time, as the housing supply adjusts, they add to demand and supply and we don't see any medium-term impact on inflation from migration. Mr CALDWELL: Thank you. That's all from me, Chair. CHAIR: Over to you, Madonna Jarrett. Ms JARRETT: I just want to go back to economic growth. We've got the two sectors, public and private contributions. It is true—correct me if I'm wrong—that the private sector activity has contributed more to economic growth than the public sector. Is that correct? Ms Bullock : In recent times. Dr Hunter : In recent times. Ms JARRETT: What are some of the factors that you've seen that have been driving that private sector growth? Ms Bullock : Investment is No. 1. Ms JARRETT: Yes, but what's encouraging the investment? Ms Bullock : The AI boom. Renewable energy investment is also part of that. The AI boom and data centres in particular are the things that people focus on. But there is some in renewable energy, and I think there is some in other sorts of areas that we're observing. Dr Hunter : Yes, there's been a general pick-up in business investment. But, as the governor said, there's been a substantial increase in the amount of investment activity in data centres over the last 12 months, really, and there's also been a pick-up in renewable energy as well. Those are the two main categories. But there's been a general pick-up in business investment across the board. There are other areas where we have seen a much less dramatic pick-up but nonetheless a bit of a pick-up. There has been in dwelling investment activity. So we actually saw a lift in approvals coming through, starting in 2024 and going into 2025. That's now actually starting to realise in actual activity. Again, that sector has a bit of a pipeline. It takes time. We did see through the back half of 2025 a bit of a pick-up in household spending. That has eased quarter to quarter this year, but you can still see a bit of that in the annual figures and even in the growth rates and the pace of growth this year. Although it is a bit softer than the second half of last year, it's still a bit stronger than we were seeing for household spending in 2024 and going into 2025. Ms JARRETT: On that household spending, is there a difference in households in terms of where that spending is coming from? Is it older Australians with superannuation? Ms Bullock : We get some information on this from card data, and various banks provide information which breaks it down by sectors and, in particular, age groups. We have typically observed that older age groups are spending a bit more quickly than some of the middle-aged groups. Is there anything else? Ms JARRETT: Middle-aged groups being—? Ms Bullock : It's people probably who have mortgages, people with families and mortgages. The growth in spending is a bit more than people. That's been a feature of the data for a few years actually. Dr Hunter : Just to add to what the governor said, that's absolutely right in terms of that distribution. But you can also see the broad trends across all groups. All groups saw a bit of a pick up through the back half of last year. All groups have seen a bit of a softening this year. Most of what drives consumer spending are aggregate factors, so what's happening to inflation, for example, and what's happening to household incomes. Even different groups have different trends within. There are always broad trends that really are the anchor point and the driver. Ms JARRETT: I just want to go back to private credit markets actually. I know you've said it's been less of an issue in Australia but there are some concerns in terms of that market overseas. You talked earlier about how it's a bit opaque, and we know that ASIC's got some concerns about it. What are you seeing overseas that is different to here, understanding that it is an opaque area for you to be able to say that there must be things happening overseas that you're seeing more of than we're seeing here. Ms Bullock : I'll have a couple of reactions. Brad might have a few reactions as well. I think a few things. The first is that it's much bigger overseas. It's a much bigger share. If you think of the universe of bank financial institution lending and then non-bank financial institution lending, non-bank financial institution lending overseas is much bigger relative to the financial sector than it is in Australia. Private credit is a much bigger chunk of lending overseas than it is here. So that's the first thing. The second thing is—this is where the data opaqueness comes in—there is a feeling that there are increasing links to the financial sector overseas. Brad already spoke to the point that in Australia we don't see that so much. But I think there's increasing concern overseas that the links to the formal financial sector, the banks, are actually increasing and are much stronger. So if there's a big implosion in the private credit market, it will wash back onto the banks and the financial system. And if it does that then that might impact the way banks are thinking about their own credit provision and so on. They'd be my first couple of reactions. I don't know if you have any to add. CHAIR: Dr Jones, if you can keep it tight. We have gone over time. We have three other members and we finish at 12:30—welcome to my world! Ms Bullock : Alright, I'll leave it there. CHAIR: Unless there's anything quick you want to add before I go. Dr Jones : Very quickly: greater marketing to retail in the US in particular, which is a different feature to Australia; more concern overseas about insurers interacting with private credit in a way that we don't hear a lot about here in Australia. The final piece is the actual loan portfolios, particularly in US private credit funds, are more exposed to the disruption that's going on in AI. A lot of our private credit has gone into commercial real estate, for instance. They are the main differences. CHAIR: Ms Spender. Ms SPENDER: I want to return to productivity. I think it's critical to growth in wages and also to fighting inflation. I'm interested in your perspective. It's been very hard, though, to predict what's going to happen to productivity in recent years. When you're looking at your leading indicators, are there any that you look at in terms of productivity and what are you seeing? Dr Hunter : As you say, it's very hard to predict and forecast. There aren't really any lead indicators that we would look at that would give us particularly good sights on what might happen to productivity. There are historical relationships, though. For example, we just talked about business investment. We do know that capital deepening is a source of labour productivity. If you upgrade your capital stock, you would expect to make your workers more productive, which would then lift your labour productivity. We're also, of course, tracking—we haven't talked about it too much—the impact of AI and thinking about that, more in the longer term, and what that might do to productivity. We aren't seeing any signs of that in the actual data yet, but it is very early. I wouldn't expect to be seeing signs of it in the data yet. That will be a watch point for us going forward from here for sure. But, no, there are not good lead indicators for productivity, unfortunately. You have to rely on history, I'm afraid. Ms SPENDER: Thank you. I want to talk about the RBA and how people understand the work that you do, including interest rates, because there's obviously a great deal of concern in the community about higher interest rates and inflation. I understand that, in a recent survey that you did, over half of Australians didn't understand how interest rates impact inflation and didn't really understand those sorts of mechanisms. I'm interested in whether this is a particularly Australian phenomenon and in how you are thinking about this. It goes to some of the trust and unrest and unhappiness of the community. Ms Bullock : I have couple of quick points. First of all, we are trying to address this through public education. Earlier, the Deputy Governor went through how we think about the transmission of monetary policy. Monetary policy works in all countries, regardless of their structures and, particularly, the issue of the cash flow channel and so on. So we know it works. In terms of trying to educate people, we are trying to get out there. We're trying to explain things simply to people. But I do understand that, for people with mortgages, what they're focused on is that variable interest rate, and it's very hard for them to understand why it is that we have to increase interest rates to address inflation. It's our only instrument, though, and it does work through other channels. In Australia, we're not unique, but we're relatively unusual in having a variable rate 'mortgage book', effectively. That does mean that, in Australia, interest rates capture much more of the public imagination than they do in many other countries. Mr Hauser : The finding in our survey that you cite is actually quite common across countries. I would say what people see is that periods of high inflation are typically associated with periods of high interest rates, and they think, 'Oh, one must be causing the other.' In fact, the causality is the other way around. If inflation gets high for any reason, central banks usually have to raise interest rates to bring it down. I actually think most of these surveys are not saying people are dumb at all; they're actually spotting something really important. They're just making slightly the wrong inference about it. In the UK, for example, when we did surveys of this, we found much the same type of belief. Ms SPENDER: My last point on that—if people don't understand how these mechanisms work, does it actually make it harder to stabilise inflation because of these misconceptions of what these interest rate rises are trying to tell you? Ms Bullock : Again, around the world, we see that monetary policy does work and that interest rate rises do work in terms of lowering inflation. Having said that, I think it is important that people understand how this works, and, I think, ultimately, that can only be helpful. But it doesn't mean that it doesn't work. Mr Hauser : The one country where this insight was put into practice in policy was Türkiye, where the prime minister decided that higher interest rates meant higher inflation. They've got an inflation of about 37 per cent at the moment. So, to the governor's point, we'll persevere. Ms SPENDER: Thank you. CHAIR: Mr Laxale. Mr LAXALE: I'm fine. CHAIR: Ms Campbell. Ms CAMPBELL: I will change gears a little bit and talk about Project Acacia. You obviously touched on it at the beginning, in your opening statement. The final report came down in May. By all accounts, tokenisation of wholesale assets looks like it has some good impacts. What are the next stages going forward, in very practical terms? Ms Bullock : I'm going to pass directly to Brad for that. Dr Jones : Let me just take a step back. What we are trying to achieve here—what we have observed is that the wholesale financial system in Australia has generally been less dynamic than parts of, in particular, our retail payment system, which, by and large, we've seen basically be a hotbed of competition and dynamism. We haven't quite seen the same dynamics in the wholesale markets. Tokenisation may well have an important role to play in the future of our financial system. It's not the only thing, and there are plenty of other things that I think we can consider as a country. That's the context for the project, and ensuring that Australia stays pretty close to the global frontier, from an international competitiveness perspective, because we still rely on foreign capital in this country. We have to provide international investors with a seamless end-to-end experience to bring money and put capital to work in Australia. That's what's sitting behind all of this work. Most concretely, the next really big cross-agency initiative, that we hope will involve all aspects of industry, both large incumbents, but also the smaller disruptors, will establishing a thematic sandbox. The Governor touched on that. As I said, that will involve not just ourselves, potentially, but other agencies. What we're trying to do is create a safe space for innovation to move beyond just ideas and very small prototypes and provide a longer runway for ideas to be commercialised and scaled. That case was quite helpfully made as part of the ERS review, which the government recently tabled and the Assistant Treasurer spoke to at the Intersekt conference a couple of weeks ago. There's a broader push that will involve all public agencies and big chunks of industry— Mr KENNEDY: Sorry, is this the fintech sandbox? Dr Jones : Yes. We're contemplating a digital financial market infrastructure sandbox, where you could have, for instance, tokenised public and private money and tokenised assets exchanging at much faster rates and be able to do things that are not currently possible with our settlement and payment rails. That's the big focus. There are other initiatives that are starting to form up. Our banks have expressed very strong interest in accelerating their work on the tokenisation of bank deposits. We put out an expression of interest and got 40 responses. There's very strong engagement now, right across the banking ecosystem. We also put out an expression of interest for an advisory group that will work with regulators to identify the major issues that need to be identified and worked through. We had more than 120 submissions for that expression of interest. What Acacia's managed to do is to create a bit of a step change and engagement on this issue. A lot of it's trying to make sure that Australia remains internationally competitive. Ms CAMPBELL: What do you think the impact of the tokenisation of banking deposits will have on consumers? Dr Jones : Today's monetary system consists of a couple of tiers. There's the central bank layer, which, basically, sits underneath everything. That's the trust in money that we provide, the infrastructure and the level playing field. On top of that, you have banks and other payment service providers innovating and providing consumer-facing products and services in a more innovative way than, frankly, central banks can. From a philosophical perspective, there are good reasons to think that tokenised bank deposits would be part of this broader ecosystem, where the speed of money, the way money can be used and programmed and the way that it can be used to accelerate settlement times et cetera—all of those things would be in the frame. That's why banks are looking into this space. Frankly, they're also looking at the potential threat that stablecoins pose and are looking to make sure that they're not just reacting to the emergence of stablecoins. At the end of the day, the two main private forms of tokenised money are going to be stablecoins and bank deposits. If there's no form of tokenised bank deposits, the risk for banks is that all the action happens in the stablecoin space. Ms CAMPBELL: Post the project—as you say, the industry has to innovate—what other levers are out there for the industry to innovate beyond the sandbox? Dr Jones : This is where the opportunities that the recent review into financial innovation—the whole architecture—comes to bear. As I said, it's not just about tokenisation. I think the architecture that was set out in the review of the enhanced regulatory sandbox is to look for multiple ways where you can have potentially complementary financial sandboxes. One possible idea I've heard people speak about, for instance, is the use of AI in financial services. There could be opportunities for sandboxes to interact. There could also be opportunities for sandboxes here in Australia to interact with those abroad. I think the opportunities are limitless. Ms CAMPBELL: Pace is obviously essential, as you've outlined. What is the RBA doing post report to make sure that we've got our foot on the throat of this? Dr Jones : The governor mentioned that we've just put out a consultation to the public on how our settlement infrastructure can evolve over time to accommodate and facilitate responsible innovation in the country, including tokenisation. What we hear back from industry will inform a much larger multiyear rejuvenation of our settlement infrastructure. That's going to be a very big piece of work. I mentioned the sandbox for next year. I also mentioned the advisory groups we're setting up and helping to coordinate for banks on tokenised bank deposits and also on a much wider range of tokenisation initiatives as well. We're also contemplating some cross-border initiatives because none of us are satisfied with where the speed or cost of cross-border payments are. So there are multiple things we've got in the pipeline. Ms CAMPBELL: Thank you. CHAIR: I don't want to be a Debbie Downer, but I've been watching that fintech sandbox for years. We've been pumping air into that punctured tyre. I hope these changes work, because it's been around for two different administrations and it's yet to yield. Dr Jones : Yes. We've got to do some things differently. CHAIR: Using the prerogative of being chair, I'd like to jump in with just a few minutes left. I don't want to verbal you, Dr Hunter, but my colleague Matt Gregg—who we'll condemn later for leaving early—put to you that investment in data centres was inflationary. You took a different view, from memory. Dr Hunter : If I recall the question—and I might not recall it correctly—I think he asked me if we thought that the data centre investment here was more inflationary than in other countries. My response to that was that we haven't looked at that very specifically, but I wouldn't expect that to be the case. I think the way we're investing in data centres looks quite similar to other countries. We have to import the machinery and equipment as, for example, the US does. Everyone has to build the shed. That's domestic activity. You can't import that. So that flows through. For clarity, that's what I meant. CHAIR: This is going to run into the billions. If you look at everything that's happening in the economy in terms of investment, it's massive. You've impressed upon us today about how, if demand is greater than supply, that's an issue. Part of that is capacity constraints. We're 90,000 workers short in construction. We've talked about the need to build more dwellings. We've got all the infrastructure that's required to support it. That's in a context where we're thinking about immigration changes as well. This is the thing that doesn't gel in my mind when you make that statement— Dr Hunter : To be absolutely— CHAIR: Just give me a tick. In my mind, all that does not gel with that type of statement. Dr Hunter : To be absolutely clear, what we are hearing in liaison and what we can see in the numbers is that this type of activity is adding to construction demand. It is absorbing labour locally, and that is putting pressure into the construction system. Sorry, I did not mean to suggest that it wasn't inflationary in an absolute sense. I meant that it's relative to other countries. We know that this activity is definitely adding to demand. We're hearing through liaison about workers that are getting attracted to come and work on these projects. That means that they're not working on home building on other types of construction activity. It's particularly concentrated in Sydney and Melbourne at the moment, because that's where these data centres are currently getting built. So that channel that you're talking about is definitely playing through. That's absolutely true on the ground. We hear it in liaison. But I talk to colleagues overseas and they're seeing the same thing. That was all I meant earlier on. Ms Bullock : It is exerting inflationary pressure, particularly in an area that we know is already stretched. CHAIR: Yes. Just between us, can no-one tell Matt Gregg that I said we were going to condemn him! Mr LAXALE: We won't tell him, but I'll just send him the Hansard! CHAIR: Oh, terrific—that's very helpful, Mr Laxale! I can't chip you because you ceded your time. Witnesses, on behalf of the committee, thank you yet again for your attendance here. The committee secretariat will be in contact with you in relation to any matters arising out of today's hearing. You'll be sent a copy of the transcript of your evidence and will have an opportunity to request corrections. I also thank my colleagues for their attendance and participation today. Also, I thank the secretariat for all their work. With that, I declare the public hearing closed. Committee adjourned at 12:30