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Economics Legislation Committee
Reserve Bank of Australia

Reserve Bank of Australia


CHAIR: The committee now welcomes the Reserve Bank of Australia and its representatives, Ms Michele Bullock and Dr Christopher Kent. In welcoming the RBA, the committee recognises the central bank's independence under the Reserve Bank Act 1959, particularly with regard to its setting of monetary policy. The committee is cognisant that while the RBA does not receive annual appropriations, it does provide the parliament with opportunities to discuss its insight and performance, which the committee greatly welcomes. As such, no government minister will be in attendance with the committee while representatives of the RBA are present. Before we move to any opening statements and any questions from senators, I will advise that, in the interests of the many senators who I expect will be joining us for this conversation, I will start with a few 10-minute blocks of questions and then move down to five minutes to appropriately manage the discussion. Ms Bullock, deputy governor, do you wish to make an opening statement?

Ms Bullock : No, I don't.

CHAIR: With that, we will invite senators to ask you questions.

Senator BRAGG: Congratulations, Ms Bullock. I think this is your first appearance since your appointment as deputy governor?

Ms Bullock : I did one via video. Yes, it is the first one in person.

Senator BRAGG: Congratulations.

Ms Bullock : Thank you.

Senator BRAGG: I want to ask you some general questions and then some questions on payments. How many times has the Treasurer met with the RBA leadership since the election?

Ms Bullock : I couldn't speak for the governor. I know that he met once with the Reserve Bank leadership team about a couple of weeks, I think, after the election. I believe he has met with the governor more frequently than that, but I couldn't say.

Senator BRAGG: Can you take that on notice?

Ms Bullock : I'll take it on notice.

Senator BRAGG: Do you know what was discussed?

Ms Bullock : With the senior leadership team, it was generally a briefing on what was going on in the economy. There was a bit of a briefing from the assistant governor economic. The assistant governor financial markets gave a bit of a briefing about what was going on in the markets. There was one on financial stability. We also talked a bit about our operations. As to what is discussed with the governor, I would have to ask the governor and take that on notice.

Senator BRAGG: Can you please take on notice any action items, minutes or notes that you can release.

Ms Bullock : I could confirm that there would have been no minutes taken at that meeting—the one I'm referring to that I was at.

Senator BRAGG: Has the Prime Minister met with the RBA leadership?

Ms Bullock : He has not met with the RBA leadership team. I couldn't speak for the governor.

Senator BRAGG: Can you check?

Ms Bullock : I can check with the governor if he has met with him.

Senator BRAGG: What about the finance minister? Has the finance minister met with the RBA leadership since the election?

Ms Bull ock : No. It has not. I can check with the governor.

Senator BRAGG: In terms of the review, what sort of engagement are you having with the review panel?

Ms Bullock : The review panel itself has had an engagement with the governor and the other members of the board, including myself. I've had a one-hour meeting. I think a number of the board members have also had about one-hour meetings with the panel. The questions have varied. I can only say what I was asked about. Others, I think, have been asked about different things. More broadly in terms of engagement with the review itself, the working group, if you like, has had quite extensive engagements. We've provided quite a lot of written answers to questions that have been put to us by the review panel and a lot of data, a lot of information, from our systems on staffing issues and those sorts of things. So it's quite extensive engagement.

Senator BRAGG: Has there been a draft of the review's findings presented to you at this stage?

Ms Bullock : No.

Senator BRAGG: Has there been any draft context put to you yet about recommendations?

Ms Bullock : No.

Senator BRAGG: I want to ask you about your recent statement on monetary policy. This included a lot of forecasts, including a higher inflation forecast than what is in the budget. Can you explain to the committee why this forecast has been updated?

Ms Bullock : We update our forecasts every quarter formally and we publish them. In the last ones we published in August, the inflation forecast was for a peak of inflation at 7¾ per cent in the December quarter of this year. Since then, the main thing that has happened is that energy price forecasts have been revised up, electricity prices in particular. That's the main reason it has been revised up.

Senator BRAGG: That is the main reason it has been—

Ms Bullock : That's the main reason it has been revised up.

Senator B RAGG: What is the electricity price component?

Ms Bullock : Ten to 15 per cent this year. But I believe we've used the budget forecast for next year for energy prices, electricity prices in particular.

Senator BRAGG: You have used the budget forecasts. You haven't used your own forecasts?

Ms Bullock : No. We've used whatever the budget has assumed for electricity prices, yes. We don't have our own forecasts.

Senator BRAGG: Since the last statement of monetary policy, has anything changed your view on the need for tighter monetary policy?

Ms Bullock : No. Our view is the same. There are some supply effects on inflation. This is continuing. There are actually more broad based inflationary pressures. We are observing it particularly in services and goods and in food—fruit and vegetables. Some of that is temporary, but some of it is more persistent. That has not changed our view that inflation is more broadly based than it was and we need to increase interest rates to influence demand.

Senator BRAG G: What can fiscal policy do to help fight inflation?

Ms Bullock : If fiscal policy is too expansive, that adds to demand. At the moment, we have a situation where, abstracting from the supply impacts on inflation, there is a sense in which demand is a bit too strong for the supply that we've got forthcoming. If fiscal policy adds too much to demand, that can potentially exacerbate inflationary pressures.

Senator BRAGG: I want to ask you about some payments issues. The CRC process is being run with the digital finance CRC. Who is leading that in the RBA?

Ms Bullock : The person working with that is a fellow called Chris Thompson, who is the deputy head of payment systems.

Senator BRAGG: How much money is going into that, from the RBA's perspective?

Ms Bullock : Can I take that on notice, because there is a certain cash component but there are also staff costs? I would have to come back to you specifically.

Senator BRAGG: How many staff do you think are working on that?

Ms Bullock : On that project?

Senator BRAGG: Yes.

Ms Bullock : The core team is probably four. They are not full time on it. They do other things as well. A couple of others who are not in that team are also contributing, again, not full time on that project.

Senator BRAGG: Have you formed a view about possible use cases for a CBDC?

Ms Bu llock : No, we haven't. In the past, we've thought that the case for a wholesale CBDC might be stronger than one for a retail CBDC. But part of the process of this work with the Digital Finance Cooperative Research Centre is in fact to see if there are some good ideas out there. The best people to think about those good ideas are the innovators, who are working in these areas.

Senator BRAGG: In terms of the RBA issuing what you called an eAUD through this process, that is quite a big development, I would have thought. What sort of digital wallet will you be using?

Ms Bullock : I would have to come back to you on that. I don't have the technical details on what they are using. But the project itself is a ring-fenced project. The idea is that the focus is not so much on the technology; it's really more on the business cases.

Senator BRAGG: You decided to use Ethereum for that purpose?

Ms Bullock : Ethereum is being used. That is my understanding, yes.

Senator BRAGG: Do you know what other digital currencies or platforms were considered?

Ms Bullock : No. I don't believe I know that. I would have to come back to you on that.

Senator BRAGG: Could you please provide on notice what process they went through to choose Ethereum and give as much detail as you can provide on the pros and cons of using that platform. Obviously in this space it is hard to separate some of the strategic issues from the economic issues. Looking at the prospect of having a digital currency issued by a central bank in some form may have an economic impact. It is also very likely to have security implications. What sort of feedback and engagement will you be doing with the security agencies as part of your eAUD process?

Ms Bullock : Initially the project isn't really engaging in the security aspects. This is a pilot. It's a small ring-fenced process. Obviously we are focused, in terms of the technology, on making sure that it is secure. It is a secure pilot. The initial idea of the pilot really, as I said, is about business cases. If it turns up issues that need to be addressed by security, that's the point we look at them.

Senator BRAGG: What does success look like from your point of view, then? Is it determining that there are business cases within the domestic economy where this is going to have some utility?

Ms Bullock : Quite possibly. As you would be aware, the Treasury has been asked to do a piece of work on looking at the cases for a central bank digital currency. This will feed into that, looking at the potential costs and benefits of a central bank digital currency. One of the things that I think will be important to establish is whether or not the existing payment systems can, in fact, provide the same or better benefits than a central bank digital currency when you consider the costs of the various systems.

Senator BRAGG: Will the project look at the digital yuan and the implications of the digital yuan? That is the only CBDC which is issued on a large scale and is already going beyond its primary jurisdiction. Will it consider that?

Ms Bullock : No. It won't be looking at the digital yuan. It's just looking at an Australian potential CBDC.

Senator BRAGG: But it won't look at the implications of—

Ms Bullock : No.

Senator BRAGG: Of a foreign government issuing a CBDC?

Ms Bullock : No.

Senator BRAGG: It could be used by the diaspora or it could be used in our backyard.

Ms Bullock : No. It won't be looking at that. That's a broader issue about potential broader, holistic government considerations of whether or not you might want a digital currency.

Senator BRAGG: Where does that sit, then, from your point of view, as an independent Reserve Bank?

Ms Bullock : That sits with the government. Ultimately a decision on whether or not a central bank digital currency would be issued is a matter for the government.

Senator BRAGG: That sits with the Treasury?

Ms Bullock : That would sit with Treasury and the government. My understanding is that Treasury are going to do a piece of work looking at that.

Senator BRAGG: I want to understand exactly what you are saying. They are, or you think they will?

Ms Bullock : One of the recommendations of the review of the Australian payments system—I think it was that one—was that Treasury, with the bank, do a bit of work looking at the potential costs and benefits of a digital Australian dollar. That piece of work is separate from this piece of work, which is simply looking at what the business cases might be.

CHAIR: For the benefit of senators who have joined us, we are proceeding in 10-minute blocks at the moment. We will move to five-minute blocks as time starts to get the better of us.

Senator McKIM: Good afternoon, Ms Bullock. Congratulations on your appointment to the board. In the first half of last year, Governor Lowe said in a number of consecutive statements following board meetings a version of the following. Specifically post the May board meeting, he said:

The board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.

What does the board say to people who are struggling to keep their heads above the water because they believed the board when it said that interest rates wouldn't go up until 2024?

Ms Bullock : Well, I think what we were trying to do at the time was give our best guess of where we thought inflation was at. Unfortunately, we were surprised. Obviously, I have a lot of sympathy for people who undertook particular transactions thinking that was what was going to happen. We were caught by surprise. Other countries were caught by surprise by the strength of inflation. Under the circumstances, we had no choice but to start raising interest rates.

Senator McKIM: I will come to the series of decisions to raise interest rates shortly. I have to ask: does the RBA board believe that your independence equals a lack of accountability?

Ms Bullock : A lack of accountability?

Senator McKIM: A lack of accountability?

Ms Bullock : No. I don't believe that the Reserve Bank board thinks that at all. In fact, the governor fronts the House of Representatives committee two times a year and is accountable for his decisions and the board's decisions.

Senator McKIM: Where, then, is the accountability for these statements and then the subsequent actions that the board has taken in contravention of those statements? No-one on the board has paid any price for getting it so badly wrong, have they? No resignations?

Ms Bullock : No. That's true.

Senator McKIM: Where is the accountability, Ms Bullock?

Ms Bullock : I think the accountability really rests with the board deciding to do the best it can. I think the board, in an uncertain environment, can only do what it thinks is best in the circumstances. At the time it did. I think people forget the dire circumstances that we were facing back at the beginning of 2020—how dire the predictions were for health, how dire they were for the economy. We took out a lot of insurance to try to deliver gains to the economy. And we did. And, in many ways, the fact that we had to increase interest rates was a measure of success for the policy. It delivered growth.

Senator McKIM: Well, I'm sure that the people who believed the RBA when it said interest rates wouldn't go up until 2024 and were basically induced into buying property on the basis of that belief would regard it as a success, would they?

Ms Bullock : No. I think they would look at it, quite frankly, and think that they've made a decision based on information that they felt was misleading.

Senator McKIM: So the information was misleading.

Ms Bullock : I don't think the information was misleading. The information was delivered when we had certain information available to us which was, as I said, a very dire state for the economy. We were taking out insurance against some very bad outcomes. Our best estimates at the time, our best forecasts, were that inflation was not going to be rising any time soon. As I said, we were caught by surprise, as was everyone. It was partly a supply thing initially, but it has become slightly more broadly based now.

Senator McKIM: I heard you say that earlier. I will come to that. I will ask you to be clear here. Although Dr Lowe's statement was caveated in terms of its 2024 prediction, it wasn't caveated at all in terms of his commitment that interest rates would not go up until wages growth is materially higher than it is currently. Wages haven't grown materially higher since he made that uncaveated commitment. In fact, real wages have gone backwards since he made that commitment. They've gone significantly backwards. So people's purchasing power has declined. Isn't that uncaveated absolute commitment that has been not met and overturned delivering significant financial pain to a lot of people? Isn't that of itself a reason for some accountability? Do people just make these statements and then skate away and it's other people who believe those statements who pay the price?

Ms Bullock : That condition was met. I do believe it was met. Subsequently, we have seen that wages are increasing. Nominal wages are increasing more quickly than they have done for some time. I think what we do have is a situation where the interest rate rises were absolutely required at the time. That has been borne out.

Senator McKIM: So you've put in there the word 'nominal', which wasn't in Dr Lowe's statement. Surely we can all agree, Ms Bullock, that, in the context of inflation, what actually matters is real wages, not nominal wages?

Ms Bullock : Yes. We accept that at the moment real wages—

Senator McKIM: And real wages are going backwards?

Dr Kent : That's not quite right.

Senator McKIM: If there's nominal wage growth but a real wage decline, are you suggesting in that case that wages will be inflationary?

Dr Kent : No.

Ms Bullock : No.

Senator McKIM: So we can all agree about that.

Dr Kent : But with the real wages you are measuring, it is nominal wage growth in the numerator and inflation in the denominator. If you're trying to think about wages pushing inflation higher, you want to think about nominal wage growth.

Senator McKIM: Are you suggesting that nominal wage growth but real wage decline is inflationary?

Dr Kent : No.

Ms Bullock : No.

Senator McKIM: I think we're all in agreement there.

CHAIR: Let the witness answer the question.

Ms Bullock : What we're trying to say here is that you asked whether or not the conditions were met for a rise in interest rates.

Senator McKIM: He didn't mention nominal.

CHAIR: Senator McKim, let's get some clarification from Ms Bullock.

Senator McKIM: Sure. Sorry, Ms Bullock.

Ms Bullock : He may not have mentioned nominal specifically, but that is what he would have meant. That is exactly what he would have meant. Not real wages, because real wages are a combination of nominal and inflation, obviously. What he would have meant when he used that statement was nominal wages.

Senator McKIM: Really? And when he spoke about wages going up, even as recently as last week, your submission would be that he was talking about nominal?

Ms Bullock : Yes. He is talking about nominal.

Senator McKIM: Do you think it would be helpful if the RBA were clear when it talks about wages to say that it is actually talking about nominal or real wages rather than just wages?

Ms Bullock : I think most people would understand when we talk about wages that we are talking about nominal wages.

Senator McKIM: You have spoken about it being a response to dire circumstances. You are talking about the pandemic there, Ms Bullock, in broad terms. What you did was issue forward guidance. What Dr Lowe did was issue forward guidance. It's a statement designed to be reported so as to encourage people to borrow more money and, in particular in this circumstance, to borrow more money to pay for housing. That's true, isn't it?

Ms Bullock : Forward guidance is about trying to provide information not just to households and businesses but also to financial markets because the forward guidance also assists to bring down funding costs by bringing down the cost of funding for banks. So it's not just about encouraging individuals. It's also about bringing down the structure of interest rates in the economy.

Senator McKIM: Thanks. But, in part, it is about encouraging individuals?

Ms Bullock : It's not explicitly about encouraging. It is about trying to bring down the structure of interest rates, and then people can make decisions about borrowing and lending based on that structure of interest rates.

Senator McKIM: So you would dispute that forward guidance was designed, at least in part, to encourage people to borrow more money?

Ms Bullock : I would say it wasn't explicitly designed to do that. It was designed to support our other policies—the yield curve target, the term funding facility and the bond purchase program—which was all about trying to bring down the structure of interest rates.

Senator McKIM: Do you accept that it was inevitable that forward guidance would lead more people to borrow more money?

Ms Bullock : I think I would say that part of the impact of bringing down the interest rate structure is to encourage more people to borrow, because that is the way that sort of process works. Yes, I would say that.

Senator McKIM: How does inducing people to take on higher levels of debt than they otherwise would ensure the economic prosperity and welfare of the nation?

Ms Bullock : People make decisions about whether to borrow and lend, and businesses make the same sorts of decisions. Businesses are making decisions about whether or not to invest. What we were trying to do through this pandemic, in bringing down the structure of interest rates, was to provide cheap funding, or funding for households and businesses to increase their demand, to support their demand in a period when, quite frankly, demand was flattened. So this is what the whole purpose of it was.

CHAIR: Senator McKim, as you would be aware, that's the end of your 10-minute lot.

Senator McKIM: I have one more question just on this section, if that's okay.


Senator McKIM: Thank you, Chair. Ms Bullock, does the RBA board accept that its decision to increase interest rates earlier than you broadcast that you would is most affecting people on the lowest incomes with the lowest levels of wealth to fall back on?

Ms Bullock : I think we would accept that interest rate rises impact those who have mortgages and are on lower incomes. That's about 30 per cent of the population. Yes, of the people who have mortgages, I think we would accept that those on lower incomes are more impacted. But it's also true that there's another chunk of the population that doesn't have mortgages at all. In fact, they are not impacted by those interest rates. Many of them are on lower incomes still. So it's not as clean-cut as all of that.

Dr Kent : I will add very briefly. Inflation is adversely affecting everyone, including low income households and those without mortgages.

Senator McKIM: I will come to the drivers of inflation next time.

Senator RENNICK: My first question is about the term funding facility and what the terms of that funding facility are. The outstanding balance, I think, is about $188 billion. Is that money that the banks have lent at a fixed rate when it was taken out, or does that move in line with the RBA cash rate?

Dr Kent : That money can be lent by banks or used by banks for a whole range of purposes. Some of it might have found its way into fixed rate loans.

Senator RENNICK: When they borrowed it from you?

Dr Kent : When they borrowed it from us.

Senator RENNICK: The RBA. What is the rate of interest they are paying?

Dr Kent : Some of it was fixed at the earlier rate it was taken out at, which is 25 basis points. Much of it is fixed at 10 basis points.

Senator RENNICK: So they are borrowing 0.1 or 0.15 and they are now lending out that money at the various market rates. It could be anywhere between the overnight cash rate of 3.25 per cent up to five or six per cent?

Dr Kent : Something like that.

Senator RENNICK: With regard to when they park it with the RBA at the overnight cash rate, they are getting about a three per cent margin on that. The same money that you've lent to them they now lend back to you. That is basically a free gift to the banks, isn't it, on behalf of the Australian taxpayer?

Dr Kent : It is a subsidy. It was intended to be because it was put in place, as the deputy governor suggested, during those dire times of March 2020, when the intention was to provide low-cost funding. Much of that low-cost funding was passed on to not only borrowers, including households, but also small businesses in the form of low-rate loans.

Senator RENNICK: Any money that is parked overnight, though, in the RBA cash facility isn't actually being passed on, is it?

Dr Kent : No.

Ms Bullock : No.

Senator RE NNICK: They are actually creaming three per cent off the top. They are borrowing at 0.1 per cent and then they are making a three per cent margin. That's something like a 3,000 per cent return.

Dr Kent : I suspect that much of it was lent out and earning a higher return for the banks.

Senator RENNICK: That is something that the banks should actually, in my view, be made repay. I fail to see why they should be getting money at 0.1 per cent while hardworking Australians are now copping it on the chin with regard to their home loans. I will leave that as a statement. I want to pick up your comment, Ms Bullock, that fiscal policy can add to demand. I disagree with that statement as a generalisation. I think there are two types of fiscal policy. There is obviously spending and consumption, which, yes, does add to demand. There is also investment in building and production. As a result of a lot of the $300 billion spent in the market throughout COVID, we've increased demand. We've had a supply shock from the Ukraine and renewable mal-investment et cetera.

What you're doing at the moment by increasing interest rates so fast through qualitative tightening is reducing demand. You are bringing on an austerity package. I've spoken to you before about this, Dr Kent. We need to be having a quantitative easing package that increases productivity and increases supply. We hear this all the time that fiscal policy only ever adds to demand. I disagree with that. If we're going to deal with supply side issues in this country—that is, the lack of productivity through not enough dams, power stations, roads and bridges et cetera—shouldn't we be looking at a quantitative easing measure that is focused on building sovereign assets that are going to supply more essential services into the market that will actually drive prices down because of increased supply? So rather than adopt an austerity package—I'm not saying you shouldn't raise interest rates; I don't think you should raise them as quickly—wouldn't we be better off raising productivity and, hence, supply to offset that lack of supply because of the Ukraine war and the other measures we are facing?

Ms Bullock : I can't disagree with that general premise. What I was basically talking about was fiscal policy that increases demand by increasing consumption.

Senator RENNICK: Sure.

Ms Bullock : Another challenge here, of course, is that we do have in the infrastructure space supply constraints there as well. We know in the federal government and the state governments there's all the home building as well. There's a huge pressure on construction at the moment, which is also increasing inflation.

Senator RENNICK: Yes.

Ms Bullock : All I'm saying is that there is nothing wrong with the idea that the government needs to look at infrastructure spending to increase productivity. But we need to be a bit careful that the spending isn't directed into areas where there are already inflationary pressures. Areas that impact consumption, particularly construction at the moment, are likely to do that.

Senator RENNICK: I accept that. Has the Treasury approached the RBA since the new government has been formed about forming an infrastructure bank designed to provide cheap capital? As I have just demonstrated, you provide cheap capital to the banks. It would be cheap capital to, say, state governments to help build dams, railways and power stations?

Ms Bullock : No. I don't believe we've been approached, no.

Senator RENNICK: Thank you. I asked at the last set of estimates for the correspondence between the RBA and the Bank for International Settlements. The RBA refused to do that. Can you tell me why, as elected representatives of the Australian people, we shouldn't have access to correspondence between the RBA and the Bank for International Settlements?

Ms Bullock : There are a couple of points. I think the first one is that the requested amount of information is voluminous because a lot of it is very transactional. It's just meetings, setting up meetings and these sorts of incidental things. So it's quite voluminous and would take a lot of work for us to do. The second point is that the information that is potentially of interest is, in fact, confidential.

Senator RENNICK: That is the information I want to get hold of. I would like to know why there is confidential information between the RBA and the Bank for International Settlements? It has a notorious history. They melted down the Nazi gold. They are a notorious operation. Why does the RBA consider that information confidential from the Australian people?

Ms Bullock : Because a lot of the information is about conversations we are having with other central banks. Those conversations are had on the condition that they are kept confidential. If we were to release that sort of information, I would say one response would be that we would not be allowed to be included in conversations which include confidential information with other central banks.

Senator RENNICK: That is my concern. Central banks aren't being held to proper standards of transparency and accountability. Given that central banks have expanded the volume of money on a dramatic scale in the last 30 years, if anyone should be transparent and accountable, it should be the world's central banks, especially the US Federal Reserve, which is owned by a number of prime banks. Most people in this room wouldn't even know what a prime bank is. That is the level of secrecy they operate behind. So I will continue to pursue those confidential minutes, whatever they may be, because I think that the RBA should be accountable to the parliament. As Senator Wong herself said last week, that is the ultimate level of accountability. Central banks shouldn't be keeping conversations to themselves. I will finish off with that as a statement.

I will return to my favourite topic, which is the gold bars stored in the Bank of England. Did the Bank of England ask permission from the RBA to actually melt down the 80 tonnes of Australia's gold before refining it from 2015 onwards?

Dr Kent : So you are suggesting that the gold bars that we owned have been melted down by the Bank of England?

Senator RENNICK: I've been given the serial numbers and the dates of refining. They've been refined from 2015 onwards, as late as 2020. So I would have thought that the Bank of England didn't have our gold bars there in the first place. The memo I got from the RBA previously has said there have been fake gold bars and duplicate serial numbers. I have the document from the RBA that says they've been refined from 2015 onwards. Clearly, our old gold bars have either been given to someone else or they've been melted down. The long story short is that it is a trespass to chattel to the Bank of England to be moving around our gold bars without permission from the RBA. Wouldn't you agree with that?

CHAIR: Senator Rennick, I was just going to ask whether you have a question. It is about whether they agree with that? That is the end of your 10-minute block.

Dr Kent : So sometimes we will lend out the gold bars that we own. Those bars will be lent by us to somebody else.

Senator RENNICK: They don't move.

Dr Kent : They don't move.

Senator RENNICK: It's a paper transaction.

Dr Kent : We might get back a different gold bar but still one that satisfies all the various stringent conditions for that gold bar to be in the Bank of England's vaults.

Senator RENNICK: The RBA has admitted that there have been fake gold bars, and the Bank of England has admitted to the RBA that there have been fake gold bars. How do you know a real gold bar has been lent and you haven't got a fake gold bar back?

Dr Kent : I think we've clarified that. Some of the problems with these gold bars that you are referring to is that they were a very different type of gold bar—a much smaller gold bar—to the ones we have in our ownership. We only deal with the much larger gold bars. There have never been questions about the quality of those bars sitting in the Bank of England, some of which we own.

Senator RENNICK: Can I just finish my questions?

CHAIR: One tiny, short question with a tiny, short answer.

Senator RENNICK: Alan Greenspan admitted in 1997 that if the price of gold took off, the central banks would lease gold out to basically suppress the price of gold. Australia's third biggest mineral export is gold at $28 billion. To put that in context, our beef exports are $11 billion. Why is the RBA working with other central banks leasing out gold? You might pick up $1 million on your side of the ledger, but given that—

CHAIR: Senator Rennick, can you ask your question, please?

Senator RENNICK: Why you are doing that? Why are you leasing out gold that is impacting the profitability of our goldminers in this country that employ over 100,000 people directly or indirectly?

Dr Kent : Well, my understanding is that some of the lending actually is to facilitate producers who occasionally need gold in their possession that they have not yet produced. They are going to produce it.

Senator RENNICK: But we don't move physical bars.

Dr Kent : No. But they've promised the gold to somebody else. So we can lend it to them for a time until they obtain suitable gold to use for their purposes. So it's facilitating the market in helping producers.

CHAIR: Thank you.

S enator O'NEILL: Thank you for joining us today. The November statement of monetary policy referenced the upgrades to expected receipts over the next two years.

Ms Bullock : To what, sorry?

Senator O'NEILL: The November statement of monetary policy referenced the upgrades to expected receipts over the next two years. Could you describe what the upgrade to receipts is expected to do relative to the estimates in the March budget?

Ms Bullock : You mean government receipts?

Senator O'NEILL: Yes.

Ms Bullock : I think what we reported was simply what was reported in the budget. I don't believe we have any separate estimates of government receipts. We simply use what they're using in the budget.

Senator O'NEILL: With regard to the government's decisions that are revealed in the budget, what would you have expected would be the impact on inflation had the government taken a different approach and spent the revenue upgrades on assistance for households?

Ms Bullock : I think what possibly could have happened was that providing assistance to households, as we discussed earlier, would provide them more room on their consumption. They wouldn't have to cut back a bit. What we're trying to do is to tame inflation. What we're trying to do is just reduce demand a bit so that it comes back more into line with supply. If the government, on the other hand, is giving out lots and lots of money, that's going to be a harder task for monetary policy.

Senator O'NEILL: So, in essence, that would have had an inflationary impact?

Ms Bullock : It potentially could have had a further inflationary impact. We've seen what happened in England when the government put out a very expansive budget in the midst of an inflation problem.

Senator O'NEILL: And the uncertainty that followed—

Ms Bullock : Ensued, yes.

Senator O'NEILL: Not just politically but also in the market. How would you describe the stance of fiscal policy for this fiscal year?

Ms Bullock : Well, I'm not an expert, but I would say that it's certainly not contractionary at this point. But it's moving in a direction which is sensible under the circumstances, which is trying to consolidate, now that we have a strong economy and strong employment. It's appropriate that the budget starts to try and consolidate.

Senator O'NEILL: 'Sensible' is your word. That's an important descriptor because, as senators have indicated in their questioning to you, what the RBA says does impact on people's decision-making and their thoughts about the economy that we're all moving around in and the society that it underpins.

Ms Bullock : Sure. 'Appropriate', I think, is probably—

Senator O'NEILL: Sensible and appropriate fiscal policy for the times?

Ms Bullock : Appropriate, yes.

Senator O'NEILL: How would you describe the impact of new policy decisions on the economy across 2022-23 and 2023-24?

Ms Bullock : Of new policy decisions on the fiscal front?

Senator O'NEILL: Yes.

Ms Bullock : You are really moving out of my lane here. We're not fiscal policy experts. We take what we are given with fiscal policy. I really wouldn't want to opine on particular programs or particular directions here in particular areas. I can think about it as a whole but not in particular.

Senator O'NEILL: I guess it's part of the ecosystem of fiscal and monetary interplay to end up with the outcomes that we want for the Australian people and our economy. Given that, there have been decisions made in this budget, including expenditure savings of $22 billion, that interact with monetary policy. How does that compare with decisions made in the budget in March?

Ms Bullock : Well, again, it's holistically how we think about fiscal policy. We don't think about the individual savings and individual categories. What we're looking at usually is what the overall budget balance and the overall fiscal stance imply for whether it's expansionary for demand or contractionary for demand. That's really what we're looking at. What we can say is that there are increased revenues. Households have got jobs, so there's an increased income tax take and there's increased profits. Because we've got that, the budget is in a better position than it was. That's positive in terms of the fiscal balance. That's helping, if you like, to move in the same direction as monetary policy.

Senator O'NEILL: For Australians to understand this, that's kind of like savings that were a little unexpected. They've come in and the decision of the government has been to use those savings to manage the budget in a way that was able to reduce the size of expenditure by $22 billion from the March budget. Is that correct?

Ms Bullock : Their budget deficit is lower than it otherwise would have been because their receipts are higher and they haven't chosen to use some of those receipts to give out. They could have used some. It's up to the government how they want to do that. They basically are in a better position because their receipts are higher.

Senator O'NEI LL: In a better position. Again, that word 'sensible' seems to come to mind. I will go to another line of questioning with regard to the economic outlook. As a result of COVID, Australians would be very aware of how much everything moves globally. The sense that the Australian economy sits on its own has now been disrupted forever by recent events. This has come hot on the heels of COVID. Given the interconnectedness in the way the economy works, what were the RBA's expectations of the global economic outlook in May?

Ms Bullock : In May this year?

Senator O'NEILL: Yes.

Ms Bullock : I think we were slightly more optimistic than we are now. We've downgraded our forecasts for world growth. We've downgraded our forecasts for our major trading partners, although not by as much as world growth generally, because our major trading partners have held up a bit better than Europe, in particular, and the United States.

Senator O'NEILL: So if I am correct, your expectations in May were that inflation in many advanced economies would reach between six and nine per cent over the course of this year. That has changed now. What is the current position that you hold?

Ms Bullock : We don't have our own forecasts as such. We usually take others' forecasts who know better about what is going on in their economies. At the moment, what we are looking at is inflation rates of 10 per cent in Europe and the UK. The US, I think, is possibly getting up to 10 per cent as well.

Dr Kent : Yes.

Ms Bullock : A lot of the increase and the uplift in these forecasts is being generated by energy prices.

Senator O'NEILL: So that has led to some changes in the behaviour by central banks. So tightening in advanced economies in May was premised on a particular set of conditions. How has that changed now?

Ms Bullock : You mean—

Senator O'NEILL: The tightening?

Ms Bullock : Well, revisions to financial markets now expect that interest rates are going to have to go up further than they were expecting they were going up in May. You've seen basically an uplift in expectations for policy rates in the US in particular but also in Europe, Canada, the UK and here.

Senator O'NEILL: You've indicated some concerns about the global economic outlook. What do you think are the main risks? I note from your speech that you have identified perhaps some of them as uncertainties as well. Can you put them on the public record as well?

Ms Bullock : Yes. Certainly from our most recent statement on monetary policy, I think the US and Europe situation is fairly uncertain. Europe is because of the energy price shock that they continue to experience. The United States is because interest rates there are continuing to go up. Indications are that inflation is going higher and it's broad-based. The third uncertainty risk, if you like, is China. It's for different reasons. They have particular COVID containment policies. They have issues in their property market. That's of concern for us, obviously, because of the importance of China to us as a trading partner.

Senator O'NEILL: I probably have another line of questioning if we have time later, Chair, thank you.

CHAIR: Thank you.

Senator CANAVAN: Ms Bullock, is the RBA bankrupt?

Ms Bullock : No. The RBA is not bankrupt. We can still continue to meet our operations and perform our operations and meet our debts and so on, so, no, we are not bankrupt.

Senator CANAVAN: In your annual report—I'm sure you're aware—and the statement of your financial position for 2022, you have net negative equity of $12 ½ billion.

Ms Bullock : Yes. That's right.

Senator CANAVAN: In a normal world, are you a going concern with net negative equity of $12 ½ billion?

Ms Bullock : There are a couple of reasons. One is because we actually have the ability to create money, if you like. We can continue to meet debts and we can continue to pay. The second reason is that ultimately the Reserve Bank is guaranteed by the government. If you think about the $12 billion in the context of the government budget and GDP, it's actually very small.

Senator CANAVAN: I'll come back to that. You're probably aware that Mr John Kehoe wrote in the Australian Financial Review on 21 September, I think when your accounts perhaps came out:

If the Reserve Bank of Australia was a commercial bank or hedge fund, it would be bankrupt.

Do you disagree with that, because it sounds like the only reason you're not bankrupt is because you can print money and, obviously, commercial banks can't do that?

Ms Bullock : Yes. A central bank is not a commercial bank; that is true.

Senator CANAVAN: Your financial accounts obviously are the ones I read out. They were as of 30 June 2022. What is the equity position of the Reserve Bank today?

Ms Bullock : I would have to take that on notice. It would depend very much on opposing forces. On the one hand, we've had a depression of the exchange rate, which will have increased profits. On the other hand—

Senator CANAVAN: And rising interest rates.

Ms Bullock : I would have to take that on notice.

Senator CANAVAN: I will come to drilling down. As you say, you are part of the Commonwealth government. The Australian taxpayer will bear the cost of these losses. I don't think they would accept that $12 billion is a small amount of money. The losses are higher than that, too. That is just the negative equity position. Presumably, since 30 June, interest rates have gone up significantly. A lot of these losses are because interest rates have gone higher than your holdings of long dated or long maturing bonds. Is that correct? Is that fair?

Ms Bullock : As you highlight, the bulk of the loss has come from marking to market our holdings of Commonwealth government securities. The extent to which yields have gone higher and prices have gone lower than they are on our books, yes, we'll make some more losses on them. The bottom line on that, though, is that we are holding them until maturity. Ultimately now, they're at a price lower than we will get back for them so they will result in realised gains at some point.

Senator CANAVAN: Before I get to that point, presumably, you would have an idea, I'm sure, whether your equity position is better or worse than 30 June. Is it better or worse than on 30 June this year?

Ms Bullock : It's slightly better, I think, but can I take that on notice, please, because it moves around so much day to day? It's very difficult.

Senator CANAVAN: And you don't mark to market every day, I presume?

Ms Bullock : No. But we can put some numbers in and get some estimates. We do mark to market every day, but we can get you that. All I'm saying is the exchange rate is moving. Interest rates are moving. Things are quite volatile. Things change day to day. Can I take it on notice, please?

Senator CANAVAN: Have you asked the government for an equity injection?

Ms Bullock : No. We have not.

Senator CANAVAN: Have you at all prepared advice to the government about the need for an equity injection?

Ms Bullock : No. We have not.

Senator CANAVAN: I noticed that the New Zealand Treasury has provided its central bank an equity injection. Why haven't you considered doing similar? We have done that in the past, I know. With a negative $12 billion position, why aren't you asking the government for an equity position?

Ms Bullock : The board discussed this. I think we mentioned this in the annual report. We felt that, given the fact that we will start to make profits again in the future, there is a viable path for rebuilding equity and coming back to positive equity and capital and so there was no need to ask for a capital injection.

Senator CANAVAN: I might come back if I have time. I have limited time. I want to go to the yield control curve policy. What are the mark-to-market losses on that policy?

Dr Kent : It's more on the bond program. I would have to get back to you on that as well. That also changes over time.

Senator CANAVAN: Some people I speak to in financial markets are not impressed by the transparency of the Reserve Bank. They say, to me at least, that the central banks overseas are publishing their mark-to-market losses on individual components of the QE policy. Do you think it's a fair criticism of the Reserve Bank?

Dr Kent : We have published quite a bit of information on that.

Senator CANAVAN: On yield control curve?

Dr Kent : Yes.

Senator CANAVAN: The yield control curve wasn't even mentioned in your annual report.

Dr Kent : In the yield target review. I believe the numbers are in there.

Senator CANAVAN: Why aren't you selling some of the longer maturity bonds that you accumulated during the yield control curve policy? I don't quite accept the point you made earlier, Ms Bullock. Wouldn't you potentially limit your losses? If interest rates are going to go up in the next few years, the losses will continue to accumulate on these low yielding bonds. Why wouldn't you consider selling them now?

Ms Bullock : It's actually just a matter of timing. It doesn't make any difference to ultimately the profit. If we sell them now, we realise the losses. If we don't sell them now and we sell them when they mature, we get the face value. That will be—

Senator CANAVAN: Those losses are dependent on the future path of interest rates, right?

Ms Bullock : It's timing. It might mean we make more on realised losses in the meantime, but when they mature, we get a bigger gain, a big realised gain, because we're coming from a lower position on the price. It's a timing matter.

Sena tor CANAVAN: One point of doing that right now is to help normalise the curve, because you are in a tightening cycle. So selling those longer maturity bonds now would help increase interest rates at that part of the curve marginally, but at least some part. Wouldn't that be consistent with the Reserve Bank settings right now to try to tighten financial conditions?

Ms Bullock : I think the point is that the main reason for having the bond purchase program on the way down was we had reached the effective lower bound of the interest rate. We don't have that restriction on the way up. So the primary monetary policy tool now is the cash rate.

Senator CANAVAN: That's right. I'm going to get to that.

Ms Bullock : I think the estimates of the impact of the bond purchase program on long-term rates was 30 basis points. So it's at the margins.

Senator CANAVAN: So you're effectively saying there's a trade-off here between cash rate rises and the sale of government bonds at longer maturities?

Ms Bullock : No. There's no trade-off.

Senator CANAVAN: It's the same. You're effectively selling bonds overnight, if you like, when you are taking the cash rate. So you could also tighten financial conditions by selling bonds. You hold two-year bonds, don't you?

Ms Bullock : At the margin.

Senator CANAVAN: At the margin, that would be true.

Ms Bullock : The point is that you can have a very direct benefit by just—

Senator CANAVAN: So this is—

CHAIR: Just let Ms Bullock answer the question.

S enator CANAVAN: Because we're on time limits, that does affect that.

CHAIR: Do you want to rephrase the question?

Senator CANAVAN: No. The reason I am sometimes interrupting is the 10-minute time blocks. I need to get through things. Sorry I interrupted there. I'm just getting to this point about the trade-offs here between cash rate rises and taking action at other points of the yield curve. It seems to me—you've just admitted almost—that home owners will have to pay 30 points more on their home loan because you're not bailing out hedge funds and investment banks by not selling these other two-year bonds that you hold.

Ms Bullock : I think the main impact, as I said, is the cash rate. We don't have a limit on that like we did on the downside. We don't have it on the upside. What we're doing with running down the bonds that were part of the bond purchase program is we are letting them run off as they mature, so they gradually tighten. That's 30 basis points over a period of 10 years. It's marginal in respect of monetary policy.

Senator CANAVAN: I don't think 30 basis points is marginal for the average Australian mortgage holder, Ms Bullock. I am very concerned that you have a very close relationship with banks in this country. Some of them have taken similar positions to you on interest rate movements. By not acting on this part of the yield curve, you are protecting their interests and potentially requiring Australian mortgage holders to have to pay higher interest rates to meet your tightening objectives.

Ms Bullock : To the extent that we are tightening—and if your argument is correct—we have to tighten less on the cash rate because of that. So these things work together. They don't work in opposition to one another. The amount we need to tighten will also depend on the extent to which there's a bit of downward pressure still on the yield curve from the bond purchase program.

CHAIR: Senator Canavan, as we know, you're at the end of the 10-minute block.

Senator CANAVAN: Can I have one more?

CHAIR: Just one more question.

Senator CANAVAN: You mentioned before that holding them will limit your losses. I am struggling to understand that logic, Ms Bullock. I imagine the value of these securities would have been a lot, especially on interest rates. Bonds tend to be priced off interest rates. The future interest rate movements are unknown and uncertain. Has the bank done a scenario analysis of different interest rate movements and what those losses would be depending on those circumstances?

Ms Bullock : Yes. We have. I want to make a distinction between the unrealised losses on the bonds, which you are talking about, and the losses that we will incur because the interest we are paying on our exchange settlement accounts is above the interest we are receiving on our bonds. That is a separate issue. We have done scenario analysis on that. But the unrealised portion of losses, if you like, on the bonds is a separate issue to this issue of scenarios on profits.

Senator CANAVAN: Could you table those scenarios? Can you provide them for the committee?

Ms Bullock : I can do that.

Dr Kent : They are also published in the bond purchase review that we put out.

Ms Bullock : Yes. There were some scenarios there as well.

Senator CANAVAN: Thank you very much.

Senator DEAN SMITH: Thank you, Deputy Governor and Dr Kent, for making yourselves available to the committee today. I want to turn to the RBA review announced by the Treasurer on 20 July. I will begin with, from the RBA's perspective, the level of engagement the RBA has had with that review process thus far.

Ms Bullock : Sure. I think the first thing to say upfront is that actually we welcome the review. We're very happy to be doing it. We've been very cooperative with the review panel. Engagement has been on a number of levels. The first level has been at the level of the panel, if you like. The panel members have been interviewing a number of people. They've been interviewing all the board members, for example. They've put out a survey for staff. They're planning to have a session with staff. So the bank has generally been engaged with the panel. More broadly, the bank at a working level has been very engaged with the secretariat, if you like. A lot of questions have been put to us by the panel. We've been working to provide information to those questions. They are questions going to the processes of the bank. They are questions going to staffing numbers, promotions and these sorts of things. There's a whole lot of data involved in this, including on diversity and inclusion. There is a very high level of engagement. We're expecting that will continue.

Senator DEAN SMITH: Thank you. I want to turn to the first matter you identified, which is the panel's engagement with the board members, senior staff et cetera. How many times has the panel had a meeting with the board as a whole on the review?

Ms Bullock : I don't believe they've had a meeting with the board as a whole. I will confirm that. But they've met individually with board members.

Senator DEAN SMITH: They have met individually with board members?

Ms Bullock : Individually with board members.

Senator DEAN SMITH: How many times have they met with each of the board members?

Ms Bullock : I would have to take that on notice. I don't know.

Senator DEAN SMITH: How many times has the governor himself met with the panel?

Ms Bullock : I'll have to take that on notice as well.

Senator DEAN SMITH: Could you also take on notice how many times you have met?

Ms Bullock : I can tell you that. One.

Senator DEAN SMITH: Thank you very much. Perhaps as part of the Reserve Bank's senior leadership team, you might provide us with some information about their engagement with the panel. Am I right to assume that the panel meets with members as a whole, or does the panel disaggregate into three members or two members?

Ms Bullock : So, in my case, it was all three panel members. But I understand from talking to others that in some cases it was only two panel members. I also understand from talking to others that whichever of the panel members chairs the session, if you like, varies. So they mix it up.

Senator DEAN SMITH: How many times has the governor or the deputy governor met with the Treasurer or the Treasurer's office regarding the review?

Ms Bullock : I personally have not met with the Treasurer or the Treasurer's office on the review. I'll have to check for the governor, so I'll have to come back to you on that.

Senator DEAN SMITH: Are board members or members of the senior leadership team provided with transcripts of their interview by the panel?

Ms Bullock : I can only speak for myself, and the answer is no.

Senator DEAN SMITH: Has the RBA senior leadership team or individual members of that team been provided with any sort of early drafts of the final review document?

Ms Bullock : No.

Senator DEAN SMITH: Is the review, from the RBA's perspective, expected to continue to report in March next year?

Ms Bullock : As far as we are aware, yes.

Senator DEAN SMITH: You've not been told otherwise?

Ms Bullock : No.

Senator DEAN SMITH: How does the RBA expect to communicate the review's finding to its staff?

Ms Bullock : We haven't got that far yet, I have to say. It's not our review. It's an independent review, as you know. So when the review comes out, I don't expect that we will get advance notice. I'm sure we'll know when it's coming out, but I don't think it will be given in camera. But who knows?

Senator DEAN SMITH: Who knows?

Ms Bullock : Who knows?

Senator DEAN SMITH: The RBA may be. It may be.

Ms Bullock : It's unknown at this stage. We haven't discussed yet how we communicate it to the staff.

Senator DEAN SMITH: From the RBA's perspective, are there any concerns about how the review is being conducted at present?

Ms Bullock : No. As I said earlier, we welcomed the review. We are very happy to cooperate as far as possible with it. We've told our staff in particular to please feel free to put submissions to the review. We're very welcoming of it.

Senator DEAN SMITH: Have you heard of the review engaging with other domestic or global experts as part of its review process thus far?

Ms Bullock : Again, we're removed from it. I've seen what I've seen in the media, as I'm sure others have as well. I have no other information than that. I am aware that they've interviewed a number of different academics. I gave a speech last night at the Australian Business Economists. A number of people there had said they had engaged with the panel. So I'm aware they are out there, but I have no knowledge of the specifics.

Senat or DEAN SMITH: This is on a slightly different tack. Senator Rennick talked about the importance of productivity gains as part of moving forward through our current economic predicament. What sort of observations would you make with regard to the importance of productivity gains and where the RBA thinks they might be able to be achieved? It's a little out of the brief—I accept that—but have a go.

Ms Bullock : I think the governor gets asked this quite a lot. There have been many reports out there about areas you can look at for productivity, education and infrastructure. There are some tax actions you could take.

Senator DEAN SMITH: Conversations, I think they're called.

Ms Bullock : Broadly, I think they are outside the remit of the Reserve Bank. Productivity is important. It's important for the growth of the Australian economy, it's important for prosperity and it's important for jobs. It is important. It's not something that is within our remit. We can't do anything about it. But it is important. It's important we continue to have those conversations.

Senator DEAN SMITH: I've seen the governor's speeches, of course. He does get asked about it; you're quite right. I want to turn to another matter. If I'm almost at the end of my first set, I might hand over to someone.

CHAIR: That's a great idea.

Senator McKIM: Does the RBA have any evidence that there is an increase in demand in the economy?

Ms Bullock : The evidence is price pressures mainly coming through.

Senator McKIM: That could be supply side, though, couldn't it?

Ms Bullock : It could be, but it's not all supply side. We can identify what appear to be supply side issues. We can also identify because it's demand relative to the supply. For example, we know that there is a very tight labour market. There is a shortage of labour at the moment. Demand for that labour is very strong.

Senator McKIM: Unemployment is going up and is forecast to go up.

Ms Bullock : It is forecast to go up. The reason it is forecast to go up is partly because interest rates are rising.

Senator McKIM: That's right.

Ms Bullock : And it needs to go up in order to slow demand.

Senator McKIM: ABS figures last week had retail sales growing at 0.2 per cent in the month of September. That is a fairly weak rate of growth. Doesn't that indicate that demand is actually not driving inflation at the moment and that what we are talking about are supply side issues?

Ms Bullock : It's basically demonstrating—it's the only piece of information at the moment—that demand is slowing. We do know that demand has increased dramatically. We've come out of the pandemic really strongly. People are spending lots of money. We know they are spending it on services and clothing and footwear. These are things that are under price pressure at the moment.

Senator McKIM: The RBA has put up interest rates for seven consecutive months. Prices are still going up. I know there's a lag. When are your interest rate rises—you've left open the opportunity for more into the future—actually going to stop prices going up?

Ms Bullock : Well, we don't know. This is the uncertain world we live in. What we've done is increase interest rates a substantial amount, as you mentioned, over a short period of time to get interest rates from a very low level, an emergency low level, where we were taking out insurance, to a level now that is getting up to where maybe there might be an opportunity to sit and wait and look a bit at what is going to happen next. We've got to that point. We think interest rates probably still have to go up a bit further. But we're not set on our timing and we're not set on the amount.

Senator McKIM: That is what I was going to ask you, Ms Bullock. It looks as if demand for actual goods is quite low based on retail sales growth figures. There's obviously a lag between interest rates and prices. I think you would probably acknowledge that. The RBA is forecasting inflation to peak this year and then come down. Why isn't the RBA taking more of a wait and see approach rather than engaging in a very significant series of interest rate rises, which is, as we've acknowledged, hurting a lot of people in the economy?

Ms Bullock : The forecasts that we've got of inflation peaking and coming down is predicated on basically a market path—a path for interest rates which continues to go up a bit further. This is the best we've got. As I said, there's a lot of uncertainty. You only have to look at our forecasts and our outlook, the statement of monetary policy, to see that there are substantial bands around this. But this is the best we've got, so that's what our forecasts are predicated on. If we don't follow that path, that will have implications for the forecasts.

Senator McKIM: I'm just trying to understand this. You've just said that demand is slowing. Is that right?

Ms Bull ock : No. I said the one number you have quoted is, so far, the first sign we have seen in the data that demand might be slowing.

Senator McKIM: So you don't think there's enough evidence to say that demand is currently slowing at the moment?

Ms Bullo ck : We're hoping it might be slowing, but we need a bit more evidence to see if it is slowing.

Senator McKIM: Thanks. I read your speech from last night. I noted with interest some of the comments you made around wages. We spoke a bit about this earlier. Can we be clear? Do you accept that wages are currently not driving inflation?

Ms Bullock : I accept that, at the moment, wages are not increasing at a level that is driving inflation.

Senator McKIM: Wages, which are growing nominally but declining in real terms—

Ms Bullock : That's right. Nominal wages at the moment are rising more quickly than they have done in the past.

Senator McKIM: But are still below inflation, right?

Ms Bullock : Yes.

Senator McKIM: So they are declining in real terms?

Ms Bullock : Yes.

Senator McKIM: They are forecast to decline in the budget for another year. Correct? Over the four out years of the budget, net is a flat line. It is declining over the first 12 months, but at the end of the four budget out years, real wages—

Ms Bullock : Real wages, yes.

Senator McKIM: are going to be exactly where they are today. That is the budget forecast. Correct?

Ms Bullock : I think our forecasts we have are for real wages actually to be rising a bit.

Senator McKIM: Your forecast is different to the government's budget forecast?

Ms Bullock : We don't have the same forecasts as the government. Basically, they decline, and then in the out years they start to rise again.

Senator McKIM: Understood. But the budget forecast nets out after four years at no change to them?

Ms Bullock : Yes. I accept that is the budget forecast, yes.

Senator McKIM: Can we agree that wages are currently not driving inflation?

Ms Bullock : Inflation is a nominal thing. Unit labour costs are what is going to drive inflation. Basically, if nominal wages are rising in a way that means the unit costs for producers are going up, that's what is going to drive inflation.

Senator McKIM: I was really interested in what Governor Lowe said last week about the importance of avoiding a wage-price spiral. I actually don't take issue with the importance of avoiding a wage-price spiral. I don't take issue with the need to avoid a wage-price spiral. Governor Lowe's basic argument, which I found to be incredibly circular, was, 'We've got a high level of inflation. Real wages are declining. There's a lot of supply stuff going on.' I agree with that, by the way, that there is a lot of supply stuff going on. But he's worried that an increase in prices might lead to workers making more wage claims and, therefore, we've got to keep interest rates high in order to respond to that danger of a wage-price spiral. That is a pretty circular argument, isn't it? You can make the case now when real wages have been declining for the last two years, are forecast to decline and we're in the middle of a three-year decline in real wages. If the governor is going to make a case now that we have to guard against a wage-price spiral, you could say that at any time, couldn't you?

Ms Bullock : I think the way I—

Senator McKIM: When would we not be worried about that, if you can make that argument in the middle of a three-year decline in real wages?

Dr Kent : This is partly about trying to have wage growth and growth of prices—inflation—all consistent with the inflation target over the longer term. So ideally, yes, we'd like to see real wage growth. That's going to come fundamentally from productivity growth over the longer term. But the risk is if inflation expectations in the short term were to persist and move into longer term high inflation expectations, workers would seek to have higher nominal wage growth. That could become inflationary.

Senator McKIM: Of course.

Dr Kent : We're not saying it is now.

Ms Bullock : Let me put it slightly differently. What we want is a rate of inflation and a rate of wage growth that is rewarding workers for productivity improvements.

Senator McKIM: Real wage growth.

Ms Bullock : Real wage growth that is rewarding workers for productivity improvement, but prices and wages growth that basically is low enough that it is in the background and it's not influencing and introducing uncertainty. What we've got at the moment is, as you point out, a big supply element in this. We've had a big shock to the price level. That results in inflation. But if we can stop that from winding its way into more permanent prices and wages, that is actually optimal, because that is what will generate a strong economy and strong employment growth. If you move out of that zone and people start worrying about prices and wages, we know that is not good for business and it's not good for workers.

Senator McKIM: I want to be clear. What I understand the RBA to actually be arguing, based on Governor Lowe's comments last week, is that price increases, which I think you have acknowledged are caused in part by interest rate rises that the RBA has delivered, are going to lead to wage rises, which the RBA then will use as the justification to raise interest rates. Have I got any of that right?

Ms Bullock : I'm not sure the first bit was quite right.

Senator McKIM: So you don't think the RBA putting up interest rates leads—

Ms Bullock : Leads to inflation?

Senator McKIM: In part?

Ms Bullock : No.

Senator McKIM: You don't think that's inflationary in any way?

Ms Bullock : No.

Senator McKIM: If you put up interest rates—

CHAIR: Senator McKim, do you want to ensure that you ask a question? I note that you're at the end of your time block.

Senator McKIM: Thank you.

CHAIR: If it assists you to ask one or two more questions, that's fine.

Senator McKIM: I appreciate that. When you increase interest rates, what happens to the price of food?

Ms Bullock : The price of food is probably an example of supply and demand. For example, with the recent floods and so on, the price of food moved around a lot, particularly fresh food. It's very volatile.

Senator McKIM: Are you arguing that increasing interest rates does not lead to an increase in the price of food?

Ms Bullock : Not in a sustained point, no. Increasing interest rates does not lead to increased inflation.

Senator McKIM: I'm asking about the price of food.

Ms Bullock : No.

Senator McKIM: Anyone in the food chain who has a debt will see their costs increase if you put up interest rates. How does that not lead to an increase in the price of food?

Dr Kent : They are also businesses and they tell us through our liaison. They anticipate with rising rates future demand will be lower than otherwise, which gives them less scope to put their prices up. They have to do their very best—

Senator McKIM: Their costs go up.

Dr Kent : Yes. But they have to do their very best to absorb those by either generating productivity or reducing their margins.

Senator McKIM: So you don't think anyone in the food chain will put their prices up if their costs go up?

Ms Bulloc k : Interest rates is part of it if they have debt. But other more important factors will influence costs. Workers is one.

Senator McKIM: Sure.

Ms Bullock : Costs and all those sorts of things. So there's a whole lot of things that go into the cost base. If you want to take a step back, raising interest rates does not increase inflation. Ultimately, what raising interest rates does is bring demand down and lower inflation.

Senator DEAN SMITH: I want to turn to the matter of the effigy on the $5 note, which has attracted some media attention. The governor has said, and I quote:

Given this tradition and the national significance of the issue, the Bank is consulting with the Australian Government regarding whether or not the new $5 banknote should include a portrait of King Charles III.

There are two things. Can you share with the committee the consultation process? Am I right to assume that there's also a design process due and that these things are happening at the same time?

Ms Bullock : The consultation process so far has involved a letter from the governor to the Treasurer. I believe that's with the government at the moment to—

Senator DEAN SMITH: Can you make that letter available to the committee?

Ms Bullock : I'm sure we can. I'll take that on notice.

Senator DEAN SMITH: What date was that letter sent by the governor?

Ms Bullock : I would have to take that on notice. I don't recall. I think it was after the October board meeting, but I'll take that on notice.

Senator DEAN SMITH: Obviously you don't have it in front of you. What was the substance of that letter?

Ms Bullock : The substance of the letter was that the design of the banknote is typically the Reserve Bank of Australia's responsibility. We issue the banknotes. The long historical convention is to have the monarch on the notes. In fact, Queen Elizabeth has been on the $5 note for the last couple of iterations of the $5 note. I'm just making that point. We note for the Treasurer that there does seem to be some public interest in this and we value the thoughts of the government on it. That's the gist of it, I think.

Senator DEAN SMITH: Is it correct that the monarch has been on at least one of Australia's banknotes since 1923?

Ms Bullock : I believe that's correct.

Senator DEAN SMITH: And was on all of our notes until 1953?

Ms Bullock : I believe that's correct.

Senator DEAN SMITH: So the consultation process that the governor has commented on publicly is an internal consultation process that he leads in the RBA?

Ms Bullock : No. He is not talking about a consultation process in the RBA. He is talking about consulting with the government on what the bank should do.

Senator DEAN SMITH: And that consultation with the government thus far is limited to a letter from the governor to the Treasurer?

Ms Bullock : I know the letter has been sent. I can't speak for the governor. I don't know if he has had any conversations on this issue with anyone in the government yet. I can take that on notice.

Senator DEAN SMITH: Could you take on notice whether or not the governor has had a response to his letter and whether there have been any other letters? Are you aware of any telephone conversations between the governor and the Treasurer on this matter?

Ms Bullock : You would really have to ask the governor. I don't know.

Senator DEAN SMITH: You are deputy governor. You are free to take that on notice. Do you think that the government might have misunderstood its role in any decision about who should appear on the $5 banknote?

Ms Bullock : No. I think there might have been some confusion about how this process would work and who is responsible. But I don't have any specific concerns that there is a misunderstanding.

Senator DEAN SMITH: Dr Kent, is there anything that you can add to my line of questioning thus far?

Dr Kent : Not on the notes, no.

Senator DEAN SMITH: Can you explain the design process that is gone through? What are the various elements of the design process and how long it is expected to take?

Ms Bullock : The design process of a note is actually quite a lengthy process. If you were going to design a brand new note, it could take many years, quite frankly. If you are talking specifically about the design process for this note now, if there were a decision that King Charles would be on the note, it would be probably a 12- to 18-month process. You would need a portrait approved by the Palace. It's a very technical process. There's a lot of security—you wouldn't believe it—embedded in the design process. They would have to do that. Then you would have to do testing. You would have to do trials and all that sort of thing. So it's that sort of process. If you were going to put a completely new design on the banknote, that would be much more involved because you would have to think up the designs. You would have to test the designs. You would have to consult. We do a lot of focus group testing with new designs. We did this with our note printing when we did our new series of banknotes. There is a lot of consulting on the actual look and feel of the design. That's a much longer process.

Senator DEAN SMITH: Just to be clear, the design process—my language—for the suite of banknotes is very laborious and detailed and will take many years.

Ms Bullock : Yes.

Senator DEAN SMITH: To be fair, they are a symbol of our country et cetera. They carry important messages. But if there were a contemplation about whether or not the new King should appear on the $5, that will still take 12 to 18 months, but it's not going to take years?

Ms Bullock : No. It's not. It would be a shorter process. It would be dependent upon approval of the portrait. Once the portrait is approved by the Palace, it would take maybe 12 months from there.

Senator DEAN SMITH: Is there a timetable or a schedule for the renewal or re-evaluation of the suitability of the suite of banknotes? Is that approaching?

Ms Bullock : No. We don't have a fixed timetable for that. As you know, we've only really just completed a new one. We haven't typically had to replace them a lot, because one of the reasons for doing a new suite of banknotes typically is counterfeiting. Because our banknotes are very secure, we typically haven't had that issue. In fact, the most recent banknote suite replacement was about 20 years after the previous one. That is a long time for banknotes. Most central banks find their counterfeiting rates increase and they do have to replace their banknotes. So we've been very fortunate. We've got secure banknotes. There's no particular timetable. At the moment, we've really just finished with the last project.

Senator DEAN SMITH: I think I heard the Treasurer say—it may well have been on the ABC program Q&A—and I'm quoting now—that the governor of the Reserve Bank had indicated 'it's a choice between the King or a design', in his view. Does that comment make sense?

Ms Bullock : Yes. I think all he is saying is that it probably wouldn't be a choice between the King and another person. It would be a choice between the King and, if we didn't have the King, some sort of Australian style design. So you would have Parliament House on one side and some sort of Australian themed design on the other.

Senator DEAN SMITH: So it is going to take some time. It sounds like the RBA can reassure Australians who are interested and concerned about this matter that they won't wake up tomorrow or next week and have a new $5 note absent the late Queen?

Ms Bullock : No. It's going to take longer than that. There's obviously the process with the government first. The bank will then have to make a decision on how to proceed.

Senator DEAN SMITH: The decision gets made by the board?

Ms Bullock : Yes. The board would be involved.

Senator DEAN SMITH: It's quite a heavy burden for the RBA board to get wrong, given the high level of—

Ms Bullock : Get wrong, get right. It depends on which side. I suspect some people think one thing is wrong and others think others are wrong.

Senator DEAN SMITH: But care will be taken and it will be a decision of the RBA board?

Ms Bullock : The RBA board will be involved in it. Ultimately, it will probably be a decision of the governor.

Senator DEAN SMITH: Is he contemplating any public consultation process?

Ms Bullock : I would have to take that on notice. I don't know what he is contemplating.

Senator O'NE ILL: I want to ask a question on notice. I have a question about how much physical money is moving around in the economy as practice has changed and we're using a digital means of money transfer more frequently. If you have reported that somewhere and can point me to that, that would be very interesting.

Ms Bullock : Well—

Senator O'NEILL: On notice. I don't want to take any time today.

Ms Bullock : It's a long and complicated story, so we'll take it on notice.

CHAIR: I'm noting the time. We've been having some discussions about an effort to finish on the schedule time at 1.45 pm, so I'm now going to move to five-minute blocks and go to Senator Canavan.

Senator CANAVAN: I want to follow up briefly on our previous discussion. I've had a look at the bond purchase program review. Has the bank looked at options other than holding its bonds under this program to maturity? The review doesn't seem to discuss that.

Dr Kent : We did consider the issues. The board decided that it had no current plans to actively sell bonds. As the deputy governor suggested, our view was that the best way to tighten monetary policy was to use the cash rate, particularly because it's something that can be calibrated to evolving conditions. Typically, if you—

Senator CANAVAN: I'm sorry to cut you off. That wasn't actually my question. Have you evaluated options other than holding bonds?

Dr Kent : Yes. We actively considered whether or not we should sell bonds.

Senator CANAVAN: That option and analysis does not seem to be in the review of the bond purchase program. There are some scenarios there about different interest rates. This is about the effect of the strategy.

Dr Kent : I could provide you on notice the—

Senator CANAVAN: Could you provide on notice some analysis of that?

Dr Kent : I gave a speech on it.

Senator CANAVAN: I want to clarify, because I've thought about this issue a bit more. You are saying that if you hold the bonds to maturity, your losses will reduce. But you do actually bear a cost every day, effectively, by holding these bonds currently, don't you, because you're borrowing at the cash rate to pay for the—

Ms Bullock : But that was the point I was making earlier. It is a distinction between the unrealised losses on the valuation of the bonds and the interest rate differential between what we are paying and receiving.

Senator CANAVAN: If you sold early, you would no longer bear these losses you are incurring?

Ms Bullock : That's right. We would run down—

Senator CANAVAN: Or the taxpayer wouldn't bear them.

Ms Bullock : Yes.

Senator CANAVAN: I want to quickly turn, in the limited time I have, to the bank's consideration of climate change risk. There was a speech given by Mr Kearns in August this year about this. It seems to me the only two scenarios the bank is looking at under this climate vulnerability assessment is a delay transition—I'm reading it here—which is scenario 1. The second scenario is the continuation of current global policies. Why isn't the bank looking at a policy scenario of a too-fast transition, if you like? It seems to me that the only real financial security risk that we've seen in the world so far from climate change is a ridiculously too fast transition in Europe, which nearly bankrupted the UK a few weeks ago. Your remit is to look at this from a financial perspective. Why aren't you looking at a too-fast transition away from fossil fuels?

Ms Bullock : The focus for the Council of Financial Regulators, which is the group that is looking at this, is the banks and the insurance companies. So it's the financial sector. What are the implications for the financial sector? The focus there is very much on the transition process according to scenarios that are basically set out by the NGFS, the Network on Greening the Financial System. So we are doing this in a framework that is quite familiar, and a number of others are doing it around the world. They are the scenarios that we are using.

Senator CANAVAN: When I think about this and read some of your material, it really does beggar my belief that somehow more natural disasters would cause a financial security risk. Even the biggest natural disaster in our country's history—and we're not exactly unfamiliar with them—have not been major events for financial security, notwithstanding their impact locally on people. We just saw how, in the last few months, when the Truss government decided to subsidise people's power bills, which are a direct result of the UK not investing enough in their own energy sources, it almost seized up their financial institutions. The cost of that program, which is now being stopped in April next year, apparently, on some measures was higher than their Jobseeker scheme. So why isn't the bank looking at this? If we push up energy prices too high, of course there will be demands for governments to fund people's energy bills. We might end up in the same position as the UK. Why aren't you looking at that? Why isn't that part of the climate change assessment? It seems like you are only looking at one aspect of the climate change policy suites.

Ms Bullock : I think what we're looking at is some reasonably stock standard scenarios that others are looking at. I think that's appropriate.

Senator CANAVAN: Well, I think a lot of people are making a lot of mistakes in this space, aren't they? Maybe we should reflect on it.

CHAIR: Thank you very much, Senator Canavan.

Senator McKIM : I want to go back to the issue of food. Is it your evidence that, when the RBA increases interest rates, that has absolutely zero effect on the price of food?

Ms Bullock : No. I'm not saying that. What I am saying is that, when the RBA increases interest rates, it might have an impact, as you say, on those who have debt. But it's not the only impact on the costs of people who are producing food.

Senator McKIM: Understood.

Ms Bullock : It's quite likely that, in fact, the other cost pressures are much more important than rising interest rates. So it's not rising interest rates that are driving the increases in the cost of food; it's the other factors that are driving it.

Senator McKIM: Do you accept that, when the RBA increases interest rates, that puts an upward pressure on food prices?

Ms Bullock : It might. Again, it depends on the debt levels.

Senator McKIM: Of course. I'm just about the effect of interest rate rises.

Ms Bullock : If they have no debt, it doesn't impact them. If they have some debt, yes, it does increase their costs. But other costs are much more important by far, I think, in that process.

Dr Kent : The other point, which is what I was trying to say earlier, was they are the direct effects. The indirect effect, by working to suppress demand through higher interest rates, will broadly bring down the inflation of all goods and services. Food is an important part of that.

Senator McKIM: So are you saying that increasing interest rates will reduce demand for food?

Ms Bullock : For discretionary food, yes.

Senator McKIM: This is the point, isn't it? For a lot of people, food is not a discretionary spend. Poor people spend a much higher percentage of their income on food. I think you have acknowledged that putting interest rates up does have an impact on food. You have said there are other impacts; I accept that. But it does have an impact on the cost of food. How is it in the interests of the economic prosperity and welfare of the people of Australia to put the price of food up?

Dr Kent : What we are trying to do is actually reduce the inflation of all goods and services.

Senator McKIM: Yes. But you've just admitted that it is putting the price of food up.

Dr Kent : No. A small incremental—

Senator McKIM: A small increase in the price of food—

Dr Kent : For some—

Senator McKIM: For a lot of people is a very significant matter.

CHAIR: Senator McKim, could you allow an answer to occur.

Dr Kent : But it's a small direct, incremental effect for some producers who might have large amounts of debt whose interest rates are going up. But, for everybody else, the bigger effect is a weakening in demand, which will help to keep a lid on and bring down inflation.

Senator Mc KIM: So poor people have to starve in order to get on top of inflation. Is that what you are telling us?

Ms Bullock : No, not at all. By far the worst outcome for those people is if inflation gets out of hand. We know that inflation will impact those people the most. It won't just impact food. It will impact everything. So you can't just focus on the narrow aspect of food. You have to consider, as Chris said, the broader economic implications of this. Really, if inflation gets out of control, the people who will suffer will be people at the lower end of the economy.

Senator McKIM: There's no better way to tackle inflation than to put interest rates up?

Ms Bullock : That is the most appropriate way to tackle inflation, yes.

Senator McKIM: Tax reform wouldn't be a better way? Maybe walking away from the stage 3 tax cuts?

Ms Bullock : That might be able to help.

Senator McKIM: They are very inflationary, aren't they? Or they will be very inflationary when they come in, won't they?

Ms Bullock : I have no particular view on that.

Senator McKIM: You don't think spending a quarter of a trillion dollars on tax cuts over 10 years will be inflationary?

Ms Bullock : It depends on what else they do apart from that.

Senator McKIM: But all other things being equal—

Ms Bullock : But all other things are not equal.

Senator McKIM: But, all other things being equal, the stage 3 tax cuts will be inflationary, won't they?

Ms Bullock : They could add to demand, yes.

Senator McKIM: They will add to demand.

Ms Bullock : But—

Senator McKIM: It's a quarter of a trillion extra dollars in the economy.

Ms Bullock : All other things are not equal.

Senator McKIM: Do you—

CHAIR: Just one question.

Senator McKIM: Thank you. What is the RBA doing, if anything, to understand whether corporate profiteering or corporate price gouging is playing any role whatsoever in driving inflation?

Ms Bullock : We do a lot of business liaison, obviously. In that process, we talk to large businesses and small businesses. I think there are a couple of things. One, there isn't a lot of evidence, apart from mining, which is doing very nicely, thank you very much, at the moment.

Senator McKIM: My word.

Ms Bullock : I don't think more generally there's a lot—

Senator McKIM: Superprofits tax now, I would suggest.

Senator CANAVAN: Where would we be without coal?

Senator McKIM: Sorry, Ms Bullock.

Ms Bullock : I don't think there's a lot of evidence that there are lots and lots of profits being made by companies in Australia. In fact, the equity market would suggest otherwise. They are quite disappointed in some of the profits. Share prices are going down. The other point I would make is that a lot of the demand here at the moment that we're seeing is in services. It's in food and clothing. There are a lot of small businesses in this. Small businesses are not profiteering. They are in a very competitive market. I don't think we see any evidence at all from our liaison or from the data that small businesses are profiteering from consumers.

CHAIR: Thank you, Senator McKim.

Senator ROBERTS: Thank you for appearing today. I want to ask questions about inflation. The last time the Reserve Bank of Australia was at Senate estimates, I asked about the roughly $600 billion in money printing or quantitative easing. I said we knew that printing money essentially out of thin air or, as Mr Dobell said, electronic journal entries could directly impact inflation. From my notes, Ms Bullock, you agreed. Most of all, I asked how inflation forecasts could possibly be right. At the time, the RBA's forecast was that inflation would top out at just 4.25 per cent. I asked how that could be possible given inflation overseas was racing away. Your response, Ms Bullock, was that Australia is just different. We're not suffering the energy spikes like Europe and the wage pressure isn't here. Given inflation is now up to 7.3 per cent, far above your topping out at 4.25 per cent headline CPI, do you accept responsibility for being repeatedly and systematically wrong about your inflation forecasts so far at the RBA?

Ms Bullock : In our recent Statement on Monetary Policy, we actually published a box on the reasons why our inflation forecasts were so far out. A lot of it still is the fact that there were unknowns—the Russian war on the Ukraine came. There was a massive spike initially in food and energy prices that we did not factor in. So a lot of that miss was, in fact, the unexpected supply shock that we got. Another thing is that some of the supply chain issues that were evident during the pandemic didn't come off as quickly as we thought. These were things that we couldn't really forecast. They were well outside our previous experience. The only other thing I would add about the bond purchase program and the low interest rate and the expansion is that at the time we were deliberately trying to inflate the economy. The economy was absolutely in the doldrums. There were disastrous predictions for growth and employment. You might recall that 15 per cent unemployment was predicted at one point. We were taking out—

Senator ROBERTS: Who predicted that?

Ms Bullock : We were taking out insurance against a really bad outcome. That is why we did what we did.

Senator ROBERTS: We're hearing anecdotal evidence now of wage pressures not detected by the wage price index starting to increase. It's almost certain that Australia's energy prices are going to go up over the next two years. In fact, I think the budget predicts a 20 per cent increase next year and 30 per cent increase the year after. I believe that's conservative. We've seen electricity companies warn of prices potentially going up 50 per cent next year and 50 per cent the year after. If energy prices are going to skyrocket and wage pressure is increasing, how can you still be forecasting inflation coming down in the short term? I understand that you are saying it's a decline in 2023.

Ms Bullock : Inflation is declining, but it's still not back down to the target; that's true. We have got those energy price rises in that forecast. There are other prices that we are forecasting to come off. In particular, homebuilding costs we are predicting will come off quite a lot. We're expecting good price inflation to decline as well. So there are other offsetting factors.

Senator ROBERTS: The Reserve Bank of Australia said inflation psychology might be the most important factor behind inflation. Do you think being systematically wrong about inflation going down can affect people's expectations of inflation? If you keep saying inflation is going to go down, like you have, and it doesn't, at what point do you think people just stop listening to what you are saying and expect it to go up anyway?

Ms Bullock : Well, I think that's a very good reason why we need to make sure that we are keeping interest rates high and possibly increasing them—to make sure that people understand that we will do what it takes. If we're slightly wrong on our forecasts, we will be looking at that and learning from that and we will be taking action on that.

Senator ROBERTS: This is the second last question. Do you accept that inflation is the worst possible theft of everyday Australians' wealth?

Ms Bullock : We agree. I think the governor has used the word 'scourge'. We agree that inflation is a very poor thing for the country, and it does not help either employment or growth.

Senator ROBERTS: This is the last question. Do you do any detailed analysis on the uptake of new unreliable energy, such as wind and solar? For example, people are saying that the price of our electricity is increasing because the coal price has increased. That is complete rubbish, because the coal coming into the power stations in Australia has been sold on long-term contracts, so it hasn't changed. It's still $80 to $100 a tonne. The selling price overseas for thermal coal has been as high as $400. It's remarkable. Aren't the increases in energy due to the increased use of solar and wind, just like every country in the world that is increasing solar and wind has reported increased prices for electricity?

Ms Bullock : I wouldn't like to speculate on that. I don't have enough knowledge.

Senator ROBERTS: Thank you both for appearing.

Senator DEAN SMITH: Is Australia tracking towards a narrow landing?

Ms Bullock : A narrow path.

Senator DEAN SMITH: A narrow path.

Ms Bullock : Landing on a narrow path, maybe.

Senator DEAN SMITH: Are we heading in the right direction?

Ms Bullock : We live in a really uncertain world, as we've already talked about. Our forecasts and our intention are to try and land on that narrow path. With inflation coming down, unemployment will rise a little bit, but not too much. That is our intention.

Senator D EAN SMITH: And the probability? Could you put a—

Ms Bullock : No. If you wanted to go to the Statement on Monetary Policy, you will see that we do put some confidence intervals around our forecasts. You will see that they are wide. Forecasting is a difficult business, but we have to do it because, as we've discussed, there are lags in the effect of monetary policy so we need to at least have some views on where we might end up.

Senator DEAN SMITH: How do Australia's prospects differ from some of the other major economies?

Ms Bullock : I think we have a couple of things going in our favour. The first is that we've got much lower unemployment than pre-pandemic. Other countries had that as well. What we've got is much higher participation. Some countries have had a withdrawal of participation from their workforce. People have just packed up their bags and gone home. They're not working any more. We've got much higher participation, so that's really positive, because the best thing for people is to have a job. That's number one. The second thing is that wages aren't growing really quickly yet, which means we have a better possibility of being able to keep inflation expectations down and bring inflation back down to the target. The third thing, ironically, is that we are benefitting from the high energy prices because of our exports. So they are all positive things in our favour at the moment, which put us in a slightly better position than some other countries.

Senator DEAN SMITH: We talk about the Australian economy. Of course, it's a large continent. The population is dispersed. There are areas of very high population density. Can you give us a bit of an insight into how the economic story is different in a state such as Western Australia, where I am from, and a state such as Queensland, where Senator Canavan is from? Can you give us some insights? What is sitting beneath this Australian economic story at the moment? Am I right to assume that the experience is not the same for everyone irrespective of where they might live?

Ms Bullock : I think that's most definitely true. The challenge for monetary policy, though, is that it's just one single interest rate. It is a blunt tool. It has an impact wherever it will have an impact. It can't distinguish between different areas or regions of Australia. To your point about Queensland and Western Australia, obviously, the resource-exporting states are doing quite nicely out of this. But it's also true, if you look at recent data, that New South Wales and Victoria have come back very strongly after experiencing quite strong lockdowns. So there's a whole range of things going on here at the moment. Part of the problem of the pandemic and coming out of the pandemic is that everything is all over the place a bit. I think we're still getting back into some more normal outcomes here. You have had a big spring-back for New South Wales and Victoria. Western Australia wasn't as badly impacted to begin with. You've got the energy price spikes going on overseas, which are assisting resource-exporting states. So there are a whole range of things going on. Obviously, that's impacting different areas differently.

Senator DEAN SMITH: Thank you very much for your time today and your responsiveness to my questions. Could you share with the committee what inflation psychology is? What is the risk or the challenge that it presents?

Ms Bullock : As I said earlier when I was answering Senator McKim, what we really want with inflation is that it's just in the background and people aren't worrying about it. That's really why we have an inflation target—as do other central banks—of about two to three per cent. It's a level of inflation which people don't worry about. It's not affecting their businesses. It's not introducing uncertainties. The concept of inflation psychology is that if inflation rises above a certain level, it starts to influence people's decisions. They start thinking, 'Well, I'm facing these increases in prices. I might have to go and put in an increased wage demand.' Or the businesses might say, 'Well, all the other prices are going up around me. I'm just going to have to put my prices up too.' So it's this sort of more general sense. Rather than sitting in the background, inflation starts to move to the front of people's thinking. The reason that's important is that is when it starts to impact economic decisions. We know that low and stable inflation, because it sits in the background, is actually much better for stable growth and good employment outcomes.

Senator DEAN SMITH: Are we in a good inflation state of mind at the moment as a country, or are we getting closer to an unsafe state of mind?

Ms Bullock : That's the challenge at the moment. That is why we are raising interest rates. Yes, people are expecting inflation at the moment to be quite high, and it is quite high. If you look at expectations a couple of years out, most expectations are that inflation is back around the band. That is the important thing. If we can keep that, and people understand it's temporary, we can get back to low and stable inflation.

Senator DEAN SMITH: Thank you again.

Senator O'NEILL: I point Senator Smith to the speech that Ms Bullock gave last night. There's a section in there where you refer to inflation forecasts having been revised up, but there are good reasons to think that we are approaching the peak of that inflation cycle. You cite a number of reasons there. Importantly, I think one thing that hasn't been mentioned today—you might want to make a comment on that—is the decline in shipping costs.

Ms Bullock : Yes, on the supply side. One result of the pandemic was that shipping costs rose dramatically. Supply chains were quite affected by that. What we've noticed is that they are starting to come off quite dramatically. That will take time to work its way through to the general level of prices. To the extent that it has been a factor—and it has been a factor in goods price inflation—that is starting to unwind now.

Senator O'NEILL: Thank you.

CHA IR: Thank you very much, Ms Bullock and Dr Kent. They are all the questions the committee has for you today. We are happily in a position to release the Reserve Bank of Australia. We always welcome your attendance at our committee. We always appreciate the time that you take to answer our questions. Thank you very much. You go with our thanks.

Ms Bullock : Thank you.

Dr Kent : Thank you.

CHAIR: The committee will now suspend for one hour and reconvene at 2.55 pm.

Proceedings suspended from 13:54 t o 14:55