Transcript of Question & Answer Session Today's Monetary Policy Decision

We'll start with Hayley Francis from Channel Nine.

Can you tell us how much is the election weighing in to today's decision?

The election has no influence at all on today's decision. The Reserve Bank has been given a mandate by Parliament That is to achieve price stability, full employment, and to promote the economic welfare of the Australian people. We have operational independence and it's testimony to the political culture in Australia that that independence is respected. We take our decisions in the best interests of the country, and that's what we always do, and that's what we did today, and we do that without any interference from politics and we don't take the political situation into account. We do what we think is right for the country.

Next question. This is Robert Ovadia, from Channel Seven.

Thank you. You mentioned spiralling labour costs, the correlation with inflation and the uncertainty of what's happening in Ukraine at the moment and supply from COVID. So all of those don't auger particularly well. You also mentioned the term ‘medium term’. Can you define what medium term is please, sir? And when you talk about a number of rate rises over the coming months, can Australians expect a quarter rise every single time the RBA is going to meet over the next six months or so? What sort of increase are we talking here? Keeping in mind you are gun shy about predictions given what's happened in the past six months.

Well, I obviously don't want to kind of predict what the Board's going to do over coming months, but I think what I can say is that the midpoint of our inflation targeting band is 2½ per cent. I've said previously that I would expect that at some point in the future, that interest rates would get back to that level because after all that would mean the inflation adjusted interest rate was zero. I hope actually over time we can do better than that, but that would require stronger productivity growth in Australia. But over time, it's not unreasonable to expect that interest rates would get back to 2½ per cent. How quickly we get there, and indeed, if we get there, will be determined by how events unfold. We're going to be, as we have been up until very recently, guided by the evidence and it will depend upon how the resolution of the various uncertainties that you cited occurs.

We've got an open mind. We've been over the past two years, very flexible. We changed in response to the changing circumstances and we'll continue to do that. But it's not unreasonable to expect that the normalisation of interest rates over the period ahead could see interest rates rise to 2½ per cent – that would be a more normal level of interest rates – and how fast we get there, and whether we get there, is going to be determined by events.

Follow up question. Has there been even one phone call from any tier of government or the opposition in relation to your decision today?

No. As I said before, it is a testimony to the political culture in Australia that the Reserve Bank can take its decisions completely independently of politics. We make decisions in the national interest. I know those decisions are not always popular. They're contested and in some cases they're controversial. The government of the day appoints nine Australians to make those decisions and we take them in the national interest with no political interference. And we don't take account of politics in making those decisions either. It really is testimony to our political culture that that can be the case and that's not the case in every other country, obviously.

Another question from the room. This is Ed Boyd from Sky News.

Governor, do you believe you're behind the curve and you've come to this cash rate rise a bit too late? With soaring inflation across the economy, will you admit that you are playing catch up now?

I don't see it in those terms that we're playing catch up, but I do see it in that we need to normalise interest rates. We have said right through the pandemic that we would wait for the evidence on both inflation and wages. We intentionally did that because we wanted to get out of the low inflation years that we'd been in previously. We made a commitment to wait for the evidence. That evidence is now upon us. It was clearly there in the CPI and the evidence on wages is there in our liaison. I think we'll see it in the published data over the coming months. Having got that evidence it's appropriate to move, and we will move to normalise interest rates and I expect to see further increases over the months ahead. But we wanted to wait for the evidence. That was a conscious decision made and I know when you're waiting, people say sometimes that, well, you waited too long and people will make that point, but we wanted to wait for the evidence, and as soon as we've seen the evidence we've moved.

And Governor, just as a follow up, how long is it going to take for the cash rate to get to that 2½ per cent level? How far off are we talking?

Well, it's a very good question and I don't want to make a prediction on that for you. It will depend upon how these various issues resolve. It's quite possible that the supply side issue is resolved. And even if, say, for the price of oil, it stays where it is, then the inflation rate in oil prices becomes zero. It was 35 per cent. Oil price was up 35 per cent over the past year. If the oil price stays where it is, that'll be zero next year. The price of home building is up 13½ per cent over the past year. So the cost of building a new home is up a long way, it's quite possible that it continues to rise, but probably not at another 13 per cent. So there are reasons to believe that inflation will start moderating, but on the other hand, the labour market's tightening. So it's difficult at the moment to predict for you how those factors are going to play out, but the main point is, that it is time to normalise rates. We don't need these emergency settings anymore. With an unemployment rate of 4 per cent and probably likely to get go lower and the economic growth this year of 4 per cent, we don't need these emergency settings anymore, and it's good news. I know many people don't like rising interest rates, but it's a reflection of the underlying strength of the economy that we can move off these emergency settings.

Next question from David Chau, from the ABC.

Governor, so it was only months ago, the RBA reassured the public that rates are unlikely to rise until 2024 and then more recently it's plausible they might rise this year. Indeed, there was a rate hike today. So, you know, we don't know how many borrowers relied on the RBA's previous guidance, and took up massive debts to get into the property market in reliance on the fact that it might not rise till2024, but, you know, I guess they're in the unfortunate predicament that house prices are starting to fall and they may fall to negative equity, especially in Sydney, Melbourne, and those expensive markets. So I guess what would the Reserve Bank say, to those borrowers, who I guess, were listening to the guidance of the Reserve Bank, which has changed, you know, rather quickly in a short amount of time?

We've certainly changed the guidance and we've changed it because the economic circumstances have changed. Nobody predicted, at least to my knowledge, that we would be looking at the lowest unemployment rate in decades now. You might recall that during the dark days of the pandemic, through much of 2020, people were talking about an unemployment rate in Australia of 15 per cent; that there would be deep scarring that would take many, many years to overcome. So that was the situation that people were thinking through 2020. Fortunately, things have worked out much better than that, which means that we don't need these very low level of interest rates that we thought we would need. And I know it's coming as a shock to many people, but it's a testimony to the resilience of the economy and the fact that more Australians have jobs today than ever before.

I think the other point I would make is that Australians have understood that interest rates would go up at some point. None of us understood really at what point that would be, but I think we all understood that at some point interest rates would go up. They didn't know when, but they knew they would go up and they responded appropriately. Over the past couple of years, households have saved an extra $240 billion over and above what they otherwise would've saved. They've squirrelled that away, it's in bank accounts, and the average owner-occupier with a mortgage is more than two years ahead of their mortgage repayments. Back in 2018, they were only one year ahead.

So they've saved a lot of extra money and they're ahead, many people are ahead of their mortgages. Loan arrears at the moment are very low. So people have understood that interest rates would go up. It's happening earlier than I expected. I'm sure it's happening earlier than many borrowers expected. But I think we all knew that interest rates couldn't stay at this current level forever, and many people have saved in advance of that day and I think that's very sensible behaviour.

And if I may, Governor, just a quick follow up question. So I think in the post-meeting statement the RBA is expecting inflation to fall back to, you know, within the target band sometime next year or 2024 as these supply shock factors dissipate. But, you know, these are big ifs too. Like no one knows how long the Russian Ukraine war would last, the slowdown in the Chinese economy. So is there a chance you might have to revise these future lower inflation forecasts in the very near future?

Well, the world's probabilistic, isn't it? So I can't say there's no chance that that's going to happen. All the inflation surprises in the past six months globally have been to the upside. We've responded to that with the provided set of forecasts and we're expecting the headline inflation rate to get to 6per cent, and then to gradually come down. But you're right, if the supply side problems get resolved quickly, China gets on top of COVID, there's a peaceful resolution in Ukraine, the inflation outlook could look quite different, but as you say, they're all big ifs.

Okay. We might go just some questions on the phone. If I could ask everybody to limit themselves to one question, because we've got a number of people who would like to ask something. The first person on the line is Ron Mizen from The Australian Financial Review, Ron?

Good afternoon, Governor. Thank you for your time as always. When we spoke or when we had a question and answer session in November last year, you said that rate rises were plausible in 2023 and in February you said they were plausible in 2022. The markets have been tipping rate rises in 2022 for quite a long time and you've previously labelled that a complete over-reaction to inflation data. I just want to see, why do you think the markets have got this so right over this period, while the RBA hasn't? And the markets are currently pricing in a cash rate at 2.75 per cent by December, do you think that's plausible?

I don't want to offer any comments on the plausibility of market pricing. Why have interest rates increased more quickly than we had expected and broadly in line with the market? I think that the main reason is that inflation has surprised everyone on the upside. Even people who thought we were going to raise interest rates quite quickly, my understanding is they did not predict 5 per cent inflation or even 6 per cent inflation. So this has come as a surprise to us all. Not just here in Australia. I know in the US, at the beginning of last year, the Fed thought that inflation in 2021 was going to be 2-and-a-bit per cent. It turned out to be 8. So it's come as a surprise to all central banks and to most market forecasters, and in response we've had to increase interest rates earlier than we expected. Why the market pricing got the timing more accurate than we did, I'll have to leave others to make a judgement about that, but this is, inflation surprises has really been a big one and we've had to respond to it.

The next question is from Chris Reid from Morgan Stanley.

Thanks for your time, Governor. I guess, my question is more specifically around the rate path that was used within your economic forecast. Can you just confirm, is that similar to the last SMP where that's an average of market economists' expectations and market pricing? And would you view that given that that results in inflation only just touching the top of the target band in two years' time, is that really the minimum of rate hikes that's required, at least given your current understanding of the economic outlook?

Well, I can confirm that we've used the same assumption as last time, an average of the market path and the economists' path. And just to be specific about that, we're assuming in preparing these forecasts that the interest rate by the end of the year is between 1½ and 1¾ per cent. And then by the end of next year at 2½ per cent. So that's a technical forecasting assumption. It's not a prediction, it's not a policy prediction, but it's a technical forecasting assumption and based on those assumptions, the inflation rate does come back to 3per cent in 2024. There's just a huge amount of uncertainty. So I don't think you want to read too much into that, but from a forecasting point of view, that's the technical assumption we've made, 1½ to 1¾ per cent by the end of the year and 2½ per cent by the end of next year. And it's not an unreasonable set of assumptions to make, but will depend as I said before, on how things develop.

The next question is from Patrick Commins from The Australian.

Thanks very much, Governor. My question is how confident are you that you can contain inflation over the coming year or two without sending the economy into reverse?

The economy's got quite a lot of positive momentum at the moment, hasn't it? We're expecting growth to be 4 per cent this year and roughly 2 per cent next year. The number of job ads at the moment is at a record high, job vacancies are at a record high. Firms tell us they want to hire more people. So there's quite a lot of positive momentum at the moment. So I think it's quite unlikely that all that positive momentum would be completely lost and it's not going to be lost by relatively small movements in interest rates. As we all know, the future is inherently uncertain, but at the moment the economy looks like it has quite a lot of positive momentum and that's clearest in the labour market.

Next question is from Shane Wright from The Age.

G'day, Governor. My question goes to fiscal policy. The government has announced in the budget $5 billion in cost-of-living relief plus the $12 billion that's going to come from the middle of the year through the enhanced lower and middle-income tax offset. Plus there's been several billion promised by both sides of politics through the campaign. Was there any discussion today about fiscal policy and does that – it's about 1 per cent of GDP coming into an economy that you say has a lot of positive momentum with people saving an extra $240 billion in savings – doesn't that make bringing inflation under control more difficult?

I'm not going to be drawn on fiscal policy. I'm here to explain our decision today. What we did talk about this morning was the growth outlook for the Australian economy. And as I said, we're expecting growth of 4 per cent this year and the unemployment rate to come down to 3½ per cent. Fiscal policy plays some role in that, but there are broader factors at play, including the recovery from the pandemic, the fact that firms need to invest after a period of underinvestment and the fact that household savings are still high and households have a big buffer of savings to draw on. So they're the factors that are driving the economic recovery and fiscal policy is playing some role, but these other factors are more important.

The next question is from Andrew Ticehurst from Nomura Australia.

Governor, thank you for holding this briefing. You said a few moments ago that 2½ per cent represents a more normal level of interest rates. Could you please clarify for us, does that mean that you think the neutral nominal cash rate right now is roughly around 2½ per cent? And do you think it will be necessary to take that cash rate into restrictive territory to bring inflation back under control?

I think working out what the neutral rate is is very difficult and I don't want to be pinned down on a particular number. I think it's quite plausible that the neutral real interest rate is positive. If the economy can generate reasonable productivity growth, I'm sure the neutral real rate is positive. So my hedging here is really around the fact that I don't really have a good handle on what underlying productivity growth in Australia's likely to be. The higher it is, the higher will be the neutral real rate. I think it is at least in real terms zero, which would mean that we'd have to get back to 2½ per cent. And whether we need to have interest rates higher than that, it remains to be determined, but it really comes down to what you think underlying productivity growth is. If underlying productivity growth is strong, we're going to have higher equilibrium interest rates, we'll have higher growth in real wages, there'll be more government revenue and we'll have stronger asset prices. So, so much of this comes down to stronger productivity growth and re-energizing the productivity growth agenda in Australia.

The next question is from Su-Lin Ong from RBC Capital Markets.

Good afternoon, Governor. I was wondering whether any other quantum changes to the cash rate were considered today? Was 15 basis points or 40 basis points part of the discussion? Was 25 a compromise or was 25 delivered to put a bit more focus on the ES balance rate?

Well, we kind of consider, as we always do, a range of options so the options that you just mentioned were certainly ones we talked about. But the 25 basis point increase wasn't a compromise decision. It was one that we agreed was the right amount. We want to get back to business as usual. In the past, 25 basis points was the standard amount we moved. We deviated from that in various times in the past because circumstances required it, but 25 basis points is the standard move. We want to signal we're getting back to business as usual, things are normalising and 25 basis points was the right number. It doesn't preclude a bigger or a smaller number in the future, but we wanted to signal that, really, things are getting back to normal, it's business as usual, we're making a standard adjustment in interest rates. Fifteen basis points would've been small and 40 basis points to take us to 50 would've been, you know, larger than normal. So we want to get back to normal and business as usual.

Next question is from Tapas Strickland from National Australia Bank.

Good afternoon, Governor Lowe. It seems like you have relied a lot on evidence from liaison for labour costs picking up. How confident are you that it reflects what is going on? And does this mean you'll de-weight the signal from the WPI over the next few quarters?

No, we're not going to de-weight the signal from the WPI. But each month we talk to many, many businesses and we always ask them what the wage increase they're currently paying is, and what the wage increase they expect to pay over next year. And in the past two months, there's been a very marked shift. Most firms used to say, well, 2, maybe 2½ per cent. And now we have roughly 40 per cent of firms answering that question saying they're going to pay wage rises above 3 per cent, and a significant number of firms saying they're going to pay bigger wage rises than 3 per cent. So that's quite a big change just in the past two months. It's consistent with the ongoing discussions that we are having with other businesses as well. And you're starting to see that in the business surveys as well, undertaken by the banks and others where they're asking about growth in labour costs.

So it's a very clear message coming through all these channels that labour costs are on the move. I think in time, we'll see that in both the Wage Price Index and in the measure of labour costs from the National Accounts. But the message from our liaison, as you picked up, is very clear at the moment, wages growth in Australia is finally picking up. This is something that we welcome. For too long, I think wages growth had been stuck in the 2s. It now seems to be moving into the 3s for many businesses and in some cases, where labour is in short supply, to the 4s. So that's a welcome development. It's a by-product of a tight labour market. But it does mean that the time for emergency settings of interest rates is over and we have to normalise.

Next question is from Prashant Newnaha from TD Securities.

Good afternoon, Governor. The language in today's statement is very similar to that employed by the BoC and the Fed in that you're all committed to rein in inflation and the BoC and Fed appear intent on front loading hikes and getting to neutral quickly. Is the RBA also intent on front loading hikes like the BoC and the Fed?

I'm not sure that I'd agree completely with your characterisation of the Fed and the Bank of Canada, but we are committed to normalising monetary policy as conditions allow. As the unemployment rate continues to come down and the evidence on wages and inflation continues to accumulate, then we'll normalise interest rates. We're not on a pre-set path here. We haven't made any decision about the future size of upcoming interest rate changes. We're going to respond to the conditions as we see them. We haven't made a decision about upcoming interest rate movements in terms of whether we need them and what size they're going to be. We've got an open mind and we'll be guided by the evidence here.

The next question is from Jonathan Shapiro from The Financial Review.

Thanks, Governor. My question is about quantitative easing, or I guess, the balance sheets. I'm just wondering how, obviously quantitative easing and the bond purchases was a big part of the stimulus and easing financial conditions. I just wonder how should the man on the street think about the balance sheet from here? How do you plan to calibrate, either speed up or slow down the timing of the balance sheets run off, to tighten conditions and get inflation back to where you need it to get to?

Well, I think the person on the street shouldn't really be thinking about this. I mean our balance sheet is projected to decline. I hope to see that really being on autopilot. We've laid out clearly that we don't intend to reinvest the maturing bonds and we have no current plans for selling bonds. So you can think about the balance sheet withdrawal being on autopilot and not a material influence on monetary policy from here on in. The main tool for adjusting monetary policy is back to the cash rate and we're returning to this world of normal where interest rates move around because of the outcomes on inflation and on the labour market and that's going to be our tool of choice from now on. And I hope that the person on the street doesn't have to worry about our balance sheet for some time. Better things to worry about.

The next question, is from John Rolfe from The Daily Telegraph.

Thanks, Governor. Your initial written statement today mentioned an inflation rate of about 3 per cent by mid-2024. Given your comments in this Q and A regarding 2½ per cent inflation and a 2½ per cent cash rate, does that mean that by mid-2024, we can expect the cash rate to be near 2½ per cent?

Well, it will depend. We were having this discussion before about what the neutral rate is, we've got an open mind about that. If productivity growth is really strong, then I'd expect it to be higher than that. But if it's weak, then the equilibrium interest rate is lower than that. So I don't think you can read any particular path of interest rates into these forecasts. As I said before, the forecasts are predicated on the interest rate getting to 2½ per cent and that leading to inflation coming back to 3, but there are a lot of ifs there. There are so many uncertainties, and I think it's too hard to stand here today and say, look, we have a great deal of confidence that interest rates are going to peak out at 2½ per cent, or some other number. It depends very much on how you view the equilibrium neutral rate and that remains to be determined. We've got an open mind and we'll respond to the data as they come in.

The next question is from Stephen Halmarick from the Commonwealth Bank.

Good afternoon, Governor, thanks for doing this. So there's been lots of great questions on how high interest rates might go and your outlook for wages, so thanks for your clarity on that. I wanted to ask also about the quantitative tightening program as you've described it. So allowing the balance sheet to run off. What impact do you think that might have on bond market yield, on bond yields and particularly on funding costs, financials and companies in Australia. And when you talk about the neutral rate, do you mean the cash rate or do you mean actual borrowing rates that businesses and people in the Australia will have to have to face so, you know, standard variable rate and business borrowing rates. Thanks.

I think this discussion we've been having through the course of this briefing on the neutral rate is really in terms of the cash rate. So, as I said before, I hope that we get back to the point where we have at least a non-negative real cash rate; that would require the cash rate to be 2½ per cent, if we're going to get inflation back to 2½ per cent. So it's really about the cash rate. I've lost track of the first part of your question. It was, I think, it was about quantitative easing, but I lost track of what you were asking when you were moved to the neutral rate.

Stephen Halmarick, are you still on the line?

Can you hear me?

Yeah, so I lost track of the first part of a question.

It was about the impact of quantitative tightening, so allowing balance sheet to shrink on bond yields, and actual borrowing costs for Australian companies and people.

It's a good question. I think the announcement on not investing the maturing bond proceeds is unlikely to have any impact at all on bond yields because what's important is how our announcements line up with what people expected. Bond markets are forward-looking and my understanding is they had already priced in today's decision. If we had made a different decision, if we'd made a decision to continue to reinvest the proceeds, then I think that would've forced bond yields lower and possibly the exchange rate lower. The fact that we made an announcement that was in line with what people expected means that it has very little impact from here on bond yields or the exchange rate.

And that's how we want it to be. We want people to return to a world where they think about the cash rate as the main tool for monetary policy. We had to buy bonds when the cash rate was effectively at the zero lower bound. It couldn't go any lower. We wanted to deliver more stimulus the economy so we had to buy bonds, but those days are over. So our plan now is to allow the bonds to mature, to run off over time, not to sell them, but to allow them to run off over time and to return to a world where the cash rate is the instrument of money policy.

That doesn't mean that a situation couldn't develop where we had to return to a world where we had to buy bonds again, but let's hope that doesn't happen.

The next question is from John Kehoe from The Australian Financial Review.

Thank you, Governor. Just reflecting on the forward guidance on interest rates over the last couple of years, notwithstanding you point to, you know, challenges with the pandemic, it's difficult to forecast, grant you that. But I mean, how would you reflect on forward guidance as a tool? And I noticed you're being a lot less certain in how you're looking at the future today. Do you think forward guidance as a tool maybe was overused and you'd be more reluctant to use it in the future, given the lessons that have been learned from some of the inaccuracies on it?

Yeah, it's a very good question and later on in the year, the Board's going to have a full review of how forward guidance has been used and how we should use it going forward. So towards the end of the year, I'll be in a better position to answer that question. But I just want to make one general point and that is really to ask you to go back to 2020. We were faced with a global pandemic. We were being told that it would take many, many years for vaccines to be developed, that people could be locked down for a long period of time. That tens of thousands of Australians would die from the pandemic, that our hospitals would be full, that we would have double digit unemployment, perhaps 15 per cent unemployment, that there would be deep scarring that would last for years, perhaps decades. That was the situation we were making decisions in, in 2020. And in that situation, the board decided that it wanted to do everything that it could possibly do to help the economy through what was a truly horrific outlook. I didn't want to leave any stone unturned in that very difficult situation. The Reserve Bank wanted to do everything it could do to help the economy through that period. And one of the things that we could do is to be very clear about what we saw as the outlook for interest rates, that we would keep them low for as long as was necessary and at the time, we thought it was going to be necessary out to 2024.

So that was our mindset. Thankfully, we were wrong. The economy has been much better. The unemployment rate has come down. The economy has been strong. Australians have been resilient, they've adapted and interest rates are normalising much quicker than we thought was going to be the case. So from a forecasting perspective, that's embarrassing. We should forecast this better. We didn't. But what we did do in 2020 was make sure that we took every possible step that we could take to help the country in the full knowledge that if things turned out better, we'd have to reverse the policy stimulus more quickly, that I'd have to go back on the forward guidance, that it would be embarrassing, but at the time, we thought that was the right decision.

In retrospect given the same situation, I'd probably make the same decision because I think it was incredibly important at the time to provide confidence that both the central bank and the government would do the right thing. We would stand by Australians and make sure that the country could get through this with limited economic damage, and it's worked. And so because it's worked, we're having to change interest rates earlier than we thought. That's a bit difficult to explain, but as I think it's basically a positive story, a story of resilience. We have people with jobs, finally have rising incomes and certainly we didn't expect that to be the case.

So that's a long-winded answer to your question, John, but we will be taking a full review of forward guidance later in the year, how we're going to operate, in a world where hopefully things are more stable and the shocks are smaller.

The next question is from James Glynn, from Dow Jones.

Hi Governor. Thanks again, for this press conference. Your business liaison is clearly full of anecdotes pointing to rising wages and that's underpinned your decisions today. However, in the past we've been here before, the business liaison has been chock-a-block full of these reports, yet it hasn't converted into high numbers in the actual data. In some ways it's like gathering in the backyard, waiting for the Roman candle to go off, but it just fizzles. What will you do if the Wage Price Index data in a couple weeks is a fizzer? Will you just look through that and press on, confident that the wave of anecdotes will eventually come good?

Oh, I'd say it's more than a wave of anecdotes. As I said before, we ask firms what they're increasing wages by at the moment and that has shifted. I expect that the higher inflation rate, we'll see a stronger increase in award wages this year. I expect that over time the governments will have to shift their wages policies in a strong labour market with inflation as high as it is. Anyone who wants to hire people to work for them will have to pay higher wages and the message we're getting at the moment from the liaison is very clear. That's just one piece of information, as you said, the WPI will be another and we'll have the National Accounts measure later this month.

I'm reasonably confident and I say this with only limited hesitation, I'm reasonably confident that over coming months we'll see the stronger wage growth in, in most of the headline data series that we follow. If we don't, we'll have to work out why, but the message at the moment from liaison is very strong.

The next question is from Robert Rennie from Westpac Bank.

Governor many thanks for taking the time today. We've seen a number of central banks around the world announce 50 basis points, and that likely includes the Fed in the next day or so and a number of Australian economists were actually forecasting 40 basis points today. So why wasn't 40 or 50 basis points under consideration, particularly 50 basis points given the interest in getting away from emergency settings quite quickly. The other quick question, if I can, also interested in why the exchange settlement balance discount was kept at 10 basis points rather than it being widened as we were used to in prior history. Thank you, Governor.

The question of the size of the movement. As I said before, we wanted to get back to business as usual of normal operating procedures where we're most of the time moving by 25 basis points and only deviate from that if there's a really strong argument for doing so. In the US, in Canada, in Europe, in the UK, inflation is much higher than it is here. The headline inflation number last week was a shock at, you know, over 5 per cent. That's quite a lot different from 8 per cent or 7per cent, which many other countries are seeing. So the inflation outlook here is not as serious. It's also the case that wages growth in Australia while it's picking up, hasn't picked up like it has in the United States. So I can understand why they're talking about bigger numbers, than we are. But in the circumstances that we face, we thought a standard adjustment of 25 basis points was the right decision and the Reserve Bank Board meets every month as you know, so we'll get to make another decision next month.

In terms of the interest rate we pay on exchange settlement balances, if you have read the minutes from the previous Board meeting, we had an extensive discussion on the way we were going to operate monetary policy going forward with high settlement balances. And we announced last time, that our intention was to keep the gap between the exchange settlement rate and the cash rate target at 10 basis points. We're in a world with very high exchange settlement balances. We think that's likely to continue for some time and given we're in that world, we thought the right deviation between the cash rate and the ES rate was 10 basis points. And you can find a fuller elaboration of that discussion in the minutes from last month.

We have another five questions to take us to five o'clock, but the next one is from Michael Heath from Bloomberg.

Governor, hi, this is Swati from Bloomberg. My question is around the consumer confidence data. We have been seeing a consistent drop in consumer confidence data I'm hearing today. I just wanted to understand how much is that going to weigh in your interest rate decisions especially given that you mentioned that households are a lot more indebted today than they were previously?

What we're really looking at here is the trend in household consumption. Consumer confidence obviously has a role in influencing how much people spend, but the real influences on spending are: Do you have a job? What's your wage increase? How much money do you have in the bank? And how much do you have to pay on the mortgage? They're the drivers of how much we each spend and at the moment people are getting jobs and I expect them to continue to get jobs. Wages are increasing more quickly, inflation is higher. So that's eating into people's real incomes. So we've got to weigh the effect of the decline in people's real incomes temporarily while inflation's high, against the fact they are getting jobs, they should be confident they can continue to get jobs and many people have a lot of money in the bank that they can draw on. I talked previously about the $240 billion that people have put away.

So the issue is how is the decline in real income going to offset, or balance against, the fact that we're getting jobs, we should be confident, we'll get jobs, and we've got a lot of money in the bank. And this is one of the reasons why I'm hesitant to be drawn into the future of interest rates, how far they're going to go, because this is quite a big uncertainty, how these various factors are going to balance out. I mean it's not consumer confidence itself that's the driver, it's these other things, whether you've got a job, how fast your wage is going up and how much money you've got in the bank.

Next question is from Justin Fabo from Macquarie Bank.

Hi there, Governor, thanks for your time. I know you talked a lot about the wages stuff and liaison. I just wanted to question you a bit more on that. I think you've mentioned that it's more of a forecast still, in terms of a pick-up in wages growth, rather than hard evidence from either liaison or surveys, that it's actually been kind of percolating at a faster rate. And there's some other evidence that you haven't mentioned is when you look at consumer surveys and their questions on wages growth they're still not really showing a pick-up in people's actual wage outcomes, over and above what we're seeing in the WPI. So it might be coming, but is that fair to say that it's still a forecast and you're still waiting for it to happen over the next three to six months, rather than actually seeing it in what businesses are saying. Thanks.

It's not just a forecast. Businesses are telling us right now that they are paying higher wages or they've taken the decision to lift up the rate of wage increase in their firm. You talk to any business person in the country at the moment, they tell you it's hard to get workers, particularly, with the right skills, they're prepared to pay more for them and with workers experiencing cost-of-living pressures in a tight labour market, it's understandable why firms are paying higher wages. And they're telling us they're doing it right now. Obviously not every firm in the country is paying higher wages, in the public sector, they're not, but many private sector firms tell us that they've already responded to the tight labour market and the higher inflation. I expect to see further responses in the months ahead. So we've got the evidence now, we thought we have the evidence now to move, and I think we'll see further evidence over coming months.

The next question is from Phil O'Donaghoe from Deutsche Bank.

Thanks Governor. I just wanted to ask in the post meeting statement, you said that the Board is not currently planning to sell the bonds that they purchased during the pandemic. Under what circumstances might that change and has the Board considered the cost and benefits of an active QT program? Thank you.

The possibility that we sell bonds, I think, is remote, but I'm hesitant to say never because, as we know, the world can change in unexpected ways. But we discussed the possibility today about under what circumstances that we'd sell bonds and they were so remote, it's not worth elaborating on them. But it is an option, but it's an extremely remote probability option.

Last two questions. First one from Sophia Rodrigues from Central Bank Intelligence.

Thank you, Governor. So from a position of wanting to see a shift upwards in inflation psychology so inflation moves sustainably in the target band, have you in the span of less than two months trying to … are you now trying to rein in that same inflation psychology, so you can have inflation moving back to the target band. Is my assessment correct? And if I'm right, does it mean that front loading a rate hike becomes a necessity, not a choice?

We're not trying to rein in the inflation psychology. We had wanted the inflation psychology to shift. You know, it'd been stuck in a world where inflation was consistently below 2 per cent. I think it was becoming a problem. So we'd wanted the inflation psychology to shift, and it has shifted. The rate of wage growth as I talked about is picking up and I think it's quite unlikely that we're going to return to sub-2 per cent inflation at any time soon. So the inflation psychology has shifted.

We are moving today in a pre-emptive way, in a sense, to increase the probability that doesn't shift too far. I would like Australians to know that we will take what action is necessary to get inflation back to 2 to 3 per cent. So people shouldn't be worried that the higher inflation, the 5 per cent rate, is going to persistent indefinitely. We think inflation will come down because the supply side problems will be resolved and we're going to take the necessary steps on monetary policy to bring inflation back down. So I hope that people understand that we will take the necessary steps to make sure that inflation in Australia does not become a persistent problem. I don't think we have to rein in the inflation psychology, because it hasn't shifted in a troubling way yet. And we don't want it to shift in a troubling way and today's decision I think helps increase the chance that that is how it works out.

The last question is from Tom Dusevic from The Australian.

Thank you, Governor, for your comments on productivity, one of the lone voices out there, and an important voice. So my question goes to the productivity agenda. If we had more competition in Australian product and factor markets, would that help you in your inflation fight and also improve productivity across the economy?

Well, I'm here today to explain what we did today. So I don't want to kind of elaborate on issues outside, beyond what we talked about today, other than I agree with the general principle that stronger productivity growth is good. It's going to mean higher growth in real wages, more resources available for the government to spend on goods and services for the community. It will mean a higher equilibrium level of interest rates, which I think it would be good and it would mean stronger asset values and a wealthier and more prosperous society. So today's interest rate decision isn't going to influence any of that but I agree with your general sentiment.

That brings us to the end of proceedings. Thank you for everybody in the room and on the phone and we'll end it there. Thank you.

Thank you. Thank you for attending and listening.