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Reserve Bank of Australia Assistant Governor Sarah Hunter said Tuesday the central bank believes the economy is close to achieving full employment and bringing inflation back to target, following three interest rate cuts implemented this year.
Speaking at the Australian Financial Industry Association conference, Hunter outlined the RBA's cautiously optimistic outlook while acknowledging ongoing challenges in housing supply and construction capacity that continue to constrain economic growth.
"We think that we're pretty close to full employment," Hunter said. "We've put through three cash rate cuts this year. And in the context of the labor market and our mandate, we also think that we're pretty close to full employment."
Hunter said inflation, which peaked at nearly 8% at the end of 2022, has been successfully brought down through monetary policy measures that began more than two years ago with cash rate increases.
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Balanced Economic Outlook Despite Regional Variations
The RBA official described the current economic outlook as "broadly balanced," with risks that could push the economy in either direction. While some sectors show continued strength, particularly in Queensland and Western Australia, other regions face slower momentum.
"There's still some strength in some parts of the country, out west as well in Perth," Hunter said. "If you try and get a tradie, that might still be a bit of a challenge. If you're in Brisbane, it's definitely still a bit of a challenge."
Based on the bank's August forecasts, which assumed market expectations of additional rate cuts, the RBA projects core inflation will remain around the midpoint of the target band while the labor market maintains current employment levels relative to population growth.
"We think the economy is going to stay, in terms of inflation and the labor market, about where it is right now," Hunter said. "We thought that inflation in underlying terms, the core inflation, would stay around about the midpoint of the target band."
Household Conditions Show Improvement
Hunter said household financial conditions are beginning to improve as several positive factors converge. Wage growth now exceeds inflation, meaning workers are taking home more in real terms than a year ago.
"We're now in a position where wages are growing faster than prices, so wage growth is higher than inflation," she said. "So the average person, the average worker, is now taking home more in real terms than they were a year ago."
The improvement stems from multiple factors including stage three tax cuts implemented a year ago and three interest rate reductions for variable rate mortgage holders. Most banks have passed on the rate cuts to customers, Hunter noted.
However, she acknowledged the ongoing challenge of higher absolute price levels compared to pre-pandemic periods, using milk as a personal example.
"Milk is an awful lot more expensive today than it was pre-COVID, and I still catch myself on that even now," Hunter said. "The price of milk will not go back to where it was pre-COVID. Same thing for bread, other staples, petrol and so on."
Construction Sector Faces Capacity Constraints
The construction industry continues to face significant capacity constraints despite strong demand across multiple sectors, Hunter reported. The sector must address residential housing shortages while managing substantial pipelines of non-residential and infrastructure projects.
"There's just a lot to get done," she said. "So whenever I talk to people in the construction sector, they're not short of demand, generally speaking. What they're worried about is how the sector can get it all done with the capacity it's got."
The capacity limitations span labor availability and materials access, though Hunter noted material supply issues have improved significantly since the COVID-19 pandemic disruptions.
Construction demand includes the widely acknowledged need for more residential housing, plus social infrastructure like hospitals and schools required for population growth, and major infrastructure projects including renewable energy transition facilities.
"With a growing population, we have got to do that," Hunter said. "You know, kids need someone to go to school. We need those hospitals and things like that."
Housing Market Responds to Rate Cuts
The housing market has begun responding to interest rate reductions in typical fashion, with modest price growth acceleration and increased investor mortgage lending activity.
"We've seen a bit of a pickup in prices growth," Hunter said. "As I said, a bit of a pickup in terms of investor mortgage lending. So that dynamic is not atypical."
Hunter characterized the housing market response as occurring within normal parameters and consistent with historical patterns following rate adjustments.
The persistent challenge remains supply-side constraints rather than demand management, with developers citing ongoing issues including skilled labor shortages, high construction costs and lengthy planning approval processes.
"Interest rates don't really have a role to play there," Hunter said regarding structural supply challenges. "But we know from what we hear from the S1 that it is still a challenge."
AI Technology Impact Still Emerging
Regarding artificial intelligence and its economic implications, Hunter said the RBA views AI as a "generalist technology" applicable across virtually all economic sectors, but expects implementation benefits to materialize gradually over years rather than immediately.
"We're not really seeing its impact in the data just yet, but I'm not surprised by that," she said, comparing the rollout to the personal computer revolution of the 1980s and 1990s.
Hunter cited economist Robert Solow's observation about early technology adoption, noting that transformative technologies are often visible everywhere except in economic data initially, with measurable productivity gains appearing later.
"Maybe we can do it quicker this time, and if it does give those kind of benefits, that would be great," she said. "But it does take time, I think."
The RBA expects AI to automate repetitive tasks while preserving roles for human decision-making and innovation. Hunter emphasized that successful AI adoption will require businesses and workers to develop new approaches to leveraging the technology effectively.
International Factors Remain Key Risk
Hunter identified international economic conditions as a primary concern for the coming 12 months, particularly developments in the United States and China and their global transmission effects.
"I certainly can't depart too far from the international conditions and how they play out," she said. "There's a lot of uncertainty and unpredictability in that space."
The RBA maintains close monitoring of China's economic performance given Australia's substantial trade relationship, while tracking how US policy changes affect global economic conditions.
Hunter noted that financial markets are experiencing "interesting developments" as participants respond to changing policy settings and structural shifts in the global economy.
Credit Conditions Support Private Sector Growth
Business and household credit growth has picked up moderately, with lending to businesses expanding at what Hunter described as a "pretty healthy pace" without reaching boom levels.
Importantly, the RBA's business liaison program, which conducts approximately 900 interviews annually with organizations across the economy, indicates that credit availability is not currently constraining business operations for most firms.
"Not many businesses are telling us that access to credit is a constraint on their operations at the moment," Hunter said, though she noted some sectors like startups and small-to-medium enterprises face greater challenges on average.
The finding supports government expectations for private sector leadership in economic growth as public sector stimulus measures moderate.
Personal Experience Shapes Policy Perspective
Hunter shared how the 1992 European Exchange Rate Mechanism crisis, which occurred when she was young, profoundly influenced her understanding of monetary policy's real-world impact through her family's experience.
Her father's small business nearly went bankrupt during the economic downturn that followed the UK's dramatic exit from the ERM, leading to her parents' divorce and lasting family consequences.
"For me, the lesson from that period is how powerful policy can be, for good or for bad monetary policy in particular, and how important the mandate that we have as central banks really is," she said.
The experience reinforces Hunter's commitment to balancing low inflation with full employment objectives, ensuring policy decisions consider broad community impacts.
"I wouldn't want anyone to experience what my dad and my family did as a result of a policy decision we make," she said. "So balancing those two, that balance I talked about, for me, it's actually something I've lived experience and it's very real."
The RBA continues monitoring economic conditions closely while maintaining its dual mandate of price stability and full employment, with Hunter emphasizing the institution's responsibility to "deliver for the country" through careful policy calibration.
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