Hello, I'm Rebecca Jones and this is the

Bloomberg Australia podcast where each

week we go behind the biggest stories

shaping Australia's place in global

business. Well, the Reserve Bank is this

morning warning a recession may be the

only way to drive inflation out of the

economy.

>> The rate rise will put further pressure

on borrowers already feeling the pinch

from higher petrol prices. We do

understand that this puts additional

pressure on people who were already

feeling uh these pressures in our

economy even before the escalation of

the conflict in the Middle East which is

making things hard up.

>> Inflation is proving a stubborn beast to

tame. For the second straight meeting,

the RBA has lifted interest rates again.

But could things get even worse? A

widening moore in Iran is threatening to

push up fuel costs. And that's adding

fresh pressure on inflation, interest

rates, and our mortgages. So, what does

all this mean for the economic outlook

from here? To discuss this and more, I'm

joined by James McIntyre. James is an

economist for Bloomberg Economics.

James, this is not the start to 2026

that you expected. Backto-back rate

hikes. What happened? How did we get

here?

Yeah, that's right, Beck. This is

definitely not what uh when I was

sitting uh you know, thinking about

taking a Christmas break and and

pondering the year ahead for 2026. Uh

like um like several, I'd expected that

we would be uh seeing the RBA

eventually, you know, after weathering a

little bit of a bump up in inflation

eventually pivoting to to rate cuts this

year. uh but the first couple of weeks

of the year have seen a very significant

pivot from the central bank. Big shift

from where they were in in October and

to some extent November in terms of

their assessment of the inflation risks

in the domestic economy. And then over

the last couple of weeks, we've had what

looks to be a major shock uh to global

energy supplies and supplies of a whole

range of uh of commodities uh hit the

global economy. And that's what we're

just beginning to see the RBA grapple

with right now.

>> And of course, we're referring to to

what's happening in Iran and and that is

of course a very fastm moving situation.

Very much still a live news cycle,

right, James? The RBA came out of the

blocks hard this year discussing

capacity pressures in the economy and,

you know, demand exceeding supply. Can

you help me sort of decode that? What is

it that they're worried about

specifically? Is it the labor market or

what's the fuss here?

>> Well, there's a famous Australian film

called The Castle and uh and in that um

the uh the solicitor Dennis Dudo u who's

defending uh a family who's about to

lose their home to an airport is at the

high court saying it's the vibe. And

before the Iran shock, we were getting

similar messages from the RBA that they

were worried about some things in the

economy and the in the vibe on inflation

had shifted. They were grasping or or

identifying issues like capacity

utilization from business surveys being

elevated. Uh and the labor market before

we had the unemployment rate uh dip down

to below their forecasts uh dip down to

4.1%.

Before that they were talking about the

labor market and perceptions around it

being a little tighter than they had

been expecting. But there was very much

this vibe shift within the economy

towards a little bit more uh pressure

between supply and demand uh and this

capacity pressure coming through. Now I

think the labor market is an incredibly

important piece of the puzzle here and

has been a big big part of uh what the

RBA's decision to raise rates in March.

It wasn't just the shock that we've seen

to energy prices in the Iran war. It was

this pressure within the labor market.

Now, the labor market or the amount of

employment growth in the economy, it had

gone pretty much how I'd expected. It

slowed and it's it's slowed quite

dramatically. Um, we've got 1%

employment growth, which is, you know,

running well below uh working age

population growth at nearly 1.8%. And by

the way, that looks like that's uh going

to be remaining a little bit higher than

we expected thanks to some excess net

overseas migration. But back to that

labor market, jobs growth is slowed, but

that unemployment rate is very low and

it's and it's setting off alarms at the

RBA about capacity or a tight labor

market. And I'm scratching my head

going, well, what is what's the what's

the issue here? What's what's changed

and what's shifted? cuz I'd thought uh

my outlook had been that we would be

seeing that unemployment rate rising.

But what's happened is we've had a

participation rate decline over the last

year over the course of the last year.

That has surprised many. It surprised me

and I think it's probably quietly

surprised the RBA and now we've got a

much tighter labor market than they were

expecting and that's a big part of I

think the decision to hike.

>> And and what causes the decline in the

participation rate?

Well, um I I dug into this actually

because we have been experiencing over

the last decade or so a structural

increase in the participation rate.

We've been seeing rising female

workforce participation. It's still got

a little bit further to go um uh as a

result of reforms that we've made to

labor markets and things like child care

and and the culture with in all of our

organizations within Australia over the

80s and 90s and and 2000s and 2010s. And

we we're seeing ongoing dividends in

female workforce participation from

those improve long overdue improvements

uh many would suggest uh across that

front and we've also seeing increasing

uh workforce participation into in the

65 plus cohort the pension we used to be

eligible at 65 years and now it's 67. So

some of it is still uh that going uh

occurring but Australians are also

working uh longer as well. that is has

still got a way to run as well. So these

are two structural tailwinds that have

been pushing up the participation rate

over recent years but over the last 12

months they the winds blew in the other

direction and that's been a surprise to

us. I think there's still a further

structural increase in the participation

rate to go. But what it does mean is

that instead of the RBA looking at an

unemployment rate of 4.8 4.9 or 5%

they're staring at 4.1%. And we've got a

very different policy discussion and a

very different macro environment within

Australia's economy to absorb this

energy and supply shock that's coming

from the conflict in Iran. We had uh Amy

Bainbridge uh pensions reporter here at

Bloomberg on the podcast a couple of

weeks ago and she was referring to that

uh ideal amount that people need now to

have a you know a so-called comfortable

retirement and how that was one of the

reasons that people were staying in the

workforce a little longer than perhaps

they were previously. It's interesting

though to consider that the

participation rate has dropped despite

all of these forces as you say. Women,

you know, entering the workforce for

longer and longer periods of time and

earlier on and and people staying a

little bit longer than um perhaps they

did in in days of old. Um James, there

is a big piece of the macro puzzle that

we haven't really talked about yet and

and and that's the Aussie dollar. You

know, usually it's a shock absorber for

for the economy, but so far the Aussie

is at its strongest in three years

versus the US dollar, and that's at

almost a 9-year high on a trade weighted

basis. What does that mean for the

inflation picture?

This is this is interesting because

we've got this major shock and usually

when there's a big shock uh to global to

the global outlook uh you see you know

markets take that riskoff view and and

Australia has traditionally been the

Aussie dollar a risk on um you know

currency or a risk currency but here we

are in an environment where there is

this major shock but the currency has

been uh holding firm uh and and rising

against a range of other currencies um

And so what that means is that well

we're not getting when it comes to the

energy shock we're not getting as much

of that spill over uh from high energy

prices back into domestic prices as we

might have. Now that might feel a bit

academic because we are facing uh you

know in a matter of three or four weeks

we've seen a 50% increase in the uh the

cost of of fuel at uh at the petrol pout

for households. But um you know it it

could have been worse. But what it means

for the RBA is that there is a very very

strong link between uh shifts in the uh

the trade weighted index and imported

consumer goods prices. The structure of

Australia's economy. We've got an

oversized agricultural sector, a

massively oversized mining sector and a

and um a much smaller compared to the

average advanced economy manufacturing

sector. a lot of our consumer and

capital goods uh are are imported and so

that exchange rate matters for them and

so what we're seeing right now is that

appreciation of the exchange rate means

that you know might have the RBA as we

begin to see more well we're currently

in the fog of war and central bankers

are having to deal with the economic

side of that but as that as those clouds

begin to clear over coming months we

might see that if the Aussie dollar

holds firm we're not going to see as

much uh of a double whammy when it comes

to any of the inflation ripples that

come from this big supply shock that's

coming out of the Middle East

disruptions.

>> I guess that's something circling back

to the RBA's decision on Tuesday. A

question raised with Governor Bulock at

their postmeating press conference was

the fact that the decision to hike in

March wasn't unanimous. Can you explain

to us why that point is particularly

interesting especially when we've seen

some um some structural changes around

the processes at the RBA in recent

times?

>> Yeah, this this is this is quite an

interesting sort of extra element to the

story for the RBA around about a year

ago. So we're 12 months into a new

structure stemming out of the RBA review

and a new structure that implemented a

monetary policy decision board uh which

you know is is is a dedicated board

that's um constituted of in theory

macroeconomists or people with some

extra expertise to really be able to

challenge the central bank's view when

it comes to making that allimportant

policy decision. Um, lots of other

central banks have these. Governor

Bulock pointed out though uh in her

press conference that things are a

little bit different for the RBA. Those

central banks that have a dedicated

monetary policy board, the central bank

staff tends to outnumber the other

members of the board. However, for the

RBA, it's a nineperson board, but only

two of the staff uh two of the members

on that board are RBA staff. So there is

a significant you know there is it's

obviously going to be much more

difficult relative to other central

banks for the central bank's own view or

recommendation to come up. The challenge

is going to be greater and so there is

some concerns as we uh have yet to kind

of really see the next leg of RBA reform

which is members of this monetary policy

board begin to communicate their own

views about how they see the economy and

the world um publicly. We don't we

haven't really heard from them yet.

We're not quite sure who's a hawk, who's

a dove, and how they're going to be

approaching the monetary policy

decision. And so we're not quite sure

what that board is going to do when they

disagree with the view put forward by

the RBA of what the policy

recommendation should be. Two board

members and a thousand economists versus

seven uh other members of the public

with uh whose views we don't quite know

yet. So that's going to that's you know

today or or the May March decision was

one that that governor you know that the

statement identified was very close run

five votes to four.

>> Bullock disclosed that actually the four

were supporting a hike. They just

supported it later. So that would be

waiting for a little bit more

information and making that decision to

hike in May when you would do the full

for you know you'd receive the quarterly

CDI and you do a full quarterly forecast

update and really get a lot more

information about how the situation in

uh in the Middle East is is evolving and

what the spillovers to the global and

domestic economy are versus going now.

But it might not always be the case. And

and what does that mean if if uh the

central bank governor, Governor Bullock,

has to front up to a postmeating press

conference and defend a decision that

she and her deputy and the central bank

themselves don't necessarily really

agree with, but the other seven members

of the board voted to move ahead on. So

that's kind of one of the very

interesting pieces of where things are

with the RBA.

>> So it was very it was a very close call

uh this week.

Is there a solution there? Is it more

transparency? Is it really understanding

who is a dove and who is a hook within

that composition of the board?

>> Well, that will that will evolve. So,

it's still new. Uh we need to remember

that it's only 12 months in and we

haven't yet got we haven't yet got to

the phase where we've got a full round

of appointments to this new board.

there's still some legacy board members

and then we're also um yet to hear what

the or see these new board members begin

to communicate publicly and get a sense

of how they think and what their views

are. So there is a there's still more of

the story to come uh on on how the RBA

board is and policym monetary policy

decision-m in Australia is going to

look.

>> So let's get a bit of global context

here James. How does Australia sit right

now relative to the other big central

banks around the world? Are we lagging,

leading, or are we just in a completely

different cycle?

>> Yeah, look, I think this this sort of

positioning of Australia as you were

were they was Australia late to to raise

rates after the co shock or, you know,

while trying to emphasize or um uh

secure some of the gains in the labor

market. um uh you know late to hike and

and now are we uh in in our own

different cycle. I think we need to sort

of step that back one level and look at

well where are labor markets in

different economies because the shock is

going to hit every economy different and

the circumstances of each economy

matters for how their central banks are

going to respond and so we've got the

Federal Reserve in the US we've got the

labor market story there uh with that

weak non-farm payrolls growth and and

the Fed likely to be you know even

though there is this energy price shock

coming to a different extent in the feed

through to the US economy they'll

they'll have their response there if we

look across the Tasmin to New Zealand,

uh a a much higher unemployment rate, a

labor market that's sputtering for a

recovery, an economy that's starting to

rebound there. Um that's a different

scenario that that central bank is

facing. There's scope for the RBNZ to

wait and see. But that labor market in

Australia, the tightness, the 4.1%

unemployment rate, that's really what we

think, you know, had the RBA having to

get off the bench when it saw this new

inflation threat coming to the economy.

Uh so I think I think the labor market

really really matters and in the RBA's

case uh we've seen uh them react to uh

the current shock. How however where we

go from here really depends on how the

shock unfolds, how inflation

expectations in the uh domestic economy

unfold and also how the labor market

pans out over coming months.

Finally, what is the base case, James?

What is the base case for now? Are we

talking about the next move from the RBA

being a cut, a hold for now, or maybe

put another way, how many more hikes

will it take until the straight of Homus

is open?

>> That's that's right. Right. Like the RBA

has a hammer and so how many how many

times do they have to hit the nail uh to

fix this problem? The problem being that

you can't uh do anything with Australian

monetary policy to resolve a bottleneck

in the global uh energy system uh energy

supplies and and all of the relevant

spillovers that we're increasingly

becoming aware of uh by the day as the

disruption uh from the Middle East

unfolds. Uh so we're lucky that there's

a a couple of weeks until the RBA's next

meeting at the beginning of May that

they're likely to you know we we might

have a bit of a picture about what

energy prices will do but between now

and May it will be crucial uh for the

RBA to see what the spillovers are in

the economy and how people are

responding. One of the responses in the

economy is is uh that we will need to

keep an eye out for is what uh one of

the responses that was instrumental in

uh on containing inflation last time

around in 2022 when we had the energy

shock from the outbreak of conflict uh

between Russia and Ukraine. Uh and that

is the federal government. What might

the federal government and some of the

state governments do? There were big

energy subsidies both for electricity

prices um uh but also a h havinging of

the fuel excise to try and ease some of

that pain that consumers are feeling at

the petrol pump. If if we have some of

those moves coming in from the federal

government, it could buy the RBA a bit

of time. If we have the the situation in

the straight of Hormuz um resolve

quickly and the global economic damage

being only mild instead of extreme from

a prolonged uh closure and disruption to

energy supplies then you know maybe we

could have the RBA being on hold for

quite some time or um however the longer

things go on in the Middle East the

greater the risk of global recession the

bigger the risk that whilst we've had

the RBA deliver these backto-back hikes

a third hike back might not be coming

and the next move might be a cut once

it's clear what the damage is across not

only the global economy but the the

damage here at home.

>> Thank you James. And there just is so

much to watch, isn't there? And of

course we're talking on Wednesday

morning and we've just heard from

Australian Prime Minister Anthony

Albanesy that he will convene a meeting

of the national cabinet to discuss this

very issue. Just before we go, let's

give the last word to Governor Michelle

Bullock. Here she is at the RBA press

conference on Tuesday responding to a

question from Bloomberg's Michael Heath

on the board composition and just how

tricky this task is. The reality of our

board as you have pointed out it's quite

unusual

um in that respect in that the bank

representatives there's two and there's

seven non-bank representatives. That is

very unusual. I'm not sure if there's

any other countries around the world

that have that. most have a majority

representation um by the uh bank staff

if you like. Um so that's just the way

it is and as I said earlier um

particularly in circumstances like this

where you know it's very difficult it's

uncertain there are two very good

arguments to do two different things

then reasonable people can differ and

that's a positive thing. The other point

that um the review made was it did feel

that the bank was a little too insula

and so if we are being challenged by

outside views

then I don't take that personally that

is a positive thing um I don't know if

that would is going to happen but you

know my own view is that this is the

structure we've got we've got to work

with it and ultimately economics is this

is not a science this you know this is

difficult stuff and pe reasonable people

can hold different views very reasonably

so that's you know and I think um the

meeting today with its split decision

and the process it went through I

thought was an excellent demonstration

of how that can be very positive if you

found today's conversation insightful be

sure to follow the Bloomberg Australia

podcast wherever you listen and check

for more reading on Australia's economy

including the latest from Bloomberg

economist James McIntyre at

bloomberg.com.

This episode was recorded on the

traditional lands of the Wanderery and

Gatagle people. It was produced by Paul

Allen and edited by Ansley Chandler and

Chris Burke. I'm Rebecca Jones and we'll

see you next week.