1 00:00:03,830 --> 00:00:06,390 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,480 --> 00:00:09,690 Sean Aylmer: Aylmer. Well, the Reserve Bank has increased the official cash 3 00:00:09,690 --> 00:00:14,660 Sean Aylmer: rate by 25 basis points to 0. 35%. Yesterday's board 4 00:00:14,660 --> 00:00:17,459 Sean Aylmer: meeting was probably the most anticipated in years, after a 5 00:00:17,460 --> 00:00:20,640 Sean Aylmer: sharp spike in inflation and central banks all around the 6 00:00:20,640 --> 00:00:23,550 Sean Aylmer: world moving to raise rates. It's the first increase in 7 00:00:23,550 --> 00:00:28,060 Sean Aylmer: Australia since November 2010, so where to from here? Cherelle 8 00:00:28,060 --> 00:00:32,490 Sean Aylmer: Murphy is the EY Oceania Chief Economist. Cherelle, welcome back 9 00:00:32,490 --> 00:00:34,360 Sean Aylmer: to Fear and Greed in a new guise. 10 00:00:34,720 --> 00:00:36,740 Cherelle Murphy: Oh, thank you very much, Sean. It's a pleasure to 11 00:00:36,750 --> 00:00:37,280 Cherelle Murphy: be here. 12 00:00:37,330 --> 00:00:38,419 Sean Aylmer: How's the new job at EY? 13 00:00:39,530 --> 00:00:42,500 Cherelle Murphy: It's so fantastic. I spend all my time talking to 14 00:00:42,500 --> 00:00:45,570 Cherelle Murphy: clients and getting to know what's really going on in 15 00:00:45,570 --> 00:00:49,470 Cherelle Murphy: Australia's business community, so that's where I like to be 16 00:00:49,470 --> 00:00:50,279 Cherelle Murphy: and I'm loving it. 17 00:00:50,840 --> 00:00:55,130 Sean Aylmer: Fantastic. Now, were you surprised by the 25 basis point 18 00:00:55,130 --> 00:00:56,270 Sean Aylmer: rise yesterday? 19 00:00:56,740 --> 00:00:59,720 Cherelle Murphy: Actually, no. That was my expectation and... 20 00:01:00,100 --> 00:01:00,410 Sean Aylmer: Well done. 21 00:01:00,480 --> 00:01:04,649 Cherelle Murphy: Yes, so I thought that the Reserve Bank absolutely had 22 00:01:04,650 --> 00:01:07,640 Cherelle Murphy: to do something. It couldn't have a cash rate at 23 00:01:07,640 --> 00:01:14,060 Cherelle Murphy: 0.1% and an inflation rate at 5. 1%. It's just 24 00:01:14,060 --> 00:01:18,100 Cherelle Murphy: completely inconsistent and actually I think the Reserve Bank risked 25 00:01:18,140 --> 00:01:21,450 Cherelle Murphy: its own credibility if it didn't do something. So then 26 00:01:21,450 --> 00:01:24,150 Cherelle Murphy: it became a question of, was it going to be the 0. 27 00:01:24,620 --> 00:01:29,770 Cherelle Murphy: 15 to get us to that 0. 25, I guess, increment? 28 00:01:30,030 --> 00:01:31,940 Cherelle Murphy: Or were they going to go more? Or did they 29 00:01:31,940 --> 00:01:34,240 Cherelle Murphy: just stick to the 25 basis points? And I just 30 00:01:34,470 --> 00:01:37,679 Cherelle Murphy: felt that the signaling that went with 25 basis points 31 00:01:37,680 --> 00:01:40,449 Cherelle Murphy: was probably about right as to what the next step 32 00:01:40,450 --> 00:01:40,950 Cherelle Murphy: should be. 33 00:01:41,530 --> 00:01:43,880 Sean Aylmer: Okay. So let's talk about the next step and then 34 00:01:43,880 --> 00:01:45,980 Sean Aylmer: later on, I'll get to the point about the Reserve 35 00:01:45,980 --> 00:01:50,240 Sean Aylmer: Bank's credibility, but it had no, I mean, you were saying it had no option 36 00:01:50,240 --> 00:01:52,960 Sean Aylmer: but to act, really. It made it pretty clear that 37 00:01:52,970 --> 00:01:56,100 Sean Aylmer: there are more rate rises in the next few months. 38 00:01:56,100 --> 00:01:56,770 Sean Aylmer: Is that fair to say? 39 00:01:58,910 --> 00:02:02,270 Cherelle Murphy: Yes, absolutely. There was absolutely no question about that in the statement and 40 00:02:02,270 --> 00:02:06,130 Cherelle Murphy: we, of course, knew that anyway. The Reserve Bank would 41 00:02:06,130 --> 00:02:08,490 Cherelle Murphy: not have really got the bang for its buck that 42 00:02:08,490 --> 00:02:11,980 Cherelle Murphy: it needed at of a 0. 25% move and then nothing else 43 00:02:11,980 --> 00:02:14,269 Cherelle Murphy: and no further signaling about what was coming. It really 44 00:02:14,270 --> 00:02:17,019 Cherelle Murphy: needed to say, this is the start of what will 45 00:02:17,020 --> 00:02:20,089 Cherelle Murphy: be a series of rate hikes. So I think that 46 00:02:20,090 --> 00:02:24,250 Cherelle Murphy: was quite necessary again, and again, the markets had been 47 00:02:24,260 --> 00:02:25,250 Cherelle Murphy: pricing that anyway. 48 00:02:25,790 --> 00:02:27,560 Sean Aylmer: So how many rate rises will we get? 49 00:02:28,430 --> 00:02:32,590 Cherelle Murphy: I don't know, Sean, and the reason I say that 50 00:02:32,590 --> 00:02:35,660 Cherelle Murphy: is twofold. One, I don't work for a bank anymore, 51 00:02:35,660 --> 00:02:38,280 Cherelle Murphy: so I don't have to predict the terminal cash rate. 52 00:02:38,639 --> 00:02:42,290 Cherelle Murphy: But two, quite genuinely, we don't know what will happen 53 00:02:42,290 --> 00:02:45,510 Cherelle Murphy: with the economy over the coming 12 to 18 months. 54 00:02:45,830 --> 00:02:49,150 Cherelle Murphy: So the Reserve Bank has the luxury of waiting to 55 00:02:49,150 --> 00:02:52,760 Cherelle Murphy: see what happens with the data. It will watch closely 56 00:02:52,760 --> 00:02:57,359 Cherelle Murphy: what happens with wages and consumer confidence, consumer spending, internationally, 57 00:02:57,360 --> 00:03:00,960 Cherelle Murphy: what happens with the prices of our commodities, all the 58 00:03:00,960 --> 00:03:06,340 Cherelle Murphy: various elements which go together to make up the ultimate 59 00:03:06,340 --> 00:03:08,750 Cherelle Murphy: inflation rate, because that's what it's trying to do. It's 60 00:03:08,750 --> 00:03:11,320 Cherelle Murphy: trying to bring inflation back down and get it to 61 00:03:11,320 --> 00:03:16,769 Cherelle Murphy: that 2% to 3% band, ideally. That will evolve slowly. 62 00:03:16,980 --> 00:03:19,070 Cherelle Murphy: The RBA is not in a hurry to get to 63 00:03:19,070 --> 00:03:21,410 Cherelle Murphy: the end point and it will watch the data as 64 00:03:21,410 --> 00:03:22,140 Cherelle Murphy: it comes through. 65 00:03:22,710 --> 00:03:26,239 Sean Aylmer: So Philip Lowe, the governor, in his press conference afterwards 66 00:03:26,700 --> 00:03:31,880 Sean Aylmer: hinted that 2.5% was neutral. He talked about the mid- 67 00:03:31,880 --> 00:03:36,360 Sean Aylmer: range of the inflation target band, that level of interest 68 00:03:36,360 --> 00:03:39,460 Sean Aylmer: rates. I mean, that's a long way, even at 0. 69 00:03:39,460 --> 00:03:43,890 Sean Aylmer: 35, to get to 2.5%. It's a long way. Does 70 00:03:43,890 --> 00:03:46,160 Sean Aylmer: that happen quickly? Does it take a few years? What's 71 00:03:46,160 --> 00:03:48,170 Sean Aylmer: the trajectory most likely like? 72 00:03:49,210 --> 00:03:52,830 Cherelle Murphy: It certainly takes months, I wouldn't say necessarily years. We'd 73 00:03:52,830 --> 00:03:57,650 Cherelle Murphy: be probably well into 2023 before we saw the rate, the 74 00:03:57,650 --> 00:04:00,130 Cherelle Murphy: cash rate target, I should say, get up that high. 75 00:04:01,090 --> 00:04:04,720 Cherelle Murphy: But again, it does depend on how the economy responds 76 00:04:04,720 --> 00:04:07,470 Cherelle Murphy: to the first rate hike and what happens internationally, so 77 00:04:07,470 --> 00:04:12,420 Cherelle Murphy: to speak. So I would think that the RBA will 78 00:04:12,500 --> 00:04:16,120 Cherelle Murphy: take it in 25 basis point moves. Of course, if 79 00:04:16,120 --> 00:04:19,750 Cherelle Murphy: something dramatic happened, that would change, but it will step 80 00:04:19,750 --> 00:04:23,160 Cherelle Murphy: it up and again, just watching and watching. It doesn't 81 00:04:23,160 --> 00:04:25,310 Cherelle Murphy: want to stifle the economy. It doesn't want to choke 82 00:04:25,310 --> 00:04:27,880 Cherelle Murphy: off growth, but what it does want to do is 83 00:04:27,920 --> 00:04:31,420 Cherelle Murphy: give a very clear indication that it's not going to let 84 00:04:31,420 --> 00:04:34,410 Cherelle Murphy: inflation run away, so it'll be looking for the balance. 85 00:04:35,070 --> 00:04:36,870 Sean Aylmer: Stay with me, Cherelle. We'll be back in a minute. 86 00:04:42,980 --> 00:04:47,940 Sean Aylmer: I'm speaking to Cherelle Murphy, EY Oceania Chief Economist. Okay. 87 00:04:47,940 --> 00:04:51,140 Sean Aylmer: Now six months ago, the Reserve Bank told us that 88 00:04:51,180 --> 00:04:55,190 Sean Aylmer: rates would most likely rise for the first time in 89 00:04:55,190 --> 00:05:01,000 Sean Aylmer: 2024. What's happened between six months ago and now, such 90 00:05:01,000 --> 00:05:04,239 Sean Aylmer: that rates are up 20 months before they were saying? 91 00:05:05,260 --> 00:05:08,610 Cherelle Murphy: Oh, you know, a war in Ukraine, lockdowns in China, 92 00:05:08,610 --> 00:05:11,750 Cherelle Murphy: a flood, take your pick. I mean, when you think 93 00:05:12,110 --> 00:05:14,990 Cherelle Murphy: about what's happened over the last six months to the Australian and the 94 00:05:15,680 --> 00:05:20,010 Cherelle Murphy: global economy, it's quite incredible. And again, that's why I 95 00:05:20,010 --> 00:05:22,880 Cherelle Murphy: emphasize the point that the RBA has not made up its mind 96 00:05:22,880 --> 00:05:24,750 Cherelle Murphy: about how far it's going to go, because it doesn't 97 00:05:24,750 --> 00:05:29,350 Cherelle Murphy: know what will happen. The pandemic was noted by Dr. 98 00:05:29,350 --> 00:05:33,680 Cherelle Murphy: Lowe, that the pandemic was not as bad as they had perhaps 99 00:05:33,680 --> 00:05:37,279 Cherelle Murphy: expected and therefore the economic impact was not as bad 100 00:05:37,279 --> 00:05:39,900 Cherelle Murphy: and we got that under control a bit quicker. So 101 00:05:39,900 --> 00:05:42,950 Cherelle Murphy: that's one of the reasons, but I also suspect that 102 00:05:42,950 --> 00:05:46,070 Cherelle Murphy: back when he made the call that rates wouldn't increase 103 00:05:46,589 --> 00:05:49,640 Cherelle Murphy: for a few years, he was sending a really strong 104 00:05:49,640 --> 00:05:52,810 Cherelle Murphy: signal, which was to say, we will support the Australian 105 00:05:52,900 --> 00:05:55,290 Cherelle Murphy: economy to get through this. We will do what it 106 00:05:55,290 --> 00:05:57,550 Cherelle Murphy: takes and if that means that I need to be 107 00:05:57,550 --> 00:06:01,339 Cherelle Murphy: very explicit and give you confidence that interest rates won't 108 00:06:01,339 --> 00:06:04,270 Cherelle Murphy: rise, then that's what I'll do. And that in itself 109 00:06:04,370 --> 00:06:07,930 Cherelle Murphy: actually helps the economy to recover. His words are incredibly 110 00:06:07,930 --> 00:06:10,290 Cherelle Murphy: powerful. He would've known that at the time and I 111 00:06:10,290 --> 00:06:12,010 Cherelle Murphy: think that should be thrown into the mix. 112 00:06:12,350 --> 00:06:15,909 Sean Aylmer: Yeah. Reserve Bank diplomacy, it's about jawboning where they want 113 00:06:15,910 --> 00:06:16,950 Sean Aylmer: the economy to get to. 114 00:06:17,310 --> 00:06:20,810 Cherelle Murphy: Absolutely and sometimes, and they've said this in the past, 115 00:06:20,810 --> 00:06:23,570 Cherelle Murphy: that the announcement of what we intend to do is 116 00:06:23,570 --> 00:06:27,600 Cherelle Murphy: actually more powerful than the act itself, because markets move, 117 00:06:27,600 --> 00:06:30,830 Cherelle Murphy: obviously, the second they get the information and the information 118 00:06:30,830 --> 00:06:33,790 Cherelle Murphy: sometimes comes from his words rather than actions. 119 00:06:34,050 --> 00:06:36,560 Sean Aylmer: So in the case of yesterday's announcement and then his 120 00:06:36,560 --> 00:06:41,089 Sean Aylmer: press conference afterwards, the bank was quite strident about rates 121 00:06:41,089 --> 00:06:44,089 Sean Aylmer: are rising and there'll be more rate rises, so in 122 00:06:44,089 --> 00:06:47,589 Sean Aylmer: a sense, that could actually be having the effect well 123 00:06:47,589 --> 00:06:48,930 Sean Aylmer: ahead of the actual rates rising. 124 00:06:49,540 --> 00:06:51,810 Cherelle Murphy: Exactly. Just as it was on the way down, it is on 125 00:06:51,810 --> 00:06:54,980 Cherelle Murphy: the way up. So he's saying, look, rates are rising. 126 00:06:54,990 --> 00:06:57,240 Cherelle Murphy: You should prepare for it. You should act as if 127 00:06:57,240 --> 00:06:59,770 Cherelle Murphy: rates are rising. Whether you are a household or a 128 00:06:59,770 --> 00:07:03,089 Cherelle Murphy: business, you need to factor this into your thinking as 129 00:07:03,089 --> 00:07:06,560 Cherelle Murphy: to what the economic environment is going to be like 130 00:07:07,010 --> 00:07:10,060 Cherelle Murphy: over the next few months. That is very powerful and 131 00:07:10,060 --> 00:07:12,600 Cherelle Murphy: businesses and households will make decisions accordingly. 132 00:07:13,090 --> 00:07:14,970 Sean Aylmer: Okay. So at the end of the day, we still 133 00:07:14,970 --> 00:07:17,390 Sean Aylmer: have very low interest rates and the bank can get back 134 00:07:17,390 --> 00:07:20,530 Sean Aylmer: to a neutral rate of 2.5% and we still have 135 00:07:20,530 --> 00:07:23,480 Sean Aylmer: relatively low interest rates, if you think over the past 136 00:07:23,480 --> 00:07:27,620 Sean Aylmer: couple of decades. How do you think households will act? 137 00:07:27,620 --> 00:07:29,530 Sean Aylmer: How do you think house prices will react? How do you 138 00:07:29,530 --> 00:07:31,000 Sean Aylmer: think businesses will react? 139 00:07:31,470 --> 00:07:35,470 Cherelle Murphy: So I think households will respond by, there'll probably be 140 00:07:35,470 --> 00:07:37,700 Cherelle Murphy: a bit of a dent to confidence, now that we've got 141 00:07:37,700 --> 00:07:40,190 Cherelle Murphy: the first one locked in. It may be fairly short 142 00:07:40,190 --> 00:07:44,070 Cherelle Murphy: lived, but I think there will be, combined with the inflation numbers 143 00:07:44,070 --> 00:07:46,110 Cherelle Murphy: which were fairly ugly as we know, a bit of 144 00:07:46,110 --> 00:07:48,890 Cherelle Murphy: a pull back. However, I don't think it will be 145 00:07:48,890 --> 00:07:52,480 Cherelle Murphy: severe because we know that the household sector is sitting 146 00:07:52,480 --> 00:07:55,580 Cherelle Murphy: on some cash, cash which it's largely saved over the 147 00:07:55,580 --> 00:07:58,670 Cherelle Murphy: last two years because it was harder to spend it. 148 00:07:58,740 --> 00:08:00,880 Cherelle Murphy: The government was putting more of it in our pockets 149 00:08:01,040 --> 00:08:05,370 Cherelle Murphy: and I think there was a general feeling of caution through COVID. So 150 00:08:05,370 --> 00:08:07,350 Cherelle Murphy: once I think households settle into a bit of a 151 00:08:07,350 --> 00:08:11,380 Cherelle Murphy: pattern and realize that these interest rate rises are actually 152 00:08:11,380 --> 00:08:15,040 Cherelle Murphy: not particularly dramatic for me, they'll get back to something 153 00:08:15,040 --> 00:08:17,619 Cherelle Murphy: a bit more normal. At the same time, of course, 154 00:08:17,620 --> 00:08:22,840 Cherelle Murphy: households have been prepaying their mortgages en mass, and it 155 00:08:22,840 --> 00:08:27,210 Cherelle Murphy: would take rates going up to another 2% for 40% 156 00:08:27,210 --> 00:08:31,310 Cherelle Murphy: of the variable rate mortgage holders to feel any change 157 00:08:31,310 --> 00:08:33,380 Cherelle Murphy: in their, or have to make any change in their 158 00:08:33,380 --> 00:08:36,790 Cherelle Murphy: mortgage repayments, which is quite a lot, so they don't 159 00:08:36,790 --> 00:08:39,940 Cherelle Murphy: need to really change their behavior at all. In terms 160 00:08:39,940 --> 00:08:44,660 Cherelle Murphy: of businesses, again, the business sector has fairly strong balance 161 00:08:44,660 --> 00:08:47,710 Cherelle Murphy: sheets at the moment. They have not been investing in 162 00:08:47,710 --> 00:08:49,730 Cherelle Murphy: spending a lot of money over recent years, as we 163 00:08:49,730 --> 00:08:53,300 Cherelle Murphy: know, and that too will, to some extent, buffer them 164 00:08:53,300 --> 00:08:57,330 Cherelle Murphy: from any rate hikes, but it's always at the margin, 165 00:08:57,330 --> 00:09:00,819 Cherelle Murphy: that these changes matter. It's the marginal change in behavior 166 00:09:00,830 --> 00:09:03,550 Cherelle Murphy: that can actually slow the economy, and that's exactly what 167 00:09:03,550 --> 00:09:06,410 Cherelle Murphy: we want it to do. We don't want it to have a big crashing 168 00:09:06,410 --> 00:09:09,100 Cherelle Murphy: impact on the economy. It's got to be subtle and 169 00:09:09,100 --> 00:09:11,510 Cherelle Murphy: that's the way the Reserve Bank will be planning it. 170 00:09:12,210 --> 00:09:13,960 Sean Aylmer: Okay. The big one though, Cherelle: house prices. 171 00:09:13,960 --> 00:09:21,160 Cherelle Murphy: House prices are obviously pretty high right now and there 172 00:09:21,160 --> 00:09:23,900 Cherelle Murphy: is therefore, I guess, the potential for them to adjust 173 00:09:23,900 --> 00:09:27,750 Cherelle Murphy: because they are so high. I would also say, though, 174 00:09:27,830 --> 00:09:31,270 Cherelle Murphy: when we look back on the most recent rate hiking 175 00:09:31,270 --> 00:09:35,390 Cherelle Murphy: cycles, it was only really in 1994 that we saw 176 00:09:35,390 --> 00:09:39,320 Cherelle Murphy: house prices react straight away to an increase in interest 177 00:09:39,320 --> 00:09:42,880 Cherelle Murphy: rates, so it's not a sure thing that we see 178 00:09:42,880 --> 00:09:46,310 Cherelle Murphy: a dramatic reaction. I do expect there will be some 179 00:09:46,720 --> 00:09:50,890 Cherelle Murphy: pockets, though, that will react more severely than others. That 180 00:09:50,890 --> 00:09:54,679 Cherelle Murphy: seems pretty realistic, and of course the transmission of monetary 181 00:09:54,679 --> 00:09:58,500 Cherelle Murphy: policy through the economy is designed to impact asset prices 182 00:09:58,820 --> 00:10:01,579 Cherelle Murphy: and therefore, if there was no reaction on asset prices 183 00:10:01,580 --> 00:10:04,809 Cherelle Murphy: and house prices, then monetary policy really wouldn't be doing 184 00:10:04,809 --> 00:10:06,520 Cherelle Murphy: its job and you'd see more hikes. 185 00:10:07,120 --> 00:10:09,790 Sean Aylmer: I did like the fact that Philip Lowe yesterday said 186 00:10:09,790 --> 00:10:14,060 Sean Aylmer: that the election had absolutely no bearing on his decision 187 00:10:14,360 --> 00:10:16,729 Sean Aylmer: and it seems like people were getting very excited about 188 00:10:16,780 --> 00:10:19,280 Sean Aylmer: a rate rise in an election campaign, but I dare 189 00:10:19,280 --> 00:10:21,820 Sean Aylmer: say he wouldn't be doing his job if he just 190 00:10:21,820 --> 00:10:24,230 Sean Aylmer: didn't do what he thought he should do, one way 191 00:10:24,230 --> 00:10:27,109 Sean Aylmer: or another, whether there's an election campaign or not. 192 00:10:28,460 --> 00:10:31,150 Cherelle Murphy: Absolutely, and I just think there's way too much made 193 00:10:31,150 --> 00:10:34,440 Cherelle Murphy: about this. The Reserve Bank has shown before, back in 194 00:10:34,440 --> 00:10:37,790 Cherelle Murphy: 2007, that it will raise rates in an election campaign 195 00:10:37,790 --> 00:10:40,050 Cherelle Murphy: if it thinks that is the right thing to do. 196 00:10:40,570 --> 00:10:43,610 Cherelle Murphy: Glenn Stevens was asked to explain that rate hike back 197 00:10:43,610 --> 00:10:46,920 Cherelle Murphy: in 2007 and afterwards he said, " I would've been doing 198 00:10:46,920 --> 00:10:50,870 Cherelle Murphy: a disservice to the Australian people if I didn't change 199 00:10:51,270 --> 00:10:55,040 Cherelle Murphy: the cash rate as we thought was necessary." It's no 200 00:10:55,040 --> 00:10:58,459 Cherelle Murphy: different now. I don't think it matters who forms government 201 00:10:58,460 --> 00:11:01,750 Cherelle Murphy: to the Reserve Bank. It's not their mandate to worry 202 00:11:01,750 --> 00:11:05,069 Cherelle Murphy: about that. Their mandate is to keep inflation between 2% 203 00:11:05,070 --> 00:11:08,090 Cherelle Murphy: to 3% over the cycle and do what's right for the 204 00:11:08,360 --> 00:11:11,120 Cherelle Murphy: economic good of the Australian people. It will do what 205 00:11:11,120 --> 00:11:12,959 Cherelle Murphy: it needs to do and we now have two very 206 00:11:12,960 --> 00:11:15,730 Cherelle Murphy: strong proof points there to make that point. 207 00:11:16,230 --> 00:11:17,950 Sean Aylmer: Cherelle, thank you for talking to Fear and Greed. 208 00:11:18,559 --> 00:11:19,641 Cherelle Murphy: Pleasure. Thank you for having me. 209 00:11:19,641 --> 00:11:24,660 Sean Aylmer: That was Cherelle Murphy, EY Oceania Chief Economist. This is a Fear and 210 00:11:24,660 --> 00:11:27,079 Sean Aylmer: Greed Daily Interview. Join us every morning for the full 211 00:11:27,080 --> 00:11:30,770 Sean Aylmer: episode of Fear and Greed, Australia's most popular business podcast. 212 00:11:31,020 --> 00:11:32,670 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.