1 00:00:06,000 --> 00:00:07,760 Speaker 1: Welcome to Fear and Greed Q and A, where we 2 00:00:07,800 --> 00:00:12,040 Speaker 1: ask and answer questions about business, investing, economics, politics, and more. 3 00:00:12,080 --> 00:00:14,720 Speaker 1: I'm Sean Almer. The Reserve Bank left the official cash 4 00:00:14,800 --> 00:00:17,960 Speaker 1: rate on hold at three point six percent yesterday afternoon, 5 00:00:17,960 --> 00:00:21,480 Speaker 1: as widely expected. That pretty much came after last week's 6 00:00:21,560 --> 00:00:25,520 Speaker 1: shock jump in inflation. Warren Hogan is Managing director of 7 00:00:25,640 --> 00:00:30,120 Speaker 1: EQ Economics and Economic Advisor at Judo Bank. Warren, Welcome 8 00:00:30,160 --> 00:00:31,920 Speaker 1: back to Fear and Greed, Q and A. I dare 9 00:00:31,960 --> 00:00:34,440 Speaker 1: say the shock jump in inflation may not have been 10 00:00:34,479 --> 00:00:35,400 Speaker 1: that much of a shock to you. 11 00:00:36,159 --> 00:00:38,400 Speaker 2: Yeah, God A Shanan, thanks for having me on the 12 00:00:38,440 --> 00:00:42,360 Speaker 2: show again. Unfortunately, No, I mean it's probably a little 13 00:00:42,440 --> 00:00:44,960 Speaker 2: The number was a little punchier than I thought, and 14 00:00:45,000 --> 00:00:46,839 Speaker 2: things are happening a bit quicker than I feared. 15 00:00:47,040 --> 00:00:49,800 Speaker 3: But yes, I feared that that. 16 00:00:49,840 --> 00:00:54,080 Speaker 2: We don't necessarily have our settings exactly right if we 17 00:00:54,120 --> 00:00:56,120 Speaker 2: want to get inflation under control. 18 00:00:56,440 --> 00:00:59,280 Speaker 1: Why what's the problem. Why are we suddenly worried about 19 00:00:59,280 --> 00:01:01,720 Speaker 1: inflation again when four weeks ago so they were a hunter? 20 00:01:01,800 --> 00:01:03,720 Speaker 1: The chief economists of the Reserve Bank basically came out 21 00:01:03,720 --> 00:01:06,520 Speaker 1: and said inflation has been slaid for now. Michelle Bullock 22 00:01:06,520 --> 00:01:09,440 Speaker 1: didn't quite go that far, but not far from it. 23 00:01:09,760 --> 00:01:11,800 Speaker 1: And all of a sudden we're talking about inflation again. 24 00:01:11,880 --> 00:01:16,160 Speaker 2: Why yeah, Well, the basis for all of it is 25 00:01:16,200 --> 00:01:20,560 Speaker 2: that we are going through an incredible transformation of our society. 26 00:01:20,640 --> 00:01:23,360 Speaker 3: It's happening around the world. The main driver, the. 27 00:01:23,280 --> 00:01:26,720 Speaker 2: Main incentives are coming from the demographic shifts. They're not 28 00:01:26,760 --> 00:01:30,480 Speaker 2: fully understood, but it's changed the balance between supply and demand, 29 00:01:31,000 --> 00:01:35,600 Speaker 2: particularly for labor, from fifty years of excess supply that is, 30 00:01:35,680 --> 00:01:39,240 Speaker 2: unemployment to our shortages and that of course has made 31 00:01:39,240 --> 00:01:43,440 Speaker 2: our economic models harder to be confident with. They're not 32 00:01:43,480 --> 00:01:45,759 Speaker 2: as accurate, they're not picking up on these shifts. So 33 00:01:46,440 --> 00:01:48,600 Speaker 2: that's the core of it, and of course that means 34 00:01:48,640 --> 00:01:50,600 Speaker 2: we should be cautious and we should be thinking about risk. 35 00:01:50,680 --> 00:01:53,440 Speaker 2: But then we've got some unique factors, particularly in Australia 36 00:01:53,880 --> 00:01:57,120 Speaker 2: where we've seen a big shift in the size of 37 00:01:57,160 --> 00:01:58,960 Speaker 2: government and it's been going on for a decade, and 38 00:01:59,000 --> 00:02:02,080 Speaker 2: the RBA and the quarterly statement, yes, they had a 39 00:02:02,120 --> 00:02:05,080 Speaker 2: great chart showing out it's all recurrent, and of course 40 00:02:05,160 --> 00:02:07,600 Speaker 2: this has implications for the rest of the economy. The 41 00:02:07,600 --> 00:02:10,720 Speaker 2: government takes the bigger chunk, there's less left over for 42 00:02:10,760 --> 00:02:13,919 Speaker 2: the rest to compete over, and that's inflationary. So look, 43 00:02:13,960 --> 00:02:18,880 Speaker 2: I think it's a combination of this uncertainty, structural uncertainty 44 00:02:18,880 --> 00:02:22,120 Speaker 2: associated with the big changes going on and the technology, 45 00:02:22,160 --> 00:02:26,320 Speaker 2: demographics and our government's policies have been more present in 46 00:02:26,400 --> 00:02:29,240 Speaker 2: the economy, and I think it's a tricky and potentially 47 00:02:29,320 --> 00:02:32,080 Speaker 2: dangerous cocktail that all the risks are one way, and 48 00:02:32,080 --> 00:02:34,919 Speaker 2: that's higher inflation. And that's why I've been concerned about 49 00:02:34,960 --> 00:02:37,799 Speaker 2: our approach of the last few years, which has been 50 00:02:38,120 --> 00:02:40,480 Speaker 2: to try and do as little as possible and take 51 00:02:40,960 --> 00:02:44,560 Speaker 2: zero insurance out against this risk factor. So it looks 52 00:02:44,639 --> 00:02:46,960 Speaker 2: like that those fears of mine are coming through, But 53 00:02:47,120 --> 00:02:49,240 Speaker 2: you know, it's just one quarter. Hopefully I'm wrong. 54 00:02:49,919 --> 00:02:52,359 Speaker 1: Hopefully. Well. One of the things that Michelle Bullock said 55 00:02:52,400 --> 00:02:54,200 Speaker 1: yesterday which I thought was interesting, she brought up the 56 00:02:54,240 --> 00:02:57,280 Speaker 1: idea where a three point six percent cash rate is 57 00:02:57,360 --> 00:03:00,919 Speaker 1: adding or subtracting from the economy. Now, the general gist 58 00:03:01,160 --> 00:03:04,800 Speaker 1: is that the cash rate has had a kind of 59 00:03:04,800 --> 00:03:08,120 Speaker 1: a deepening effect on the economy. The Reserve Bank itself 60 00:03:08,240 --> 00:03:10,520 Speaker 1: seems to think maybe that's not the case, maybe it 61 00:03:10,600 --> 00:03:12,520 Speaker 1: is closer than neutral. What's your take, on that. 62 00:03:13,000 --> 00:03:15,240 Speaker 2: Yeah, And that's one of the really big sort of 63 00:03:15,280 --> 00:03:19,560 Speaker 2: innovations in the last week is that this surprisingly strong 64 00:03:19,639 --> 00:03:23,320 Speaker 2: inflation number, the implication, along with the fact that we're 65 00:03:23,320 --> 00:03:27,519 Speaker 2: continuing to see stronger consumer spending since the middle of 66 00:03:27,560 --> 00:03:31,120 Speaker 2: the year and that activities gradually improving, is that what 67 00:03:31,200 --> 00:03:34,000 Speaker 2: we thought was a neutral interest rate, that is, an 68 00:03:34,040 --> 00:03:37,600 Speaker 2: interest rate that was neither hindering or helping the economy. 69 00:03:37,960 --> 00:03:39,920 Speaker 3: Is probably a little bit higher than we thought. 70 00:03:40,000 --> 00:03:43,240 Speaker 2: And that's been my argument the whole time. I've never 71 00:03:43,280 --> 00:03:45,640 Speaker 2: bought into this idea that the neutral rate was around 72 00:03:45,640 --> 00:03:48,640 Speaker 2: three percent or lower, as some of the RBA models 73 00:03:48,680 --> 00:03:51,880 Speaker 2: and many economists think. I've always thought the RBA themselves 74 00:03:51,920 --> 00:03:53,640 Speaker 2: thought it was closer to three and a half. I've 75 00:03:53,640 --> 00:03:55,640 Speaker 2: always been a three and a half. But there's a 76 00:03:55,640 --> 00:03:58,560 Speaker 2: few comments in the Statement and Monetary Policy that suggests 77 00:03:58,600 --> 00:04:03,160 Speaker 2: that the current cash three point six maybe below some 78 00:04:03,800 --> 00:04:07,000 Speaker 2: estimates that they've got of neutral, which implies monetary policies easy, 79 00:04:07,120 --> 00:04:10,200 Speaker 2: which is a horrendous combination with inflation going up, because 80 00:04:10,240 --> 00:04:12,080 Speaker 2: that tells you one thing and one thing only. 81 00:04:12,280 --> 00:04:13,480 Speaker 3: That rates have got to go up. 82 00:04:14,080 --> 00:04:16,960 Speaker 1: So how does the reserve bank manage higher inflation at 83 00:04:16,960 --> 00:04:20,440 Speaker 1: the moment. We have had household spending indicative figures out 84 00:04:20,520 --> 00:04:23,640 Speaker 1: during the week which suggested that we're still growing, but 85 00:04:23,680 --> 00:04:26,279 Speaker 1: the momentum is slowing. It appears, at least in the 86 00:04:26,279 --> 00:04:29,760 Speaker 1: household sector. Reserve Bank didn't really talk about that yesterday. 87 00:04:29,839 --> 00:04:32,240 Speaker 1: To be well, perhaps they did in what you read, 88 00:04:32,240 --> 00:04:34,640 Speaker 1: but I had a more cursory glance. Shall we say, once, 89 00:04:35,200 --> 00:04:37,279 Speaker 1: but how does it manage that kind of you've got inflation, 90 00:04:37,440 --> 00:04:40,400 Speaker 1: but potentially you don't have booming growth either. 91 00:04:41,400 --> 00:04:43,440 Speaker 2: Yeah, well we're not going to get booming growth. This 92 00:04:43,560 --> 00:04:46,120 Speaker 2: is this idea of a capacity constrained economy. So you 93 00:04:46,880 --> 00:04:50,680 Speaker 2: might push money into the economy with monetary policy, or 94 00:04:50,720 --> 00:04:54,760 Speaker 2: you may create government spending with fiscal policy that generates demand, 95 00:04:54,800 --> 00:04:57,440 Speaker 2: but its ability to show up as more output of 96 00:04:57,480 --> 00:05:01,159 Speaker 2: goods and services is limited by the amount of people, cranes, 97 00:05:01,839 --> 00:05:06,040 Speaker 2: and other elements of our infrastructure ie capacity that can 98 00:05:06,040 --> 00:05:07,960 Speaker 2: deliver that. So that's why you've got to be careful, 99 00:05:08,000 --> 00:05:10,400 Speaker 2: because you push demand too hard, you will get inflation 100 00:05:10,560 --> 00:05:14,600 Speaker 2: rather than real economic output. But look, I think the 101 00:05:15,320 --> 00:05:18,360 Speaker 2: big issue is the consumer has been in a recovery 102 00:05:18,360 --> 00:05:21,400 Speaker 2: phase for a year. It was a bump, a bumpy 103 00:05:21,520 --> 00:05:24,000 Speaker 2: start to the I think the election Trump and tariffs 104 00:05:24,000 --> 00:05:26,600 Speaker 2: plate a role. But ever since May, since that election 105 00:05:26,760 --> 00:05:29,640 Speaker 2: was out of the way, the consumer has been good. Yes, 106 00:05:29,680 --> 00:05:31,600 Speaker 2: the last six to eight weeks has softened a bit, 107 00:05:31,640 --> 00:05:34,120 Speaker 2: but that's on the back of three strong months. The 108 00:05:34,160 --> 00:05:36,760 Speaker 2: real issue for me is unemployment rising, and that of 109 00:05:36,800 --> 00:05:38,880 Speaker 2: course is going to be seen as an excuse for 110 00:05:38,920 --> 00:05:41,680 Speaker 2: the RBA to be cautious with monetary policy that is 111 00:05:41,720 --> 00:05:44,720 Speaker 2: not high grates. The problem we've got, and this gets 112 00:05:44,720 --> 00:05:48,200 Speaker 2: back to the structural change in the economy, is that 113 00:05:48,200 --> 00:05:50,760 Speaker 2: that rising unemployment may have nothing to do with the 114 00:05:50,800 --> 00:05:53,640 Speaker 2: demand in the economy or the demand for labor, because 115 00:05:53,680 --> 00:05:55,680 Speaker 2: we know that there's a lot of jobs that are 116 00:05:55,680 --> 00:05:56,520 Speaker 2: going unfilled. 117 00:05:57,120 --> 00:05:57,839 Speaker 3: It's structural. 118 00:05:58,040 --> 00:06:01,880 Speaker 2: It's because the economy's chin and that the skills that 119 00:06:01,880 --> 00:06:04,400 Speaker 2: we have now are different to the skills that are 120 00:06:04,440 --> 00:06:08,080 Speaker 2: required in the future, and so we need to reskill people, 121 00:06:08,120 --> 00:06:11,680 Speaker 2: we need to reorientate our workforce, and of course that's 122 00:06:11,680 --> 00:06:14,040 Speaker 2: nothing monetary policy can do about. I argued at the time, 123 00:06:14,080 --> 00:06:16,520 Speaker 2: that's what the Economic Reform round Table should have been about, 124 00:06:16,680 --> 00:06:21,080 Speaker 2: job switching, job mobility. But that's the really critical and 125 00:06:21,200 --> 00:06:23,279 Speaker 2: tricky bit for the RBA is if that they're in 126 00:06:23,279 --> 00:06:25,560 Speaker 2: a situation at the start of twenty twenty six where 127 00:06:25,600 --> 00:06:28,800 Speaker 2: inflation is going up and unemployment. How to explain that 128 00:06:28,960 --> 00:06:32,120 Speaker 2: complex situation to the broader community and get the government 129 00:06:32,320 --> 00:06:34,080 Speaker 2: behind them on it, because I'm sure the government won't 130 00:06:34,120 --> 00:06:36,120 Speaker 2: be too keen on great hopes. 131 00:06:36,880 --> 00:06:41,279 Speaker 1: So bringing all this together, two questions, What will the 132 00:06:41,320 --> 00:06:44,360 Speaker 1: Reserve Bank do on rates going forward? That's the first one. 133 00:06:44,400 --> 00:06:48,000 Speaker 1: The second one, what should they do? According to Warren Hogan, 134 00:06:48,440 --> 00:06:49,880 Speaker 1: on interest rates going forward? 135 00:06:51,279 --> 00:06:54,080 Speaker 2: Yeah, Well, if they are a chemikazi economists, which some 136 00:06:54,160 --> 00:06:57,239 Speaker 2: people who accuse me of, you'd probably want to tap 137 00:06:57,240 --> 00:06:58,880 Speaker 2: on the brakes a couple of times as soon as 138 00:06:58,960 --> 00:06:59,760 Speaker 2: possible to take. 139 00:06:59,720 --> 00:07:01,680 Speaker 3: That that I talked about. But they're not going to 140 00:07:01,720 --> 00:07:02,040 Speaker 3: do that. 141 00:07:02,680 --> 00:07:04,800 Speaker 2: The reality is is that we're going to see how 142 00:07:04,839 --> 00:07:07,160 Speaker 2: the consumer goes through this critical last few months of 143 00:07:07,200 --> 00:07:10,680 Speaker 2: the year. Does this improvement in business activity resolve in 144 00:07:10,760 --> 00:07:15,320 Speaker 2: more investment in hiring? For me, I had a rate hike, 145 00:07:15,400 --> 00:07:17,280 Speaker 2: I had stability and the cash rate, and then a 146 00:07:17,360 --> 00:07:19,960 Speaker 2: rate hike at the end of next year. This stronger 147 00:07:19,960 --> 00:07:22,680 Speaker 2: than expected inflation number points to a risk that we 148 00:07:22,720 --> 00:07:25,360 Speaker 2: could see a rate hike in May. I'm not ready 149 00:07:25,400 --> 00:07:27,080 Speaker 2: to push that yet I want to see a bit 150 00:07:27,080 --> 00:07:30,440 Speaker 2: more data. But look, that's unfortunately we have a lot 151 00:07:30,440 --> 00:07:35,000 Speaker 2: of uncertainties, both geopolitical structural. But the reality is we 152 00:07:35,040 --> 00:07:37,920 Speaker 2: have an economy that's in a cyclical recovery. We now 153 00:07:37,960 --> 00:07:40,760 Speaker 2: have evidence that inflation has turned the corner, and that 154 00:07:40,840 --> 00:07:42,640 Speaker 2: means one thing and one thing only in the rates 155 00:07:42,680 --> 00:07:45,360 Speaker 2: are not going down and they're probably going to have 156 00:07:45,400 --> 00:07:46,000 Speaker 2: to go up a bit. 157 00:07:46,520 --> 00:07:47,960 Speaker 1: Okay, just before I let you go, I just want 158 00:07:47,960 --> 00:07:50,360 Speaker 1: to ask about government spending because what you've said there, 159 00:07:50,680 --> 00:07:55,520 Speaker 1: how much responsibility should the government should fiscal policy take 160 00:07:56,000 --> 00:07:58,920 Speaker 1: on in the next year or two too. I mean, 161 00:07:59,000 --> 00:08:01,480 Speaker 1: it's kind of self evident. Of course fiscal policy matters, 162 00:08:01,680 --> 00:08:03,440 Speaker 1: but you know, is a government doing enough? Is it 163 00:08:03,440 --> 00:08:07,440 Speaker 1: taking fiscal policy responsibly enough to help the Reserve bank 164 00:08:07,440 --> 00:08:08,600 Speaker 1: and managing the economy. 165 00:08:09,360 --> 00:08:13,440 Speaker 2: Look, I think the answer to that is probably not. 166 00:08:14,560 --> 00:08:17,080 Speaker 2: And I think if they fully understood the sort of 167 00:08:17,440 --> 00:08:20,160 Speaker 2: framework I had talked about just before, they probably would 168 00:08:20,200 --> 00:08:23,400 Speaker 2: be courses. But their objectives are short term and political, 169 00:08:24,560 --> 00:08:26,960 Speaker 2: and the thing that they should be thinking long and 170 00:08:27,000 --> 00:08:29,320 Speaker 2: hard about is even though an election is two years away, 171 00:08:29,800 --> 00:08:31,480 Speaker 2: it would be much better for them to nip a 172 00:08:31,480 --> 00:08:35,199 Speaker 2: few things in the butt now than wait, because if 173 00:08:35,280 --> 00:08:39,439 Speaker 2: we get behind the inflation, if we get behind the economy, 174 00:08:39,480 --> 00:08:41,400 Speaker 2: that's exactly what we saw in the late eighties, and 175 00:08:41,440 --> 00:08:44,280 Speaker 2: that is the disaster scenario. And the government can't do 176 00:08:44,440 --> 00:08:46,200 Speaker 2: much in the short term. They can't They're not going 177 00:08:46,240 --> 00:08:49,360 Speaker 2: to come out and start cutting spending. The best they 178 00:08:49,360 --> 00:08:52,880 Speaker 2: can do is start to moderate their spending and also 179 00:08:53,400 --> 00:08:56,679 Speaker 2: try and get this labor market moving, try and focus 180 00:08:56,720 --> 00:08:59,839 Speaker 2: on reskilling. But look, the reality is, if this thing 181 00:09:00,040 --> 00:09:02,400 Speaker 2: doesn't go well in the next day to eight months, 182 00:09:02,920 --> 00:09:05,040 Speaker 2: the big shift in government spending I think is at 183 00:09:05,040 --> 00:09:08,520 Speaker 2: the core of it, and that'll probably show up as 184 00:09:08,600 --> 00:09:10,760 Speaker 2: a as part of the next election, because I think 185 00:09:10,920 --> 00:09:12,880 Speaker 2: everything will play out before the next election. 186 00:09:13,360 --> 00:09:15,400 Speaker 1: Lauren, thanks for talking to Fear and Greed Q and A. 187 00:09:15,760 --> 00:09:17,680 Speaker 3: Thanks Sean. Great to be on the show with you. 188 00:09:18,040 --> 00:09:21,000 Speaker 1: That was Warren Hogan, Managing director of Eqeconomics and Economic 189 00:09:21,040 --> 00:09:23,600 Speaker 1: advisor at Judo Bank. If you've got something you'd like 190 00:09:23,640 --> 00:09:27,000 Speaker 1: to know, then send through your question on LinkedIn, Instagram, Facebook, 191 00:09:27,200 --> 00:09:29,280 Speaker 1: right fearan Greed dot com today you I'm sure, I'm like, 192 00:09:29,320 --> 00:09:30,920 Speaker 1: this is Fear and Greed Q and A