1 00:00:05,760 --> 00:00:08,070 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean 2 00:00:08,280 --> 00:00:11,250 Sean Aylmer: Aylmer. Yesterday, the Reserve Bank Board left interest rates on 3 00:00:11,250 --> 00:00:14,489 Sean Aylmer: hold as was widely expected, but the commentary around the 4 00:00:14,490 --> 00:00:16,739 Sean Aylmer: decision doesn't give a great deal of hope that we'll 5 00:00:16,739 --> 00:00:19,500 Sean Aylmer: be seeing rate cuts anytime soon. The Reserve Bank has 6 00:00:19,500 --> 00:00:23,220 Sean Aylmer: conceded inflation is stickier than expected, and there's a warning 7 00:00:23,220 --> 00:00:26,099 Sean Aylmer: too about the impact of big spending government budgets or 8 00:00:26,099 --> 00:00:29,790 Sean Aylmer: at least any spending government budgets. Diana Mousina is AMP'S 9 00:00:29,820 --> 00:00:32,909 Sean Aylmer: Deputy Chief Economist. Diana, welcome back to Fear and Greed. 10 00:00:33,120 --> 00:00:33,720 Diana Mousina: Thanks, Sean. 11 00:00:34,799 --> 00:00:36,598 Sean Aylmer: What do you make of yesterday? What did we learn 12 00:00:36,600 --> 00:00:39,089 Sean Aylmer: from the Reserve Bank yesterday that we didn't already know? 13 00:00:39,870 --> 00:00:44,430 Diana Mousina: I was a bit surprised to see the hawkish language 14 00:00:44,490 --> 00:00:47,370 Diana Mousina: in the post mixed statement, and also in the press 15 00:00:47,370 --> 00:00:51,809 Diana Mousina: conference. There were a lot of references to the upside 16 00:00:51,839 --> 00:00:54,750 Diana Mousina: revisions to consumption, which were in the March quarter GDP 17 00:00:54,750 --> 00:00:59,130 Diana Mousina: figures. Basically, what the ABS did was they revised up 18 00:00:59,130 --> 00:01:03,209 Diana Mousina: consumer spending based on more Australians traveling overseas. So they 19 00:01:03,210 --> 00:01:06,870 Diana Mousina: increased consumption, but increased imports because if you travel overseas, 20 00:01:06,959 --> 00:01:09,839 Diana Mousina: it's counted as import. So no change to the growth 21 00:01:09,929 --> 00:01:13,680 Diana Mousina: data, but household consumption looks a bit stronger and household 22 00:01:13,680 --> 00:01:16,319 Diana Mousina: savings ratio looks a bit weaker. So the Reserve Bank, 23 00:01:16,319 --> 00:01:18,959 Diana Mousina: I think, has taken this as a sign that the 24 00:01:18,959 --> 00:01:22,289 Diana Mousina: consumer's actually in a better shape than where they thought 25 00:01:22,289 --> 00:01:25,530 Diana Mousina: it was. They did mention the higher inflation data as 26 00:01:25,530 --> 00:01:28,469 Diana Mousina: well. That wasn't surprising. The inflation data did surprise the 27 00:01:28,469 --> 00:01:30,750 Diana Mousina: upside in March and April, but I guess just the 28 00:01:30,750 --> 00:01:34,560 Diana Mousina: overall tone that they didn't even consider a rate cut 29 00:01:34,680 --> 00:01:37,319 Diana Mousina: this meeting. Not that they should have, I think, but 30 00:01:37,319 --> 00:01:39,539 Diana Mousina: that they did discuss a rate hike. I don't think 31 00:01:39,539 --> 00:01:42,300 Diana Mousina: that they should have discussed a rate hike either, but 32 00:01:42,330 --> 00:01:45,929 Diana Mousina: clearly, the Reserve Bank I think feels like if they'd 33 00:01:45,929 --> 00:01:48,630 Diana Mousina: need to raise interest rates again, then it would be 34 00:01:48,630 --> 00:01:50,610 Diana Mousina: that bad to the economy or that the economy could 35 00:01:50,610 --> 00:01:52,740 Diana Mousina: withstand another rate rise from here. 36 00:01:53,520 --> 00:01:56,429 Sean Aylmer: It was almost like they were preparing people for the 37 00:01:56,429 --> 00:01:59,399 Sean Aylmer: idea of a rate hike. Doesn't mean they're going to 38 00:01:59,400 --> 00:02:02,339 Sean Aylmer: do it of course, but there was such an emphasis 39 00:02:02,340 --> 00:02:04,710 Sean Aylmer: on the upside risks yesterday, Diana. 40 00:02:05,430 --> 00:02:07,920 Diana Mousina: Well, Michelle Bullock did say that the probability of a 41 00:02:07,920 --> 00:02:12,269 Diana Mousina: rate hike hasn't necessarily increased, but they're just more vigilant 42 00:02:12,270 --> 00:02:15,480 Diana Mousina: to the risks. So I don't know, I guess take 43 00:02:15,480 --> 00:02:18,300 Diana Mousina: from that what you will. They're probably trying to play 44 00:02:18,300 --> 00:02:22,738 Diana Mousina: it safe given the last few years of problematic communication, 45 00:02:23,309 --> 00:02:28,710 Diana Mousina: but I agree that they're trying to warn markets and 46 00:02:28,710 --> 00:02:31,769 Diana Mousina: people that a rate hike definitely isn't on the agenda. 47 00:02:32,099 --> 00:02:35,010 Diana Mousina: And the key date when that might happen might be 48 00:02:35,010 --> 00:02:37,469 Diana Mousina: the August board meeting because that's where the Reserve Bank gets 49 00:02:37,559 --> 00:02:40,319 Diana Mousina: the full set of that quarterly inflation data, which Michelle 50 00:02:40,320 --> 00:02:44,190 Diana Mousina: Bullock emphasized a lot, and they can really make their 51 00:02:44,190 --> 00:02:48,418 Diana Mousina: decision about whether inflation has continued to surprise to the upside. 52 00:02:49,320 --> 00:02:51,480 Sean Aylmer: So what are we looking for? We know that the 53 00:02:51,510 --> 00:02:53,279 Sean Aylmer: 12 months to the end of April came in at 3. 54 00:02:53,460 --> 00:02:57,660 Sean Aylmer: 6%. This is the headline CPI. She made it clear 55 00:02:57,660 --> 00:03:00,150 Sean Aylmer: that she likes the quarterly data more than the monthly 56 00:03:00,210 --> 00:03:03,450 Sean Aylmer: data. So what are we looking at for the June 57 00:03:03,450 --> 00:03:05,100 Sean Aylmer: quarter, which I think comes out at the very end 58 00:03:05,100 --> 00:03:07,500 Sean Aylmer: of July? What sort of number are we hoping for? 59 00:03:07,800 --> 00:03:09,780 Diana Mousina: Well, I think that the data might actually surprise the 60 00:03:09,780 --> 00:03:13,079 Diana Mousina: downside for May and June. We often get this flow 61 00:03:13,080 --> 00:03:15,479 Diana Mousina: of inflation data that runs hot and cold, and you 62 00:03:15,480 --> 00:03:18,390 Diana Mousina: see that both in Australia and overseas. Early this year, 63 00:03:18,450 --> 00:03:22,080 Diana Mousina: global inflation data was running hot above expectations. Now the 64 00:03:22,080 --> 00:03:23,550 Diana Mousina: last few prints in the US have been a bit 65 00:03:23,550 --> 00:03:26,549 Diana Mousina: weaker, and the Eurozone as well. So I think that 66 00:03:26,550 --> 00:03:28,500 Diana Mousina: that's what we're likely to see here, that the next 67 00:03:28,500 --> 00:03:31,679 Diana Mousina: two prints might actually surprise the downside. I think if 68 00:03:31,679 --> 00:03:38,100 Diana Mousina: inflation comes in at an annual rate of say 3.3%, 3. 4%, and 69 00:03:38,160 --> 00:03:42,360 Diana Mousina: also that the underlying number in quarterly terms comes out 70 00:03:42,450 --> 00:03:46,169 Diana Mousina: probably at 0. 8% or below, that would keep the Reserve 71 00:03:46,170 --> 00:03:49,049 Diana Mousina: Bank quite comfortable with its current settings. If we get 72 00:03:49,049 --> 00:03:53,879 Diana Mousina: an underlying or trim print of 1%, similar to what 73 00:03:53,879 --> 00:03:56,490 Diana Mousina: we got last quarter, then I think that they'll hike 74 00:03:56,490 --> 00:03:57,450 Diana Mousina: again in August. 75 00:03:57,990 --> 00:03:59,850 Sean Aylmer: Stay with me, Diana. We'll be back in a minute. 76 00:04:06,960 --> 00:04:12,390 Sean Aylmer: I'm speaking to AMP Deputy Chief Economist, Diana Mousina. So 77 00:04:12,390 --> 00:04:15,750 Sean Aylmer: just explain why inflation isn't coming down? Michelle Bullock yesterday 78 00:04:15,750 --> 00:04:18,810 Sean Aylmer: said that obviously inflation has peaked, it's on the way. 79 00:04:19,200 --> 00:04:21,719 Sean Aylmer: The trend is the friend because it is certainly moving 80 00:04:21,719 --> 00:04:24,780 Sean Aylmer: in the right direction, but she talked about services inflation. 81 00:04:24,809 --> 00:04:27,928 Sean Aylmer: Just explain what she's talking about and how difficult that 82 00:04:27,928 --> 00:04:28,859 Sean Aylmer: last mile is? 83 00:04:29,549 --> 00:04:32,400 Diana Mousina: So then the difficulty in Australia is that it's really 84 00:04:32,400 --> 00:04:35,550 Diana Mousina: in that underlying or trim me inflation measure that's not 85 00:04:35,550 --> 00:04:39,150 Diana Mousina: coming down quick enough. In headline terms, inflation, as I 86 00:04:39,150 --> 00:04:42,270 Diana Mousina: said, was running at 3. 6%. That's not too much 87 00:04:42,270 --> 00:04:45,509 Diana Mousina: high compared to our level peers, but that underlying print is running 88 00:04:45,509 --> 00:04:48,960 Diana Mousina: at close to 4% in annual terms, and that's the 89 00:04:48,960 --> 00:04:51,539 Diana Mousina: one that takes out a lot of those volatilities. The 90 00:04:51,540 --> 00:04:56,100 Diana Mousina: areas that are mostly a concern are services areas like 91 00:04:56,130 --> 00:05:00,719 Diana Mousina: finance and insurance costs, education costs, healthcare and medical costs, 92 00:05:00,960 --> 00:05:05,760 Diana Mousina: rents, some utilities as well. So it's really around those 93 00:05:05,820 --> 00:05:10,410 Diana Mousina: areas that we have little, I guess, ability to influence 94 00:05:10,440 --> 00:05:14,099 Diana Mousina: through demand. A lot of them are government driven, and 95 00:05:14,099 --> 00:05:17,039 Diana Mousina: also, they often tend to lag what happens in the broader 96 00:05:17,460 --> 00:05:21,480 Diana Mousina: inflation landscape. So often, things like insurance and finance costs 97 00:05:21,480 --> 00:05:25,950 Diana Mousina: will only increase after you've seen the inflationary increase in 98 00:05:25,950 --> 00:05:29,880 Diana Mousina: the good sector. That's why services inflation normally tracks whatever 99 00:05:29,880 --> 00:05:32,279 Diana Mousina: happens in the good sector. I think we will see 100 00:05:32,279 --> 00:05:36,058 Diana Mousina: a further slowing in most service prices, maybe part rents, 101 00:05:36,330 --> 00:05:38,460 Diana Mousina: but it's just taking a bit longer than the Reserve 102 00:05:38,460 --> 00:05:39,210 Diana Mousina: Bank would like. 103 00:05:40,740 --> 00:05:42,419 Sean Aylmer: So we talk a lot about interest rates. The flip 104 00:05:42,450 --> 00:05:45,570 Sean Aylmer: side is economic growth and high interest rates slows economic 105 00:05:45,570 --> 00:05:49,140 Sean Aylmer: growth. That's how it's supposed to work. Michelle Bullock spoke 106 00:05:49,140 --> 00:05:51,779 Sean Aylmer: a lot in the press conference about the potential for 107 00:05:51,779 --> 00:05:54,599 Sean Aylmer: a soft landing for the economy. Is there a potential 108 00:05:54,599 --> 00:05:56,789 Sean Aylmer: that we do go into recession if we keep rates high? 109 00:05:57,809 --> 00:06:01,140 Diana Mousina: That seems to be where the talk is now in the US. 110 00:06:01,170 --> 00:06:03,300 Diana Mousina: If you look at some indicators of the US consumer 111 00:06:03,300 --> 00:06:06,630 Diana Mousina: the past few weeks, higher additional jobless claims, a higher 112 00:06:06,630 --> 00:06:11,040 Diana Mousina: unemployment rate, pretty poor retail spending, a drop in consumer 113 00:06:11,279 --> 00:06:15,689 Diana Mousina: confidence, the continuing inversion of the yield curve. I think 114 00:06:15,690 --> 00:06:18,209 Diana Mousina: a lot more people are becoming a bit more concerned 115 00:06:18,240 --> 00:06:20,250 Diana Mousina: about the US outlook and the risk that they do 116 00:06:20,250 --> 00:06:22,980 Diana Mousina: go into recession. The US consumer was really the key 117 00:06:22,980 --> 00:06:26,370 Diana Mousina: driver of that strength in US exceptionalism in the past 118 00:06:26,639 --> 00:06:30,869 Diana Mousina: 24 months, and that story's changing. And that's in a 119 00:06:30,870 --> 00:06:33,809 Diana Mousina: country where you get very little pass through of interest 120 00:06:33,809 --> 00:06:37,589 Diana Mousina: rates to outstanding mortgage rates. I think if we see 121 00:06:37,589 --> 00:06:39,540 Diana Mousina: that weakness in the US come through, I think more 122 00:06:39,540 --> 00:06:42,720 Diana Mousina: people will become concerned about Australia too. Even though of 123 00:06:42,720 --> 00:06:45,960 Diana Mousina: course, we operate in our own domestic settings and we 124 00:06:45,960 --> 00:06:49,138 Diana Mousina: have our own drivers of the economy, but I guess 125 00:06:49,139 --> 00:06:52,409 Diana Mousina: it's a sign that high interest rates are working. So 126 00:06:52,920 --> 00:06:56,160 Diana Mousina: I think that a recession is still a possibility. It's not 127 00:06:56,580 --> 00:06:59,279 Diana Mousina: our base case, but I'd say the risk of recession 128 00:06:59,339 --> 00:07:01,589 Diana Mousina: in Australia is probably about 20% in the next 12 129 00:07:01,589 --> 00:07:03,928 Diana Mousina: months. I'd probably put it a bit higher in the US, 130 00:07:03,928 --> 00:07:07,260 Diana Mousina: maybe about 35% or 40% in the next 12 months in the US. 131 00:07:07,980 --> 00:07:10,949 Sean Aylmer: What about the role of governments and budgets? We had 132 00:07:10,949 --> 00:07:13,680 Sean Aylmer: New South Wales yesterday. We had obviously the federal budget 133 00:07:13,680 --> 00:07:17,220 Sean Aylmer: last month. What did Michelle Bullock say about the fiscal 134 00:07:17,220 --> 00:07:20,160 Sean Aylmer: strategy and whether that's helping or hindering inflation? 135 00:07:21,000 --> 00:07:24,209 Diana Mousina: Well, the Reserve Bank was pretty careful not to make 136 00:07:24,210 --> 00:07:26,849 Diana Mousina: too much commentary around the budgets. They obviously want to 137 00:07:26,849 --> 00:07:30,660 Diana Mousina: see a political... There was a slight comment that the 138 00:07:30,660 --> 00:07:34,620 Diana Mousina: state and federal budgets could increase inflation a bit more, 139 00:07:34,620 --> 00:07:38,130 Diana Mousina: or that they had more stimulus in them than what 140 00:07:38,130 --> 00:07:40,830 Diana Mousina: the Reserve Bank initially expected. There was definitely a tone 141 00:07:41,429 --> 00:07:44,369 Diana Mousina: that there was more spending than the RBA was hoping 142 00:07:44,370 --> 00:07:46,589 Diana Mousina: for, I suppose. And overall, if you look at the 143 00:07:46,590 --> 00:07:49,620 Diana Mousina: state and federal budgets, that's clearly what you see, especially 144 00:07:49,950 --> 00:07:52,230 Diana Mousina: with the release of New South Wales, Victoria and the 145 00:07:52,230 --> 00:07:57,390 Diana Mousina: South Australian budget. They did have quite large estimates for 146 00:07:57,450 --> 00:08:01,349 Diana Mousina: budget deficits over the coming years, which look even a 147 00:08:01,349 --> 00:08:04,679 Diana Mousina: little bit worse. So there is this risk that the 148 00:08:04,680 --> 00:08:07,920 Diana Mousina: budget deficits and increased spending add to inflation, but when 149 00:08:07,920 --> 00:08:11,400 Diana Mousina: I tried to do the calculations about how much additional income 150 00:08:11,400 --> 00:08:13,380 Diana Mousina: consumers would get from some of those cost of living 151 00:08:13,380 --> 00:08:17,039 Diana Mousina: measures, it wasn't really enough once you take into account 152 00:08:17,160 --> 00:08:20,159 Diana Mousina: the increase in mortgage rates and how much consumers' mortgages 153 00:08:20,160 --> 00:08:24,510 Diana Mousina: are paying on housing, elevated inflation and our forecast for 154 00:08:24,510 --> 00:08:28,830 Diana Mousina: a higher employment rate. I think those factors offset some of 155 00:08:28,830 --> 00:08:32,700 Diana Mousina: the kickbacks that consumers will get. Plus, if you believe 156 00:08:32,700 --> 00:08:36,270 Diana Mousina: the Consumer Sentiment Survey, about 8% of consumers said they're 157 00:08:36,270 --> 00:08:38,490 Diana Mousina: going to save the tax cut that starts from the 1st 158 00:08:38,759 --> 00:08:39,240 Diana Mousina: of July. 159 00:08:39,990 --> 00:08:42,300 Sean Aylmer: Okay. What's it all mean for interest rates then, Diana? 160 00:08:43,410 --> 00:08:46,410 Diana Mousina: Well, we still think that the next move in interest 161 00:08:46,410 --> 00:08:48,958 Diana Mousina: rates will be down and that we will get a 162 00:08:48,960 --> 00:08:51,030 Diana Mousina: rate cut by the end of this year, and that 163 00:08:51,030 --> 00:08:54,600 Diana Mousina: really hinges on our assumption that we get a further 164 00:08:54,660 --> 00:08:56,730 Diana Mousina: increase to the unemployment rate. We think it's going to 165 00:08:56,730 --> 00:08:59,279 Diana Mousina: peak at about 4. 5% by the end of this 166 00:08:59,279 --> 00:09:02,340 Diana Mousina: year, which is higher than the Reserve Bank's expectations. Also, 167 00:09:02,340 --> 00:09:04,828 Diana Mousina: we think that inflation's going to come down faster, and 168 00:09:04,830 --> 00:09:07,800 Diana Mousina: we've been of that view in this inflation cycle that 169 00:09:07,800 --> 00:09:12,208 Diana Mousina: inflation is not proving to be persistently high. We think that it 170 00:09:12,210 --> 00:09:14,520 Diana Mousina: will continue to come down just like it has globally, 171 00:09:15,120 --> 00:09:17,250 Diana Mousina: and that will ultimately allow the Reserve Bank to cut 172 00:09:17,250 --> 00:09:20,550 Diana Mousina: rates, but it's going to be a pretty shallow cutting 173 00:09:20,550 --> 00:09:23,670 Diana Mousina: cycle. We think that we'll only get one to three 174 00:09:23,670 --> 00:09:26,880 Diana Mousina: rate cuts in the next 12 months, given that the 175 00:09:26,940 --> 00:09:29,129 Diana Mousina: cash rate's at a 12- year- high, that's not really 176 00:09:29,130 --> 00:09:31,259 Diana Mousina: too many rate cuts in the big scheme of things. 177 00:09:31,259 --> 00:09:36,299 Diana Mousina: I think monetary policy at over 3. 5% is still restrictive 178 00:09:36,299 --> 00:09:37,050 Diana Mousina: for Australia. 179 00:09:37,559 --> 00:09:42,840 Sean Aylmer: Okay. So does that mean normal monetary policy is around 3%, 3. 180 00:09:43,380 --> 00:09:46,500 Sean Aylmer: 5%, which means mortgages are closer to 5% or 6%? 181 00:09:46,980 --> 00:09:49,799 Diana Mousina: Yeah. I think that more of that neutral rate that economists 182 00:09:49,799 --> 00:09:53,970 Diana Mousina: talk about is probably somewhere 3% to 3.5%. So yeah, 183 00:09:54,000 --> 00:09:57,750 Diana Mousina: mortgage rates, just like you said, between 4.5% to 5%, 184 00:09:58,110 --> 00:10:00,990 Diana Mousina: I think would be much better for the consumer overall 185 00:10:00,990 --> 00:10:03,480 Diana Mousina: in terms of how much they're spending off their disposable 186 00:10:03,480 --> 00:10:05,040 Diana Mousina: income to household debt. 187 00:10:05,490 --> 00:10:07,200 Sean Aylmer: Diana, thank you for talking to Fear and Greed. 188 00:10:07,530 --> 00:10:08,069 Diana Mousina: Thanks, Sean. 189 00:10:08,460 --> 00:10:11,160 Sean Aylmer: That was Diana Mousina, Deputy Chief Economist at AMP. This 190 00:10:11,160 --> 00:10:14,040 Sean Aylmer: is the Fear and Greed Business Interview. Join us every 191 00:10:14,040 --> 00:10:16,710 Sean Aylmer: morning for the full episode of Fear and Greed, daily 192 00:10:16,710 --> 00:10:19,228 Sean Aylmer: business news for people who make their own decisions. I'm 193 00:10:19,230 --> 00:10:20,790 Sean Aylmer: Sean Aylmer. Enjoy your day.