1 00:00:04,080 --> 00:00:07,320 Sean Aylmer: Welcome to the Fear & Greed daily interview. I'm Sean, a Aylmer. The 2 00:00:07,320 --> 00:00:09,900 Sean Aylmer: board of the Reserve Bank yesterday increased the official cash 3 00:00:09,900 --> 00:00:12,990 Sean Aylmer: rate by another 25 basis points in its first meeting 4 00:00:12,990 --> 00:00:15,930 Sean Aylmer: of 2023. Over the last couple of weeks we have 5 00:00:15,930 --> 00:00:18,960 Sean Aylmer: had higher than expected inflation data for the December quarter, 6 00:00:19,200 --> 00:00:21,840 Sean Aylmer: suggesting more rate rises would be needed, but then a 7 00:00:21,840 --> 00:00:25,170 Sean Aylmer: tumble in retail sales and perhaps signs of a cooling 8 00:00:25,170 --> 00:00:27,660 Sean Aylmer: in the economy. But the Reserve Bank is set on 9 00:00:27,660 --> 00:00:30,659 Sean Aylmer: taming inflation. Reserve Bank Governor Philip Lowe made that very 10 00:00:30,660 --> 00:00:34,020 Sean Aylmer: clear yesterday, and that means increasing rates. Certainly a tough 11 00:00:34,020 --> 00:00:36,840 Sean Aylmer: time for mortgage holders. Gareth Aird is the Commonwealth Bank's 12 00:00:36,840 --> 00:00:40,080 Sean Aylmer: Head of Australian economics. Gareth, welcome back to Fear & Greed. 13 00:00:40,500 --> 00:00:41,339 Gareth Aird: Good day, Sean. How are you? 14 00:00:42,270 --> 00:00:46,979 Sean Aylmer: Well, thank you. Now, any surprises in yesterday's decision, and 15 00:00:46,979 --> 00:00:50,280 Sean Aylmer: not just the decision, but also the wording around the statement? 16 00:00:50,490 --> 00:00:53,310 Gareth Aird: Not a surprise in the decision. We thought they'd raise 17 00:00:53,310 --> 00:00:56,250 Gareth Aird: the cash rate by 25 basis points, as did most 18 00:00:56,250 --> 00:01:00,240 Gareth Aird: analysts in the market. The surprise though came with Governor 19 00:01:00,240 --> 00:01:04,080 Gareth Aird: Lowe's statement. He made a hawkish tilt. What that means 20 00:01:04,080 --> 00:01:06,750 Gareth Aird: in layman's terms is that he's, from where he was 21 00:01:06,810 --> 00:01:09,959 Gareth Aird: late last year, he's become more in the camp that's 22 00:01:09,959 --> 00:01:14,009 Gareth Aird: convinced he's raising rates. For me, the key change was 23 00:01:14,010 --> 00:01:16,560 Gareth Aird: they took out the reference to not being on a 24 00:01:16,830 --> 00:01:21,479 Gareth Aird: preset path. And Governor Lowe basically said that further increases 25 00:01:21,540 --> 00:01:23,880 Gareth Aird: in interest rates will be needed over the months ahead. 26 00:01:24,420 --> 00:01:27,270 Gareth Aird: So his conviction on needing to take the cash rate 27 00:01:27,360 --> 00:01:30,930 Gareth Aird: higher from here is further entrenched. And as a result, 28 00:01:30,930 --> 00:01:33,390 Gareth Aird: we've had to put a couple more rate hikes in 29 00:01:33,390 --> 00:01:35,910 Gareth Aird: our central scenario for the Reserve Bank, where we think 30 00:01:35,910 --> 00:01:39,660 Gareth Aird: now they'll take the cash rate up to 3. 85%. And 31 00:01:39,660 --> 00:01:43,169 Gareth Aird: prior to the statement yesterday, we thought the RBA was 32 00:01:43,170 --> 00:01:46,800 Gareth Aird: getting pretty close to pausing the tightening cycle, particularly given 33 00:01:46,800 --> 00:01:49,080 Gareth Aird: in November of last year was when they first started 34 00:01:49,080 --> 00:01:53,040 Gareth Aird: talking about potentially pausing. And yet, reading the statement yesterday, 35 00:01:53,040 --> 00:01:56,940 Gareth Aird: the governor sounds very committed to continuing to raise rates. 36 00:01:56,940 --> 00:02:00,270 Gareth Aird: So pretty much all analysts now across the sell side 37 00:02:00,270 --> 00:02:02,070 Gareth Aird: have had to put in more rate hikes in their 38 00:02:02,070 --> 00:02:03,270 Gareth Aird: profile for the Reserve Bank. 39 00:02:03,840 --> 00:02:06,570 Sean Aylmer: Far be it for me to criticize Philip Lowe, but 40 00:02:07,230 --> 00:02:09,210 Sean Aylmer: 12 months ago he was saying there wasn't going to 41 00:02:09,210 --> 00:02:12,810 Sean Aylmer: be a rate rise until 2024. Suddenly now he's become 42 00:02:12,810 --> 00:02:18,240 Sean Aylmer: more definitive about the need for more rate rises. Things 43 00:02:18,240 --> 00:02:21,750 Sean Aylmer: can change so quickly in economics. It surprised me somewhat 44 00:02:21,750 --> 00:02:23,940 Sean Aylmer: that he actually took that stance because he didn't really 45 00:02:23,940 --> 00:02:26,880 Sean Aylmer: need to remove that statement that you were talking about. 46 00:02:27,480 --> 00:02:30,480 Gareth Aird: I agree. In fact, if they just kept what they 47 00:02:30,480 --> 00:02:32,850 Gareth Aird: said in December, which was that the board expects to 48 00:02:32,850 --> 00:02:35,040 Gareth Aird: increase rates over the period ahead but is not on 49 00:02:35,040 --> 00:02:38,100 Gareth Aird: a preset path, then they still could have increased interest 50 00:02:38,100 --> 00:02:40,560 Gareth Aird: rates in March and April if they thought that was 51 00:02:40,560 --> 00:02:44,430 Gareth Aird: the right policy choice. But equally, if the data evolves 52 00:02:44,430 --> 00:02:47,430 Gareth Aird: not in line with their expectations, they would retain full 53 00:02:47,430 --> 00:02:50,550 Gareth Aird: optionality to do whatever they think is right at those 54 00:02:50,550 --> 00:02:53,190 Gareth Aird: meetings. By removing the fact that they're not on a 55 00:02:53,190 --> 00:02:56,040 Gareth Aird: preset path kind of implies they are on a preset 56 00:02:56,040 --> 00:03:00,930 Gareth Aird: path. And therefore it's almost like if you've committed to 57 00:03:00,960 --> 00:03:04,080 Gareth Aird: raising rates another 25 basis points in March and probably 58 00:03:04,080 --> 00:03:06,809 Gareth Aird: then in April, why did you not do 50 basis 59 00:03:06,810 --> 00:03:11,160 Gareth Aird: points yesterday? A little bit surprised by all of that, 60 00:03:11,250 --> 00:03:15,389 Gareth Aird: but clearly the inflation data has spooked them out. They 61 00:03:15,389 --> 00:03:18,270 Gareth Aird: sound more concerned about inflation than they did three or 62 00:03:18,270 --> 00:03:20,340 Gareth Aird: four months ago, and yet they've delivered quite a bit 63 00:03:20,340 --> 00:03:22,830 Gareth Aird: of tightening in that period. And it looks like they've 64 00:03:23,190 --> 00:03:26,220 Gareth Aird: dismissed all the other activity data, or the soft data 65 00:03:26,220 --> 00:03:28,470 Gareth Aird: like the business surveys. I mean, the NAB business survey 66 00:03:29,010 --> 00:03:32,130 Gareth Aird: has been softening. The PMI has been printing below 50. 67 00:03:32,610 --> 00:03:36,000 Gareth Aird: A lot of housing related data has softened and retail 68 00:03:36,000 --> 00:03:38,460 Gareth Aird: trade was down in December. But it seems like the 69 00:03:38,460 --> 00:03:41,610 Gareth Aird: inflation data just trumped all of that and they want 70 00:03:41,610 --> 00:03:43,200 Gareth Aird: to get on with it and keep raising rates. 71 00:03:43,680 --> 00:03:46,500 Sean Aylmer: How much of this is about jawboning? Because we know 72 00:03:46,500 --> 00:03:49,650 Sean Aylmer: central banks like to talk up what they're doing, whether 73 00:03:49,650 --> 00:03:52,980 Sean Aylmer: that's going up or down, because it tells the market 74 00:03:52,980 --> 00:03:56,940 Sean Aylmer: what's happening. Is it possible that the Reserve bank is 75 00:03:56,940 --> 00:03:59,580 Sean Aylmer: jawboning because it just doesn't want people to think that 76 00:03:59,580 --> 00:04:01,530 Sean Aylmer: it's taken its eye off inflation? 77 00:04:02,190 --> 00:04:04,830 Gareth Aird: Yeah, it's an interesting thought, and we discussed that in 78 00:04:04,830 --> 00:04:07,680 Gareth Aird: our team once the statement came out. And we're thinking 79 00:04:07,680 --> 00:04:11,250 Gareth Aird: maybe the Reserve Bank wants to get a response from 80 00:04:11,400 --> 00:04:14,880 Gareth Aird: consumers and doesn't necessarily intend on delivering the hikes, but 81 00:04:14,880 --> 00:04:18,060 Gareth Aird: wants people to start acting like these hikes are coming. 82 00:04:18,630 --> 00:04:21,510 Gareth Aird: But having said that, we're only four weeks away from 83 00:04:21,510 --> 00:04:24,450 Gareth Aird: the March board meeting. And if you say yesterday that 84 00:04:24,450 --> 00:04:27,450 Gareth Aird: you think you're going to be raising rates next month, 85 00:04:27,779 --> 00:04:29,849 Gareth Aird: you're probably then have to go through with it because 86 00:04:29,850 --> 00:04:31,619 Gareth Aird: you're not really going to see that much in the 87 00:04:31,620 --> 00:04:34,289 Gareth Aird: data over a four- week period that should cause you 88 00:04:34,290 --> 00:04:37,680 Gareth Aird: to deviate from what you only just thought yesterday. So 89 00:04:38,279 --> 00:04:43,050 Gareth Aird: it's an unusual one. I'm just surprised that they ditched 90 00:04:43,050 --> 00:04:45,480 Gareth Aird: the optionality of not being on a preset path. And 91 00:04:46,020 --> 00:04:48,870 Gareth Aird: look, if the governor thinks we've all interpreted what he 92 00:04:48,960 --> 00:04:51,630 Gareth Aird: put in his statement the wrong way, he can correct 93 00:04:51,630 --> 00:04:54,690 Gareth Aird: that at some stage. But from what we learned yesterday, 94 00:04:54,690 --> 00:04:57,029 Gareth Aird: it seems clear that the Reserve Bank expects to be 95 00:04:57,029 --> 00:04:59,700 Gareth Aird: raising interest rates a couple more times over coming months. 96 00:05:00,120 --> 00:05:01,979 Sean Aylmer: Stay with me, Gareth, we'll be back in a minute. 97 00:05:08,190 --> 00:05:10,979 Sean Aylmer: I'm speaking to Gareth Aird, Head of Australian Economics at 98 00:05:10,980 --> 00:05:14,969 Sean Aylmer: the Commonwealth Bank. So can Australians afford it? 99 00:05:16,860 --> 00:05:19,680 Gareth Aird: Well, for a lot of households they're going to find 100 00:05:19,680 --> 00:05:23,910 Gareth Aird: things very, very tough as we go through 2023. If 101 00:05:23,910 --> 00:05:26,370 Gareth Aird: we're right and the RBA is going to deliver another 102 00:05:26,370 --> 00:05:29,520 Gareth Aird: 50 basis points of rate hikes, and that's pretty much 103 00:05:29,520 --> 00:05:33,570 Gareth Aird: what the statement yesterday hinted at, then you're talking about 104 00:05:33,570 --> 00:05:37,890 Gareth Aird: a cash rate of 3. 85%, which would mean 375 105 00:05:37,890 --> 00:05:42,180 Gareth Aird: basis points of tightening since May of last year. Now 106 00:05:42,300 --> 00:05:46,739 Gareth Aird: the serviceability buffer that APRA asked the banks to use when 107 00:05:46,740 --> 00:05:50,520 Gareth Aird: they were lending throughout 2020 and 2021 when the cash rate was 108 00:05:50,520 --> 00:05:54,240 Gareth Aird: a record low, was 250 basis points above the loan 109 00:05:54,240 --> 00:05:58,169 Gareth Aird: rate. And that was increased in late 2021 to 300 110 00:05:58,170 --> 00:06:02,010 Gareth Aird: basis points. But if now you're talking about 375 basis 111 00:06:02,010 --> 00:06:04,740 Gareth Aird: points of rate hikes, then a lot of home borrowers 112 00:06:04,740 --> 00:06:08,430 Gareth Aird: have not actually been assessed at their capacity to repay 113 00:06:08,430 --> 00:06:11,310 Gareth Aird: a loan with rates as high now as they're expected 114 00:06:11,310 --> 00:06:14,190 Gareth Aird: to get to. Now that doesn't necessarily mean a home 115 00:06:14,190 --> 00:06:17,460 Gareth Aird: borrower will default, but it does indicate that there's going 116 00:06:17,460 --> 00:06:19,770 Gareth Aird: to be a lot of borrowers out there who are 117 00:06:19,770 --> 00:06:22,020 Gareth Aird: really struggling as we go through this year from a 118 00:06:22,020 --> 00:06:25,440 Gareth Aird: cash flow perspective. And they'll have to wind back their 119 00:06:25,440 --> 00:06:29,609 Gareth Aird: spending quite significantly where they can. And I think that's 120 00:06:29,610 --> 00:06:32,070 Gareth Aird: where, when you think about the lagged impact of rate 121 00:06:32,070 --> 00:06:34,920 Gareth Aird: hikes, that we were of the view that a pause 122 00:06:34,980 --> 00:06:37,109 Gareth Aird: in the not too distant future would be prudent, because 123 00:06:37,110 --> 00:06:40,109 Gareth Aird: you've got these lags at work and you've got lots 124 00:06:40,110 --> 00:06:42,539 Gareth Aird: of home borrowers on record low fixed rates that'll be 125 00:06:42,540 --> 00:06:45,390 Gareth Aird: rolling off onto significantly higher floating rates as we go 126 00:06:45,390 --> 00:06:48,330 Gareth Aird: through this year. And they're obviously going to be rolling 127 00:06:48,330 --> 00:06:51,419 Gareth Aird: off to an even higher floating rate now based on 128 00:06:51,420 --> 00:06:54,180 Gareth Aird: what the RBA expects to do. So there'll be a 129 00:06:54,180 --> 00:06:56,130 Gareth Aird: lot of households, I think, as we go through this 130 00:06:56,130 --> 00:06:57,960 Gareth Aird: year that find it very, very tough. 131 00:06:58,500 --> 00:07:01,920 Sean Aylmer: And that's probably not great for house prices. Well, it is 132 00:07:01,920 --> 00:07:03,719 Sean Aylmer: if you're a buyer perhaps, but it doesn't suggest that 133 00:07:03,720 --> 00:07:06,000 Sean Aylmer: there's going to be a turnaround in house prices anytime soon. 134 00:07:06,779 --> 00:07:09,690 Gareth Aird: No, no, it doesn't. In fact, you can imagine a 135 00:07:09,690 --> 00:07:12,660 Gareth Aird: lot of potential home buyers out there just sitting on 136 00:07:12,660 --> 00:07:15,780 Gareth Aird: the sidelines right now because the Reserve Bank's basically told 137 00:07:15,780 --> 00:07:19,500 Gareth Aird: them they think they'll be raising rates further. And if 138 00:07:19,500 --> 00:07:21,600 Gareth Aird: rates are going to keep going up, I would imagine 139 00:07:21,600 --> 00:07:24,000 Gareth Aird: a lot of potential home buyers are happy to sit 140 00:07:24,000 --> 00:07:25,860 Gareth Aird: it out for a little while if they think they can get 141 00:07:26,070 --> 00:07:28,290 Gareth Aird: a cheaper property a little bit further down the line. 142 00:07:28,740 --> 00:07:31,980 Gareth Aird: It's probably going to take the Reserve Bank to not 143 00:07:31,980 --> 00:07:34,890 Gareth Aird: just pause, but for it to be pretty clear that rates 144 00:07:34,890 --> 00:07:38,430 Gareth Aird: aren't going any higher, for buyers to really come back 145 00:07:38,430 --> 00:07:41,250 Gareth Aird: in any sort of significant size and for home prices 146 00:07:41,250 --> 00:07:43,950 Gareth Aird: to stabilize. So in the short run, you can see 147 00:07:43,950 --> 00:07:48,000 Gareth Aird: home prices absolutely continuing to move lower, given rates have 148 00:07:48,000 --> 00:07:50,280 Gareth Aird: gone up, they're expected to go up further. And of 149 00:07:50,280 --> 00:07:53,820 Gareth Aird: course that weighs on the capacity for a borrower to 150 00:07:53,820 --> 00:07:54,510 Gareth Aird: access money. 151 00:07:55,170 --> 00:07:57,179 Sean Aylmer: Now we all have short memories, Gareth, well, at least 152 00:07:57,180 --> 00:08:02,040 Sean Aylmer: I have a short memory. When you have rate hiking 153 00:08:02,040 --> 00:08:06,780 Sean Aylmer: hikes and cycles generally, what are we looking for before 154 00:08:06,780 --> 00:08:08,850 Sean Aylmer: we can start thinking that the Reserve Bank is going 155 00:08:08,850 --> 00:08:11,670 Sean Aylmer: to pause? And in a sense, I know we've been 156 00:08:11,670 --> 00:08:14,280 Sean Aylmer: talking about that for a few months, but just, they 157 00:08:14,280 --> 00:08:18,930 Sean Aylmer: were so determined yesterday to say rates are shifting upwards. 158 00:08:19,440 --> 00:08:23,250 Sean Aylmer: What is it we punters, not you professional economists, should 159 00:08:23,250 --> 00:08:26,910 Sean Aylmer: be looking for to get some sort of sign of light? 160 00:08:28,230 --> 00:08:30,540 Gareth Aird: It's a good question because it appears that the Central 161 00:08:30,540 --> 00:08:34,709 Gareth Aird: Bank is looking for something that we think if they 162 00:08:34,710 --> 00:08:37,260 Gareth Aird: see it, it might already imply that they've gone too 163 00:08:37,260 --> 00:08:41,460 Gareth Aird: far. Wages and inflation are backward- looking data. So if 164 00:08:41,460 --> 00:08:43,620 Gareth Aird: you're waiting for that data to peak and start to 165 00:08:43,620 --> 00:08:46,890 Gareth Aird: come down there's a good chance you've already tightened too 166 00:08:46,890 --> 00:08:50,220 Gareth Aird: much. And equally, if you're waiting for spending data to 167 00:08:50,220 --> 00:08:54,150 Gareth Aird: turn, then by definition, if it turns, in other words, 168 00:08:54,150 --> 00:08:56,490 Gareth Aird: people are spending less, but you've got the lagged impact 169 00:08:56,490 --> 00:08:59,309 Gareth Aird: of hikes to come through, then there's a chance that 170 00:08:59,309 --> 00:09:02,190 Gareth Aird: you've actually engineered a hard landing. You should really be 171 00:09:02,190 --> 00:09:05,040 Gareth Aird: stopping in the tightening cycle before you see the data 172 00:09:05,040 --> 00:09:08,280 Gareth Aird: turn because you're anticipating where things are going based on 173 00:09:08,280 --> 00:09:10,739 Gareth Aird: what you've already delivered. And that's why we thought the 174 00:09:10,740 --> 00:09:13,020 Gareth Aird: Reserve Bank would be happy to pause in the not 175 00:09:13,020 --> 00:09:15,150 Gareth Aird: too distant future because they will have said, " Look, we've 176 00:09:15,150 --> 00:09:17,310 Gareth Aird: de delivered a lot. Rate hikes work with a lag. 177 00:09:17,910 --> 00:09:20,220 Gareth Aird: We've chartered a course, now we're going to just watch 178 00:09:20,220 --> 00:09:22,650 Gareth Aird: the data because we think we've put enough tightening through." 179 00:09:22,650 --> 00:09:25,980 Gareth Aird: But the fact that it seems to be that their 180 00:09:25,980 --> 00:09:29,820 Gareth Aird: concern is primarily around the lagging data of inflation, that 181 00:09:29,910 --> 00:09:31,980 Gareth Aird: there's a risk here that they just go too far. 182 00:09:32,250 --> 00:09:35,070 Gareth Aird: I'm not sure what they're going to be specifically looking 183 00:09:35,070 --> 00:09:38,010 Gareth Aird: at to say, " Now it is clear that we don't 184 00:09:38,010 --> 00:09:41,010 Gareth Aird: need to keep hiking the cash rate." But the more 185 00:09:41,010 --> 00:09:44,460 Gareth Aird: they put through, the higher the probability that we get 186 00:09:44,460 --> 00:09:46,170 Gareth Aird: a hard landing, which is the very thing at the 187 00:09:46,170 --> 00:09:47,610 Gareth Aird: moment they've been trying to avoid. 188 00:09:48,210 --> 00:09:50,699 Sean Aylmer: And they're even talking about the narrow path of a 189 00:09:50,700 --> 00:09:54,900 Sean Aylmer: soft landing. So it's almost like they ... Well, I'm sure 190 00:09:54,900 --> 00:09:57,540 Sean Aylmer: they know that hard landing is an option, but I 191 00:09:57,540 --> 00:09:59,280 Sean Aylmer: suppose a lot of us didn't think that would actually 192 00:09:59,280 --> 00:10:01,650 Sean Aylmer: come to fruition, but maybe it will. 193 00:10:02,520 --> 00:10:05,250 Gareth Aird: Yeah, that's right. I mean, they might take the approach 194 00:10:05,250 --> 00:10:07,350 Gareth Aird: as well that if they go that bit too far 195 00:10:07,350 --> 00:10:10,170 Gareth Aird: they can always course- correct and come back down. And 196 00:10:10,170 --> 00:10:12,600 Gareth Aird: that is the silver lining here, that if we're talking 197 00:10:12,600 --> 00:10:15,989 Gareth Aird: about a policy- induced slowdown that goes a little bit 198 00:10:15,990 --> 00:10:18,120 Gareth Aird: too far, well, then the obvious thing is just to 199 00:10:18,600 --> 00:10:24,059 Gareth Aird: cut rates. And clearly they're worried about inflation becoming entrenched. 200 00:10:24,059 --> 00:10:27,330 Gareth Aird: And that was the key takeout for me yesterday, that the 201 00:10:27,330 --> 00:10:32,010 Gareth Aird: Reserve Bank has really upped their concerns around the paradigm 202 00:10:32,010 --> 00:10:36,540 Gareth Aird: shifting, where inflation expectations ratchet up and therefore inflation becomes 203 00:10:36,540 --> 00:10:40,500 Gareth Aird: entrenched. And it's somewhat ironic to me that they've upped 204 00:10:40,500 --> 00:10:42,630 Gareth Aird: those concerns at a time when we can see that 205 00:10:42,630 --> 00:10:46,500 Gareth Aird: the global inflation pulse is actually starting to dissipate. And 206 00:10:46,800 --> 00:10:49,110 Gareth Aird: that, I would've thought, would've given the Reserve Bank some 207 00:10:49,110 --> 00:10:52,860 Gareth Aird: comfort that we won't end up with entrenched inflation. But 208 00:10:53,610 --> 00:10:55,890 Gareth Aird: we are where we are at the moment, and I 209 00:10:55,890 --> 00:10:59,010 Gareth Aird: think for people that are on mortgages out there, they've 210 00:10:59,010 --> 00:11:01,380 Gareth Aird: probably got to expect a couple more rate hikes based 211 00:11:01,380 --> 00:11:03,750 Gareth Aird: on what the governor said in his statement yesterday. 212 00:11:04,410 --> 00:11:04,951 Sean Aylmer: Gareth, thank you for talking to Fear & Greed. 213 00:11:04,951 --> 00:11:04,952 Gareth Aird: It was nice to chat. 214 00:11:04,952 --> 00:11:10,650 Sean Aylmer: That was Gareth Aird, Head of Australian Economics at the 215 00:11:10,650 --> 00:11:13,829 Sean Aylmer: Commonwealth Bank. This is the Fear & Greed daily interview. Join 216 00:11:13,830 --> 00:11:16,080 Sean Aylmer: us every morning for the full episode of Fear & Greed, 217 00:11:16,080 --> 00:11:19,949 Sean Aylmer: Australia's most popular business podcast. I'm Shawn Aylmer, enjoy your day.