1 00:00:05,760 --> 00:00:08,099 Sean Aylmer: Welcome to the Fear and Greed business interview. I'm Sean 2 00:00:08,099 --> 00:00:11,550 Sean Aylmer: Aylmer. Yesterday afternoon the Reserve Bank board left interest rates 3 00:00:11,550 --> 00:00:14,969 Sean Aylmer: on hold as was widely expected, but the Central Bank 4 00:00:14,969 --> 00:00:20,220 Sean Aylmer: did revise its inflation forecast to 3. 8% up significantly 5 00:00:20,220 --> 00:00:23,400 Sean Aylmer: from the 3. 3% I think it was in its 6 00:00:23,400 --> 00:00:27,179 Sean Aylmer: previous forecast. My guest today is Westpac's Chief Economist Luci 7 00:00:27,179 --> 00:00:29,819 Sean Aylmer: Ellis. Luci is in a very unique position to comment 8 00:00:29,820 --> 00:00:32,400 Sean Aylmer: on what the Reserve Bank board might be thinking. Until 9 00:00:32,400 --> 00:00:35,459 Sean Aylmer: October last year, Luci was Assistant Governor at the Reserve 10 00:00:35,459 --> 00:00:37,380 Sean Aylmer: Bank. Luci Ellis. Welcome to Fear and Greed. 11 00:00:37,920 --> 00:00:39,360 Luci Ellis: Thanks, Sean. It's great to be here. 12 00:00:40,019 --> 00:00:43,979 Sean Aylmer: So what did you make firstly of the outcome and 13 00:00:43,979 --> 00:00:47,909 Sean Aylmer: the wording of the statement from the Reserve Bank board? 14 00:00:47,969 --> 00:00:51,719 Sean Aylmer: They weren't overly aggressive or overly hawkish in what they 15 00:00:51,719 --> 00:00:53,459 Sean Aylmer: thought on rates. Did that surprise you? 16 00:00:54,209 --> 00:00:57,990 Luci Ellis: It didn't actually. We did expect them to become more 17 00:00:57,990 --> 00:01:00,810 Luci Ellis: hawkish in their language, and they did. And they talked about how they 18 00:01:00,810 --> 00:01:05,580 Luci Ellis: were being vigilant around the upside risks. But I think 19 00:01:05,580 --> 00:01:10,260 Luci Ellis: they're also mindful that in November they reacted and took 20 00:01:10,260 --> 00:01:14,490 Luci Ellis: out some insurance to some upside risks after the September 21 00:01:14,490 --> 00:01:17,729 Luci Ellis: quarter CPI. And then of course the December quarter CPI 22 00:01:17,730 --> 00:01:20,520 Luci Ellis: and all the real side data in the December quarter 23 00:01:21,240 --> 00:01:25,409 Luci Ellis: turned out to be below expectations and their February forecasts 24 00:01:25,650 --> 00:01:28,919 Luci Ellis: went straight back down and reversed out the forecast upgrades. 25 00:01:29,430 --> 00:01:32,069 Luci Ellis: They are expecting a bumpy ride, and I think it's 26 00:01:32,069 --> 00:01:35,250 Luci Ellis: important that they don't treat every bump as a change in 27 00:01:35,250 --> 00:01:38,580 Luci Ellis: trend. It was right that they were more hawkish and 28 00:01:38,580 --> 00:01:42,809 Luci Ellis: more vigilant about the upside risks, but I think making 29 00:01:42,809 --> 00:01:45,150 Luci Ellis: sure that this isn't just yet another bump is the 30 00:01:45,150 --> 00:01:46,080 Luci Ellis: appropriate thing to do. 31 00:01:46,830 --> 00:01:50,220 Sean Aylmer: Now, Michelle Bullock, who obviously you worked with closely for 32 00:01:50,220 --> 00:01:53,040 Sean Aylmer: many years is making it very clear she doesn't want 33 00:01:53,040 --> 00:01:55,230 Sean Aylmer: to give an indication of whether the next move is 34 00:01:55,230 --> 00:01:57,599 Sean Aylmer: up or down, and that is her job as the 35 00:01:57,599 --> 00:02:00,360 Sean Aylmer: governor of the Reserve Bank. We respect that. Luci Ellis, 36 00:02:00,450 --> 00:02:02,940 Sean Aylmer: you used to be in that sort of role now 37 00:02:02,940 --> 00:02:04,920 Sean Aylmer: you're in a totally different role, what do you think 38 00:02:04,920 --> 00:02:06,030 Sean Aylmer: will happen to rates? 39 00:02:07,170 --> 00:02:10,530 Luci Ellis: Our central case is that rates are on hold. We 40 00:02:10,530 --> 00:02:12,570 Luci Ellis: do think there are upside risks. We think there are 41 00:02:12,570 --> 00:02:15,600 Luci Ellis: states of the world in which they do end up 42 00:02:15,660 --> 00:02:18,179 Luci Ellis: raising rates, but we just don't think that's the most 43 00:02:18,179 --> 00:02:22,680 Luci Ellis: likely outcome. We look at the configuration of incredibly weak 44 00:02:22,680 --> 00:02:27,780 Luci Ellis: consumer spending, of a household sector that's been squeezed of a labour 45 00:02:28,200 --> 00:02:32,490 Luci Ellis: market that is easing although some of the lagging indicators 46 00:02:32,490 --> 00:02:36,780 Luci Ellis: like unemployment haven't eased as much as some of the 47 00:02:36,780 --> 00:02:42,720 Luci Ellis: leading edge indicators such as job ads or vacancies. So 48 00:02:42,810 --> 00:02:47,460 Luci Ellis: things are turning out broadly as was expected. Inflation is 49 00:02:47,460 --> 00:02:51,960 Luci Ellis: coming down, discretionary inflation, things like dining out are all 50 00:02:51,960 --> 00:02:55,860 Luci Ellis: actually very close to their pre- pandemic rates. But there 51 00:02:55,860 --> 00:03:02,880 Luci Ellis: is this lingering element of indexation of insurance and of 52 00:03:02,880 --> 00:03:07,320 Luci Ellis: course the outworkings of strong population growth and what that's 53 00:03:07,320 --> 00:03:10,139 Luci Ellis: done to housing inflation. And all of that will unwind 54 00:03:10,139 --> 00:03:13,380 Luci Ellis: over time but I can quite understand that the RBA 55 00:03:13,380 --> 00:03:15,929 Luci Ellis: is very alert to the risk that this doesn't come 56 00:03:15,929 --> 00:03:16,919 Luci Ellis: down fast enough. 57 00:03:17,669 --> 00:03:19,709 Sean Aylmer: So your central case is that rates are on hold, 58 00:03:19,710 --> 00:03:22,650 Sean Aylmer: do you think the next move will be down rather 59 00:03:22,650 --> 00:03:23,070 Sean Aylmer: than up? 60 00:03:23,850 --> 00:03:26,339 Luci Ellis: If things turn out as we expect, so our central 61 00:03:26,340 --> 00:03:30,359 Luci Ellis: case will then around about November, we expect the RBA 62 00:03:30,360 --> 00:03:33,029 Luci Ellis: would have enough comfort to have seen enough of a 63 00:03:33,030 --> 00:03:36,929 Luci Ellis: decline in inflation to be ready to withdraw some of 64 00:03:36,990 --> 00:03:40,830 Luci Ellis: the tight stance of policy. The board does assess policy 65 00:03:40,830 --> 00:03:44,670 Luci Ellis: as being tight and they'll get to a point as 66 00:03:44,670 --> 00:03:48,660 Luci Ellis: inflation starts to approach the target range that they no longer 67 00:03:48,660 --> 00:03:51,929 Luci Ellis: need to be as tight and they can start withdrawing some 68 00:03:51,929 --> 00:03:53,969 Luci Ellis: of the tight stance of policy and come back to 69 00:03:53,969 --> 00:03:56,760 Luci Ellis: something a little bit more average in terms of the 70 00:03:56,910 --> 00:04:00,360 Luci Ellis: level of interest rates and no longer be constraining the 71 00:04:00,360 --> 00:04:04,170 Luci Ellis: economy. But we just don't think they have enough comfort 72 00:04:04,559 --> 00:04:08,250 Luci Ellis: with the current trajectory, particularly in light of the upside 73 00:04:08,250 --> 00:04:11,729 Luci Ellis: surprise in March quarter. So we just think they're going 74 00:04:11,730 --> 00:04:15,630 Luci Ellis: to wait for more information. If inflation does keep coming 75 00:04:15,630 --> 00:04:18,570 Luci Ellis: down as they would like, then they'll be in a 76 00:04:18,570 --> 00:04:21,659 Luci Ellis: position that they can start cutting rates. And we recently 77 00:04:21,660 --> 00:04:24,630 Luci Ellis: pushed out our assessment of when that was likely to 78 00:04:24,630 --> 00:04:25,980 Luci Ellis: November from September. 79 00:04:26,670 --> 00:04:28,529 Sean Aylmer: Stay with me Luci. We'll be back in a minute. 80 00:04:28,529 --> 00:04:38,700 Sean Aylmer: I am speaking to Luci Ellis Group Chief Economist at 81 00:04:38,700 --> 00:04:42,899 Sean Aylmer: Westpac. Luci, you've been inside the bank and to most 82 00:04:42,900 --> 00:04:45,240 Sean Aylmer: people out there the bank is just this big black 83 00:04:45,240 --> 00:04:48,810 Sean Aylmer: box or gray box actually at the top of Martin 84 00:04:48,810 --> 00:04:52,050 Sean Aylmer: Place there. As you talk, you sound like a true 85 00:04:52,050 --> 00:04:55,350 Sean Aylmer: market economist, but I mean all these discussions that the 86 00:04:55,380 --> 00:04:59,670 Sean Aylmer: market economists have here, presumably they're all taking place inside 87 00:05:00,059 --> 00:05:04,169 Sean Aylmer: the bank. Is the debate much different inside the bank 88 00:05:04,589 --> 00:05:05,849 Sean Aylmer: to outside the bank? 89 00:05:06,869 --> 00:05:08,669 Luci Ellis: Well, I think we're all looking at mostly the same 90 00:05:08,670 --> 00:05:12,089 Luci Ellis: data. There are some differences in the sense that, for 91 00:05:12,089 --> 00:05:15,690 Luci Ellis: example, the Reserve Bank has its liaison program so it's 92 00:05:15,690 --> 00:05:18,450 Luci Ellis: talking to firms in a somewhat different way. I mean, 93 00:05:18,450 --> 00:05:20,609 Luci Ellis: obviously we are a bank, we have a lot of 94 00:05:20,610 --> 00:05:23,339 Luci Ellis: customers. We talk to those customers as well and we 95 00:05:23,339 --> 00:05:27,930 Luci Ellis: do glean insights in an increasingly systematic way from our 96 00:05:27,930 --> 00:05:31,979 Luci Ellis: customers. But we don't have over 20 years of a 97 00:05:31,980 --> 00:05:35,790 Luci Ellis: liaison program in the same way. But by and large, 98 00:05:35,790 --> 00:05:38,040 Luci Ellis: we have the same data sets. There are some things 99 00:05:38,040 --> 00:05:40,830 Luci Ellis: that the public sector has access to, like single touch 100 00:05:40,830 --> 00:05:44,039 Luci Ellis: payroll and some of the micro data that the private sector 101 00:05:44,040 --> 00:05:47,010 Luci Ellis: doesn't have access to but all the macro data, we 102 00:05:47,010 --> 00:05:50,040 Luci Ellis: are looking at it in very similar ways. Where there 103 00:05:50,040 --> 00:05:52,620 Luci Ellis: has been a bit of an evolution has been in 104 00:05:52,620 --> 00:05:57,210 Luci Ellis: the outworkings from the RBA review, some of the recommendations there were 105 00:05:57,210 --> 00:06:00,599 Luci Ellis: things like that they now needed to be more explicit 106 00:06:00,630 --> 00:06:03,118 Luci Ellis: about their assessment of where the economy was relative to 107 00:06:03,120 --> 00:06:06,719 Luci Ellis: full employment and where the economy was relative to potential 108 00:06:06,720 --> 00:06:11,998 Luci Ellis: output. And what that's doing is making the RBA staff 109 00:06:12,540 --> 00:06:15,359 Luci Ellis: put their models more front and center. I think they 110 00:06:15,360 --> 00:06:19,050 Luci Ellis: have quite sensibly made it clear that no one model 111 00:06:19,050 --> 00:06:22,800 Luci Ellis: is perfect, that you need to use judgment. But what 112 00:06:22,800 --> 00:06:25,080 Luci Ellis: I am seeing is a bit more of a shift 113 00:06:25,170 --> 00:06:28,650 Luci Ellis: of the way the RBA is conveying its analysis to being a 114 00:06:28,650 --> 00:06:31,079 Luci Ellis: little bit more model driven and a little bit more 115 00:06:31,080 --> 00:06:34,379 Luci Ellis: like some of the other advanced economy central banks where 116 00:06:34,379 --> 00:06:36,089 Luci Ellis: you have much more of an academic flavour. 117 00:06:37,199 --> 00:06:40,050 Sean Aylmer: And what about Michelle Bullock her job, not so much 118 00:06:40,050 --> 00:06:42,900 Sean Aylmer: as an economist I suppose, but as a representative of 119 00:06:42,900 --> 00:06:46,559 Sean Aylmer: the bank, particularly because she's now to giving press conferences 120 00:06:46,559 --> 00:06:49,500 Sean Aylmer: with which none of her predecessors ever had to do, 121 00:06:49,799 --> 00:06:52,409 Sean Aylmer: how do you think she's evolving into that role? 122 00:06:53,309 --> 00:06:56,880 Luci Ellis: I would just point out that for many, many years, 123 00:06:56,880 --> 00:07:01,560 Luci Ellis: the RBA had been rolling out its senior staff to 124 00:07:01,560 --> 00:07:04,529 Luci Ellis: give speeches where you had live Q& A that was 125 00:07:04,529 --> 00:07:08,580 Luci Ellis: recorded and transcribed afterwards. And so in many respects, that 126 00:07:08,580 --> 00:07:11,820 Luci Ellis: was a substitute for media conferences. And one thing you 127 00:07:11,820 --> 00:07:14,670 Luci Ellis: might've noticed is there's actually been a lot fewer speeches 128 00:07:14,670 --> 00:07:18,450 Luci Ellis: outside of the policy decision. Now, part of that's because 129 00:07:18,570 --> 00:07:22,350 Luci Ellis: obviously my successor is new, the deputy governor's new, everyone's 130 00:07:23,250 --> 00:07:26,460 Luci Ellis: still settling in, so you haven't seen a lot of 131 00:07:26,460 --> 00:07:30,269 Luci Ellis: the other senior staff giving that many speeches. I mean, 132 00:07:30,660 --> 00:07:33,210 Luci Ellis: the assistant governor of financial markets gave a speech that 133 00:07:33,210 --> 00:07:36,960 Luci Ellis: was very straight down the line about their new operating 134 00:07:36,960 --> 00:07:39,929 Luci Ellis: model in how they're going to manage the level of 135 00:07:39,929 --> 00:07:44,219 Luci Ellis: reserves. You had the assistant governor of financial system talk 136 00:07:44,219 --> 00:07:48,960 Luci Ellis: about SME finance, but you've had very little communication outside 137 00:07:48,960 --> 00:07:54,570 Luci Ellis: of those media conferences and parliamentary appearances and the policy 138 00:07:54,570 --> 00:07:58,020 Luci Ellis: round about monetary policy and their assessment of the economy. 139 00:07:58,020 --> 00:08:02,130 Luci Ellis: And so there's been a trade- off between the kind 140 00:08:02,130 --> 00:08:05,579 Luci Ellis: of discussions about the economic outlook that used to happen 141 00:08:06,120 --> 00:08:11,160 Luci Ellis: and what's now happening. So we're getting the media conferences, 142 00:08:11,310 --> 00:08:13,980 Luci Ellis: but we are getting fewer speeches and we're not getting 143 00:08:13,980 --> 00:08:17,670 Luci Ellis: speeches with Q& A after them. And so it does 144 00:08:17,670 --> 00:08:18,989 Luci Ellis: appear to have been a bit of a trade- off, 145 00:08:18,990 --> 00:08:21,330 Luci Ellis: at least in the short term, while the other senior 146 00:08:21,330 --> 00:08:24,419 Luci Ellis: staff settle in. I think the people who were clamouring 147 00:08:24,420 --> 00:08:27,210 Luci Ellis: for a media conference may need to have been a 148 00:08:27,210 --> 00:08:29,370 Luci Ellis: bit more careful about what they wished for because there 149 00:08:29,370 --> 00:08:33,988 Luci Ellis: already was a lot of that opportunity to communicate and 150 00:08:33,990 --> 00:08:37,468 Luci Ellis: to communicate off the cuff. So in that sense, Michelle 151 00:08:37,469 --> 00:08:40,199 Luci Ellis: and all of the other senior staff have had plenty 152 00:08:40,199 --> 00:08:44,220 Luci Ellis: of practice going up before Parliament, going up in media 153 00:08:44,220 --> 00:08:48,990 Luci Ellis: Q&A, this is just a much more scrutinised event. I will 154 00:08:48,990 --> 00:08:55,889 Luci Ellis: say the way the RBA is communicating now has definitely improved. Some 155 00:08:55,889 --> 00:08:58,440 Luci Ellis: of the things they did on the SMP made it 156 00:08:58,440 --> 00:09:00,750 Luci Ellis: much more accessible. And they're all things that people would've 157 00:09:00,750 --> 00:09:04,410 Luci Ellis: liked to have done before, but sometimes you have to 158 00:09:04,410 --> 00:09:07,470 Luci Ellis: be told to do it by someone external, that's just 159 00:09:07,679 --> 00:09:10,740 Luci Ellis: the way the public sector works. And I think it 160 00:09:10,740 --> 00:09:14,880 Luci Ellis: does really validate at least one of the recommendations out 161 00:09:14,880 --> 00:09:18,539 Luci Ellis: of the RBA review, which was to resource their communications 162 00:09:18,539 --> 00:09:23,069 Luci Ellis: function differently and communicate differently. And I think that recommendation 163 00:09:23,070 --> 00:09:25,170 Luci Ellis: has been heard and responded to. 164 00:09:25,980 --> 00:09:29,130 Sean Aylmer: Now, Luci, I think I'm right in saying you started 165 00:09:29,130 --> 00:09:31,049 Sean Aylmer: at the bank in 1991. In fact, I think I'm right in 166 00:09:31,049 --> 00:09:33,000 Sean Aylmer: saying I started as a graduate on the same day 167 00:09:33,000 --> 00:09:35,040 Sean Aylmer: you started as a graduate at the Reserve Bank. 168 00:09:35,070 --> 00:09:37,800 Luci Ellis: That is correct. And you had the desk next to mine. 169 00:09:37,800 --> 00:09:38,250 Sean Aylmer: Indeed. 170 00:09:38,610 --> 00:09:42,750 Luci Ellis: Yeah. Well, that was something that I would not have forecast. 171 00:09:42,780 --> 00:09:46,530 Sean Aylmer: No. Nor I. Do you miss it? I mean, I'm 172 00:09:46,530 --> 00:09:49,379 Sean Aylmer: sure you're loving working at Westpac no doubt, but do 173 00:09:49,380 --> 00:09:51,630 Sean Aylmer: you miss the bank given it was such a major 174 00:09:51,630 --> 00:09:53,008 Sean Aylmer: part of your life for such a long time? 175 00:09:53,670 --> 00:09:55,410 Luci Ellis: Look, I think you get to a point in your 176 00:09:55,410 --> 00:09:57,958 Luci Ellis: life that it's time for a change and the right 177 00:09:57,960 --> 00:10:01,050 Luci Ellis: role came up at the right moment for me. So 178 00:10:01,050 --> 00:10:04,679 Luci Ellis: look, I'll be honest, six months in, I am really 179 00:10:04,679 --> 00:10:07,530 Luci Ellis: enjoying it. I couldn't be happier having moved. I think 180 00:10:07,530 --> 00:10:10,980 Luci Ellis: it was the right thing to do, and I think 181 00:10:11,190 --> 00:10:14,848 Luci Ellis: it's provided an opportunity to join the dots in a 182 00:10:14,850 --> 00:10:19,410 Luci Ellis: different way. I think I was always very mindful having spent 183 00:10:19,410 --> 00:10:21,809 Luci Ellis: quite a bit of time in the financial stability side 184 00:10:21,809 --> 00:10:25,200 Luci Ellis: about the need to see the system as a whole 185 00:10:25,200 --> 00:10:28,199 Luci Ellis: and connect everything together. And it's nice to be able 186 00:10:28,199 --> 00:10:30,900 Luci Ellis: to talk about monetary and fiscal policy together instead of 187 00:10:31,230 --> 00:10:33,059 Luci Ellis: just about one of them and pretend that the other 188 00:10:33,059 --> 00:10:36,330 Luci Ellis: one is something that you don't even comment on much. 189 00:10:36,660 --> 00:10:39,179 Sean Aylmer: Yeah. Luci, thank you very much for talking to Fear 190 00:10:39,179 --> 00:10:39,600 Sean Aylmer: and Greed. 191 00:10:40,349 --> 00:10:41,880 Luci Ellis: You're very welcome. Thanks, Sean. 192 00:10:42,509 --> 00:10:45,900 Sean Aylmer: That was Luci Ellis Group Chief Economist at Westpac. This 193 00:10:45,900 --> 00:10:48,389 Sean Aylmer: is the Fear and Greed business interview. Join us every 194 00:10:48,389 --> 00:10:50,550 Sean Aylmer: morning for the full episode of Fear and Greed, Australia's 195 00:10:50,550 --> 00:10:53,670 Sean Aylmer: best business podcast. I'm Sean Aylmer. Enjoy your day.