1 00:00:06,040 --> 00:00:07,960 Speaker 1: Welcome to Fear and Greed Q and A, where we 2 00:00:08,000 --> 00:00:11,559 Speaker 1: ask an answer questions about business, investing, economics, politics and more. 3 00:00:11,600 --> 00:00:15,200 Speaker 1: Are Michael Thompson and yesterday the Reserve Bank Board increased 4 00:00:15,200 --> 00:00:17,840 Speaker 1: the official cash raid by twenty five basis points, the 5 00:00:17,960 --> 00:00:21,760 Speaker 1: first interest rate hike in two years, and with inflation 6 00:00:21,880 --> 00:00:24,919 Speaker 1: forecast to continue rising, it may not be the only 7 00:00:25,000 --> 00:00:27,880 Speaker 1: hike we see this year. My guest today is Diana Messina, 8 00:00:28,240 --> 00:00:31,360 Speaker 1: Deputy Chief Economist at AMP Deanna. Welcome back to Fear 9 00:00:31,400 --> 00:00:32,280 Speaker 1: and Greed Q and A. 10 00:00:32,760 --> 00:00:33,400 Speaker 2: Thanks Michael. 11 00:00:34,520 --> 00:00:38,720 Speaker 1: Did the RBA have no choice but to raise rates yesterday? 12 00:00:39,840 --> 00:00:41,519 Speaker 2: Well, there's always a choice. 13 00:00:41,680 --> 00:00:46,320 Speaker 3: I suppose our view was actually that the interest rates 14 00:00:46,320 --> 00:00:48,640 Speaker 3: would be kept on hold, so we were wrong on 15 00:00:48,680 --> 00:00:51,040 Speaker 3: that front. I mean, the market had a thirty percent 16 00:00:51,600 --> 00:00:54,279 Speaker 3: chance priced in that they wouldn't hike, and there were 17 00:00:54,520 --> 00:00:57,360 Speaker 3: a very few, lonely bunch of economists that also held 18 00:00:57,360 --> 00:01:00,320 Speaker 3: the view of a hold, so it wasn't completely, you know, 19 00:01:00,400 --> 00:01:03,800 Speaker 3: a foregone conclusion. I was actually really surprised to see 20 00:01:03,800 --> 00:01:07,000 Speaker 3: that the board decision was unanimous, that there weren't any 21 00:01:07,520 --> 00:01:11,800 Speaker 3: descents to the High King decision, which I think can 22 00:01:11,880 --> 00:01:15,880 Speaker 3: be a bit problematic, which we could discuss later. I mean, 23 00:01:15,920 --> 00:01:18,880 Speaker 3: it was always going to be a close call in 24 00:01:18,959 --> 00:01:21,160 Speaker 3: our view whether they were going to hike or hold. 25 00:01:21,240 --> 00:01:25,479 Speaker 3: But I suppose that ultimately the takeaway was that their 26 00:01:25,480 --> 00:01:29,480 Speaker 3: inflation forecasts were revised up again and the RBA was 27 00:01:29,560 --> 00:01:32,400 Speaker 3: just too uncomfortable with inflation where it was, even though 28 00:01:32,800 --> 00:01:34,960 Speaker 3: it does think that some of the factors that led 29 00:01:34,959 --> 00:01:37,360 Speaker 3: to high inflation in the last six months between twenty 30 00:01:37,440 --> 00:01:40,880 Speaker 3: five were temporary, but they're just still uncomfortable with where 31 00:01:40,920 --> 00:01:42,960 Speaker 3: the level of inflation is right now. 32 00:01:43,560 --> 00:01:46,320 Speaker 1: And what about where it's going as well. How worried 33 00:01:46,360 --> 00:01:48,800 Speaker 1: are they about the outlook for inflation as well. 34 00:01:49,480 --> 00:01:52,960 Speaker 3: I mean, I wouldn't say that they're particularly stressed, but 35 00:01:53,360 --> 00:01:56,600 Speaker 3: it's a little bit concerning for them, and it's the 36 00:01:56,720 --> 00:02:00,480 Speaker 3: upside risks to inflation that I think worry them. They 37 00:02:01,040 --> 00:02:04,080 Speaker 3: have basically increased their inflation forecast by the end of 38 00:02:04,120 --> 00:02:08,160 Speaker 3: this year by about zero point five percentage points for 39 00:02:08,200 --> 00:02:10,280 Speaker 3: the trim mean. I mean that's quite, you know, a 40 00:02:10,480 --> 00:02:12,520 Speaker 3: decent lift. They now expect the trim mean to be 41 00:02:12,600 --> 00:02:14,680 Speaker 3: running at about three point two percent by the end 42 00:02:14,720 --> 00:02:17,120 Speaker 3: of this year, before they have two point seven percent. 43 00:02:17,200 --> 00:02:20,160 Speaker 3: I mean, our view is that we're going to see 44 00:02:20,160 --> 00:02:22,720 Speaker 3: better inflation outcomes from here, which is why we don't 45 00:02:22,720 --> 00:02:25,120 Speaker 3: think that we're going to see more hikes from the RBA. 46 00:02:25,720 --> 00:02:29,040 Speaker 3: If you believe the RBA's forecast, then yes, I think 47 00:02:29,040 --> 00:02:31,760 Speaker 3: you should be assuming further hikes from here. But in 48 00:02:31,800 --> 00:02:34,480 Speaker 3: our view, their inflation forecasts are too high. We already 49 00:02:34,520 --> 00:02:38,000 Speaker 3: had quite big revisions their inflation forecasts in the November 50 00:02:38,080 --> 00:02:41,320 Speaker 3: statement on lunitro policy, and I was surprised that they're 51 00:02:41,320 --> 00:02:45,400 Speaker 3: revised up inflation so much again. This time, my radar 52 00:02:45,480 --> 00:02:48,840 Speaker 3: the monthly CPI data was that some of the monthly 53 00:02:48,880 --> 00:02:51,560 Speaker 3: components actually looked a lot better. For the month of December, 54 00:02:51,960 --> 00:02:55,080 Speaker 3: we had better outcomes on rents, new to the construction costs, 55 00:02:55,120 --> 00:02:58,960 Speaker 3: market services, and durable goods, basically all the components that 56 00:02:59,000 --> 00:03:02,160 Speaker 3: had been worrying the RBA. But I think that their 57 00:03:02,200 --> 00:03:04,919 Speaker 3: reader is just that the signal from the other few 58 00:03:04,919 --> 00:03:07,720 Speaker 3: months prior to that was was just too high. So 59 00:03:08,160 --> 00:03:10,480 Speaker 3: the December number, you know, they sort of took it 60 00:03:10,600 --> 00:03:13,160 Speaker 3: as as not gospel for the future. 61 00:03:13,680 --> 00:03:16,960 Speaker 1: Now, Diana, you mentioned just before about the unanimous decision 62 00:03:17,560 --> 00:03:19,640 Speaker 1: and the fact that you were perhaps a little bit 63 00:03:19,680 --> 00:03:23,720 Speaker 1: surprised by that. Were you expecting the board to be 64 00:03:23,760 --> 00:03:24,280 Speaker 1: more split. 65 00:03:25,120 --> 00:03:27,120 Speaker 3: I mean, look, to be honest, I was I thought that, 66 00:03:27,200 --> 00:03:29,160 Speaker 3: you know, we may sort of get a five to 67 00:03:29,160 --> 00:03:31,880 Speaker 3: four type of situation. You know, there are nine people 68 00:03:31,880 --> 00:03:34,600 Speaker 3: on the RBA board. Two of those are internal, one 69 00:03:34,639 --> 00:03:38,000 Speaker 3: the Treasury Secretary, and than the rest external independent. The 70 00:03:38,120 --> 00:03:41,240 Speaker 3: RBA staff give a recommendation to the board about what 71 00:03:41,360 --> 00:03:43,440 Speaker 3: to do, and from the review, we know that the 72 00:03:43,480 --> 00:03:47,320 Speaker 3: Board has always taken the decision or the suggestion by 73 00:03:47,360 --> 00:03:49,480 Speaker 3: the RBA as to what to do around interest rates. 74 00:03:50,080 --> 00:03:53,600 Speaker 3: And given that, you know, economists were in disagreement about 75 00:03:53,640 --> 00:03:57,560 Speaker 3: what to do, today wasn't a completely foregone conclusion. We 76 00:03:57,600 --> 00:04:00,960 Speaker 3: know that last year in July, it wasn't a unanimous 77 00:04:01,000 --> 00:04:04,280 Speaker 3: decision by the board to hold interest rates steady. 78 00:04:04,560 --> 00:04:06,560 Speaker 2: I thought it would have been a bit closer today. 79 00:04:06,600 --> 00:04:08,200 Speaker 1: So I'm a. 80 00:04:08,160 --> 00:04:10,920 Speaker 3: Little bit worried that maybe the decision of the board 81 00:04:11,040 --> 00:04:13,400 Speaker 3: wasn't as independent as we'd like it to be. But 82 00:04:13,560 --> 00:04:16,080 Speaker 3: you know, I wasn't there, and I don't know. I 83 00:04:16,160 --> 00:04:17,960 Speaker 3: just think I think it's a little bit odd that 84 00:04:18,040 --> 00:04:21,599 Speaker 3: it was a completely unanimous decision because there were you know, 85 00:04:21,839 --> 00:04:25,640 Speaker 3: there were rapid economists, including ourselves, that thought that rates 86 00:04:25,640 --> 00:04:29,040 Speaker 3: didn't necessarily have to be hiked yesterday, So. 87 00:04:30,320 --> 00:04:33,080 Speaker 1: Just trying to make sense then if the the inflation 88 00:04:33,240 --> 00:04:37,880 Speaker 1: challenge may not be as as dire as I suppose 89 00:04:37,880 --> 00:04:40,479 Speaker 1: a lot of the headlines made out to be that 90 00:04:40,560 --> 00:04:42,800 Speaker 1: it was a foregone conclusion that there would be a 91 00:04:42,880 --> 00:04:46,400 Speaker 1: rate hike. Obviously we did see that was a unanimous decision. 92 00:04:46,960 --> 00:04:50,320 Speaker 1: But is there a chance then that essentially the RBA 93 00:04:50,440 --> 00:04:54,560 Speaker 1: is trying to almost finesse here, but with a blunt 94 00:04:54,600 --> 00:04:58,240 Speaker 1: instrument to do so that that because obviously interest rates 95 00:04:58,279 --> 00:05:00,599 Speaker 1: are a blunt instrument, and is the going to be 96 00:05:00,680 --> 00:05:03,240 Speaker 1: too much? And if there is the potential for more 97 00:05:03,320 --> 00:05:05,480 Speaker 1: rate hikes, are we going to get ourselves into trouble? 98 00:05:06,400 --> 00:05:11,240 Speaker 3: I suppose the central banks not pigeonholing itself because they're 99 00:05:11,240 --> 00:05:13,480 Speaker 3: not They're not actually saying that they're going to keep 100 00:05:13,520 --> 00:05:17,320 Speaker 3: tightening rates. I mean they're bias for interest rate policy 101 00:05:17,440 --> 00:05:21,560 Speaker 3: was quite neutral. I mean, they sounded concerned about inflation, 102 00:05:21,640 --> 00:05:23,520 Speaker 3: but it's not like they said we're going to hike 103 00:05:23,960 --> 00:05:27,560 Speaker 3: rates again. So I think they're probably seeing this as 104 00:05:27,640 --> 00:05:32,640 Speaker 3: just a bit of policy fine tuning and that eventually 105 00:05:32,640 --> 00:05:35,920 Speaker 3: we're still going to see this slowed down in inflation 106 00:05:36,320 --> 00:05:40,040 Speaker 3: come through, so I don't really see them as being 107 00:05:40,080 --> 00:05:43,279 Speaker 3: particularly concerned that, you know, this is going to be 108 00:05:43,320 --> 00:05:45,960 Speaker 3: an ongoing problem. I mean, a lot of the headlines 109 00:05:46,040 --> 00:05:51,480 Speaker 3: were quite sensational about the inflation challenge in Australia. But 110 00:05:51,760 --> 00:05:53,800 Speaker 3: if you look at all the forward looking business surveys 111 00:05:53,880 --> 00:05:57,040 Speaker 3: like NAB published one the pair mis ll have forward 112 00:05:57,080 --> 00:06:01,080 Speaker 3: looking input output surveys, employment cost indicies, those surveys are 113 00:06:01,120 --> 00:06:04,240 Speaker 3: alstill pointing to lower inflation ahead. None of them are 114 00:06:04,279 --> 00:06:08,520 Speaker 3: actually pointing to a renewed upside inflation, which again says 115 00:06:08,520 --> 00:06:10,720 Speaker 3: to me that a lot of those administered index price 116 00:06:10,800 --> 00:06:13,600 Speaker 3: increases that we had in the six months up until December, 117 00:06:14,400 --> 00:06:16,359 Speaker 3: those will not continue to be carried through at the 118 00:06:16,360 --> 00:06:17,800 Speaker 3: same rate in twenty twenty six. 119 00:06:18,640 --> 00:06:22,480 Speaker 1: Okay, there was some interesting comments during the press conference 120 00:06:22,720 --> 00:06:26,800 Speaker 1: held yesterday by Reserbank Governor Michelle Bullock. She was asked 121 00:06:26,839 --> 00:06:29,880 Speaker 1: whether we were now in a tightening cycle and she 122 00:06:29,920 --> 00:06:32,920 Speaker 1: said she just doesn't know and chose to describe it 123 00:06:32,960 --> 00:06:36,159 Speaker 1: instead as an adjustment, which makes it does sound like, hey, 124 00:06:36,160 --> 00:06:38,360 Speaker 1: this could actually just be a one off. The other 125 00:06:38,440 --> 00:06:44,000 Speaker 1: interesting thing I thought was that she was really putting 126 00:06:44,040 --> 00:06:47,560 Speaker 1: a lot of emphasis at one point on cautioning against 127 00:06:47,640 --> 00:06:50,560 Speaker 1: positioning this rate hike as a suggestion that we are 128 00:06:50,600 --> 00:06:55,000 Speaker 1: in serious trouble, suggesting that actually, as an economy, we're 129 00:06:55,000 --> 00:06:57,359 Speaker 1: in a pretty good position. Is that fair? 130 00:06:58,120 --> 00:06:58,320 Speaker 2: Yeah? 131 00:06:58,320 --> 00:06:59,960 Speaker 3: I think she did a really good job of that 132 00:07:00,120 --> 00:07:03,159 Speaker 3: as well, because it's important for people to keep in 133 00:07:03,200 --> 00:07:05,840 Speaker 3: mind that the fact that we're having rate rises actually 134 00:07:05,920 --> 00:07:08,520 Speaker 3: symbols that the economy has done better than where the 135 00:07:08,560 --> 00:07:10,320 Speaker 3: Reserve Bank thought it would be. We still have a 136 00:07:10,360 --> 00:07:13,600 Speaker 3: really low unemployment rate here, and growth, particularly in the 137 00:07:13,640 --> 00:07:17,240 Speaker 3: private sector, has picked up. So to ward off against 138 00:07:17,480 --> 00:07:20,360 Speaker 3: unwanted inflation down the track, you know, this policy fine 139 00:07:20,360 --> 00:07:23,880 Speaker 3: tuning or adjustment as she called it, is necessary. 140 00:07:23,920 --> 00:07:24,760 Speaker 2: So it's a nice. 141 00:07:24,600 --> 00:07:29,840 Speaker 3: Way to put some positive news on something that's actually 142 00:07:29,880 --> 00:07:31,840 Speaker 3: a bit negative for mortgage holders. 143 00:07:32,360 --> 00:07:37,000 Speaker 1: Yeah. Politically, how does all of this play out, because 144 00:07:37,160 --> 00:07:38,960 Speaker 1: there are a lot of questions about the role that 145 00:07:39,920 --> 00:07:45,040 Speaker 1: government spending has played in the inflation challenge. How much 146 00:07:45,160 --> 00:07:48,800 Speaker 1: of an impact has government spending had on inflation? And 147 00:07:48,880 --> 00:07:53,280 Speaker 1: obviously we saw yesterday the Treasurer Jim Chalmer is very 148 00:07:53,400 --> 00:07:56,000 Speaker 1: very keen to point out the fact that the RBA 149 00:07:56,120 --> 00:07:58,680 Speaker 1: had said that really, no, this wasn't a challenge at 150 00:07:58,720 --> 00:07:59,160 Speaker 1: this time. 151 00:08:00,280 --> 00:08:03,600 Speaker 3: I mean, I find it it's challenging for both parties, 152 00:08:03,640 --> 00:08:05,760 Speaker 3: for the Reserve Bank and also for the government, because 153 00:08:05,800 --> 00:08:09,360 Speaker 3: it is really hard to quantify how much government spending 154 00:08:09,400 --> 00:08:14,480 Speaker 3: public demand is contributing to inflation versus private because you 155 00:08:14,520 --> 00:08:16,120 Speaker 3: can't really put a number on it. I mean, we 156 00:08:16,800 --> 00:08:19,760 Speaker 3: can use administered or index prices as a guide to 157 00:08:19,840 --> 00:08:24,240 Speaker 3: how much government related inflation is contributing to overall price growth. 158 00:08:24,440 --> 00:08:27,080 Speaker 3: But at the same time, maybe those areas are just 159 00:08:27,120 --> 00:08:30,280 Speaker 3: responding to market services inflation and they have had to 160 00:08:30,280 --> 00:08:32,680 Speaker 3: increase their prices because goods prices are going up. So 161 00:08:32,960 --> 00:08:34,920 Speaker 3: it can be a bit of a virtuous cycle, which 162 00:08:35,640 --> 00:08:38,760 Speaker 3: is why I think we can't blame the government for 163 00:08:38,840 --> 00:08:41,719 Speaker 3: being the only reason that inflation has been hotter than 164 00:08:41,880 --> 00:08:44,600 Speaker 3: we'd like it to be. But I think what we 165 00:08:44,679 --> 00:08:48,160 Speaker 3: can fairly say is that government spending has added to 166 00:08:48,200 --> 00:08:52,240 Speaker 3: inflation because we're at a point in the cycle where 167 00:08:52,320 --> 00:08:55,680 Speaker 3: the economy has picked up at a pretty good pace 168 00:08:56,200 --> 00:08:58,839 Speaker 3: and our economy can only grow by a certain amount 169 00:08:58,920 --> 00:09:02,360 Speaker 3: that's about two point one. Also, government spending is currently 170 00:09:02,400 --> 00:09:04,880 Speaker 3: at a record share of the economy, and so you're 171 00:09:04,880 --> 00:09:08,120 Speaker 3: going to run into problems in some parts, particularly around 172 00:09:08,160 --> 00:09:12,280 Speaker 3: things like housing or infrastructure spending. The wage story in 173 00:09:12,320 --> 00:09:14,360 Speaker 3: the public service has been important as well. That's played 174 00:09:14,360 --> 00:09:17,440 Speaker 3: a role in increasing wages growth in the private sector too. 175 00:09:17,520 --> 00:09:20,320 Speaker 3: So we know that the economy has hit these speed 176 00:09:20,360 --> 00:09:24,040 Speaker 3: limits and government and high government spending has been part 177 00:09:24,040 --> 00:09:26,880 Speaker 3: of that, but it is really hard to quantify how 178 00:09:26,960 --> 00:09:30,480 Speaker 3: much it has contributed. I think it's just I think 179 00:09:30,480 --> 00:09:32,320 Speaker 3: what we can say is just that it would be 180 00:09:32,360 --> 00:09:35,840 Speaker 3: good if government spending was going to slow down. It 181 00:09:35,840 --> 00:09:38,439 Speaker 3: would be nice if it had already slowed. It's forecast 182 00:09:38,559 --> 00:09:41,640 Speaker 3: projected by the government to slow, but I think we 183 00:09:41,720 --> 00:09:43,520 Speaker 3: probably need it to happen a bit sooner. 184 00:09:44,080 --> 00:09:46,800 Speaker 1: Okay, then in that case, it probably does put a 185 00:09:46,800 --> 00:09:49,160 Speaker 1: bit of pressure on the government to do two things 186 00:09:49,559 --> 00:09:51,760 Speaker 1: as we look ahead now to the federal budget, which 187 00:09:51,840 --> 00:09:56,079 Speaker 1: isn't actually that far away, to pull back on government spending. 188 00:09:56,080 --> 00:09:58,520 Speaker 1: But also what kind of pressure does it put on 189 00:09:59,040 --> 00:10:01,760 Speaker 1: the government to help ease cost of living pressures, because 190 00:10:01,760 --> 00:10:05,120 Speaker 1: an interest rate hike is probably going to hurt those 191 00:10:05,240 --> 00:10:06,679 Speaker 1: who can least afford it. 192 00:10:07,400 --> 00:10:10,160 Speaker 2: Yeah. Yeah, So it's a really fine balancing act. 193 00:10:10,160 --> 00:10:13,199 Speaker 3: I mean, obviously support still has to go to very 194 00:10:13,200 --> 00:10:17,920 Speaker 3: low income groups through Commonwealth, rent assistance, all those types 195 00:10:17,960 --> 00:10:21,319 Speaker 3: of support programs, but you know, large scale of welfare, 196 00:10:21,720 --> 00:10:26,840 Speaker 3: giving people large tax cuts, cash the male type of 197 00:10:27,040 --> 00:10:30,760 Speaker 3: stimulus programs that are normally budget sweeteners should not be 198 00:10:30,880 --> 00:10:33,720 Speaker 3: considered given the stage of the cycle that we're at. 199 00:10:34,160 --> 00:10:37,080 Speaker 1: Okay, one last question. We looked forward just then. Now 200 00:10:37,120 --> 00:10:40,120 Speaker 1: let's look back a little bit of hindsight, which is 201 00:10:40,160 --> 00:10:44,320 Speaker 1: always kind of fun. We had three rate cuts last year. 202 00:10:44,880 --> 00:10:47,400 Speaker 1: The last one was only in August. Should we not 203 00:10:47,480 --> 00:10:51,360 Speaker 1: have had that rate cut that was already a very 204 00:10:51,400 --> 00:10:53,760 Speaker 1: short cycle over the red cut? 205 00:10:53,800 --> 00:10:54,000 Speaker 3: Yeah? 206 00:10:54,360 --> 00:10:56,720 Speaker 1: But should we not have had that last one? 207 00:10:57,000 --> 00:10:58,520 Speaker 3: Now? I think we should have had it because at 208 00:10:58,520 --> 00:11:01,960 Speaker 3: the time the data so the private sector was pretty soft, 209 00:11:02,360 --> 00:11:05,920 Speaker 3: inslation was declining well into the target ban, so it 210 00:11:06,000 --> 00:11:08,480 Speaker 3: made sense at the time, I think to support the 211 00:11:08,480 --> 00:11:11,360 Speaker 3: economy through that rate cut. I think what's happened is 212 00:11:11,440 --> 00:11:14,680 Speaker 3: just that the economy has responded to lower interest rates, 213 00:11:14,760 --> 00:11:19,440 Speaker 3: lower taxes, and increased government spending, and it's been running. 214 00:11:19,600 --> 00:11:22,560 Speaker 3: It's been running at a pretty high growth for what 215 00:11:22,640 --> 00:11:25,080 Speaker 3: its productive ability can do right now, given that we 216 00:11:25,120 --> 00:11:28,400 Speaker 3: have productivity growth, and also the global economy has performed 217 00:11:28,400 --> 00:11:30,480 Speaker 3: better than expected through our trading partners. So that's what 218 00:11:30,559 --> 00:11:33,480 Speaker 3: we added to demand in our economy as well through 219 00:11:33,559 --> 00:11:36,000 Speaker 3: export growth. So I think the IBA made the right 220 00:11:36,000 --> 00:11:38,720 Speaker 3: decision last year to cut rates. I don't think it 221 00:11:38,720 --> 00:11:41,000 Speaker 3: was a policy error, and I don't think today's a 222 00:11:41,080 --> 00:11:43,680 Speaker 3: rate hike sort of trying to go back and adjust 223 00:11:44,040 --> 00:11:47,120 Speaker 3: what happened in August. Policy is set at the time, 224 00:11:47,320 --> 00:11:48,760 Speaker 3: and I think it was the right decision. 225 00:11:49,040 --> 00:11:51,000 Speaker 1: All right, Thank you for breaking it all down, Diana. 226 00:11:51,000 --> 00:11:52,600 Speaker 1: Thanks for talking to Fear and Greed this morning. 227 00:11:52,880 --> 00:11:53,520 Speaker 2: Thanks Michael. 228 00:11:53,800 --> 00:11:56,640 Speaker 1: That was Diana Massine, a deputy chief economist at AMP. 229 00:11:56,880 --> 00:11:58,840 Speaker 1: I'm Michael Thompson, and this is Fear and Greed Q 230 00:11:58,960 --> 00:11:59,160 Speaker 1: and a