1 00:00:03,560 --> 00:00:06,920 Adam Lang: Welcome to the Fear and Greed Daily Interview. I'm Adam Lang. 2 00:00:07,280 --> 00:00:10,160 Adam Lang: The Reserve Bank has started to wind back its emergency 3 00:00:10,160 --> 00:00:13,520 Adam Lang: levels of support as the economy continues its better than 4 00:00:13,520 --> 00:00:17,870 Adam Lang: expected recovery. At its July meeting yesterday, the board of 5 00:00:17,870 --> 00:00:21,020 Adam Lang: the RBA kept the official cash rate on hold at 6 00:00:21,020 --> 00:00:24,440 Adam Lang: 0.1 per cent but declared it would scale back its 7 00:00:24,440 --> 00:00:27,980 Adam Lang: bond buying program. To explain what it all means, we've 8 00:00:27,980 --> 00:00:30,650 Adam Lang: gone to one of Fear and Greed's favourite economists Dr 9 00:00:30,650 --> 00:00:34,760 Adam Lang: Shane Oliver, Chief Economist at AMP Capital. Shane, welcome back 10 00:00:34,760 --> 00:00:35,580 Adam Lang: to Fear and Greed. 11 00:00:35,690 --> 00:00:36,790 Dr Shane Oliver: Thank you for having me, Adam. 12 00:00:37,070 --> 00:00:40,820 Adam Lang: It's a pleasure. Were there any surprises for you yesterday 13 00:00:40,820 --> 00:00:42,680 Adam Lang: afternoon in the RBA announcement? 14 00:00:42,710 --> 00:00:45,890 Dr Shane Oliver: Not really. In fact, the only surprise to me was 15 00:00:45,890 --> 00:00:49,129 Dr Shane Oliver: that there were no surprises. Key elements were that I 16 00:00:49,130 --> 00:00:51,440 Dr Shane Oliver: think the Reserve Bank was on track to take some 17 00:00:51,440 --> 00:00:54,950 Dr Shane Oliver: baby steps away from the emergency stimulus that it put 18 00:00:54,950 --> 00:00:57,890 Dr Shane Oliver: in place last year. But it would still want to 19 00:00:57,890 --> 00:01:01,700 Dr Shane Oliver: sound pretty dovish, given the uncertainty still facing the outlook, 20 00:01:01,700 --> 00:01:04,399 Dr Shane Oliver: particularly in terms of coronavirus, but also in terms of 21 00:01:04,640 --> 00:01:08,419 Dr Shane Oliver: the likelihood that wages growth will pick up gradually over 22 00:01:08,420 --> 00:01:11,750 Dr Shane Oliver: time at a macroeconomic level. So I can't say that 23 00:01:11,750 --> 00:01:14,300 Dr Shane Oliver: I was particularly surprised and I tend to agree with 24 00:01:14,300 --> 00:01:15,610 Dr Shane Oliver: what the Reserve Bank is doing here. 25 00:01:15,830 --> 00:01:18,259 Adam Lang: In simple terms and perhaps along the lines of those 26 00:01:18,260 --> 00:01:22,759 Adam Lang: baby steps, how significant is the reduction in the RBA's 27 00:01:22,790 --> 00:01:24,139 Adam Lang: bond buying program? 28 00:01:24,470 --> 00:01:27,169 Dr Shane Oliver: It's probably the main one and the one that people 29 00:01:27,170 --> 00:01:29,800 Dr Shane Oliver: can most easily get their heads around. I must admit, 30 00:01:29,810 --> 00:01:32,390 Dr Shane Oliver: some of the other things they do can get very confusing. 31 00:01:32,900 --> 00:01:36,919 Dr Shane Oliver: But basically, starting late last year, the Reserve Bank announced 32 00:01:36,920 --> 00:01:41,240 Dr Shane Oliver: a quantitative easing program which involved buying one hundred billion 33 00:01:41,420 --> 00:01:47,010 Dr Shane Oliver: dollars worth of government bonds over six months. And these 34 00:01:47,030 --> 00:01:49,730 Dr Shane Oliver: were to be long duration government bonds. So it already 35 00:01:49,730 --> 00:01:54,080 Dr Shane Oliver: had in place a 0.1 per cent yield target for 36 00:01:54,080 --> 00:01:58,070 Dr Shane Oliver: three year bonds. But there was an issue that beyond 37 00:01:58,070 --> 00:02:01,090 Dr Shane Oliver: the three year period, bonds were free to go wherever. 38 00:02:01,370 --> 00:02:03,830 Dr Shane Oliver: And of course, it didn't want to see a pick 39 00:02:03,830 --> 00:02:07,880 Dr Shane Oliver: up in bond yields, particularly given that other central banks 40 00:02:07,880 --> 00:02:11,450 Dr Shane Oliver: were aggressively buying their bonds and effectively injecting cash into 41 00:02:11,450 --> 00:02:15,019 Dr Shane Oliver: their economies in the process. So the Reserve Bank, partly 42 00:02:15,020 --> 00:02:18,320 Dr Shane Oliver: motivated by desire to match other countries and to avoid 43 00:02:18,470 --> 00:02:21,650 Dr Shane Oliver: being seen to be too tight and therefore allowing the 44 00:02:21,650 --> 00:02:25,430 Dr Shane Oliver: Australian dollar to rise too quickly, announced their own program. 45 00:02:26,150 --> 00:02:29,180 Dr Shane Oliver: The initial program ran out to April this year, and 46 00:02:29,180 --> 00:02:31,280 Dr Shane Oliver: the Reserve Bank announced early this year that it would 47 00:02:31,280 --> 00:02:35,989 Dr Shane Oliver: extend that program by another six months out to September this year, 48 00:02:36,110 --> 00:02:39,440 Dr Shane Oliver: again to the tune of one hundred billion dollars. And 49 00:02:39,650 --> 00:02:41,900 Dr Shane Oliver: the big decision was going to be around what would 50 00:02:41,900 --> 00:02:45,260 Dr Shane Oliver: they do beyond September? And of course, the Reserve Bank 51 00:02:45,260 --> 00:02:46,940 Dr Shane Oliver: for the last few months have announced that they would 52 00:02:46,940 --> 00:02:49,400 Dr Shane Oliver: review it at the July meeting and make an announcement, which, 53 00:02:49,400 --> 00:02:52,760 Dr Shane Oliver: of course, is what they've done. They've basically, if you 54 00:02:52,760 --> 00:02:54,950 Dr Shane Oliver: sort of, it doesn't quite work out, but basically, they 55 00:02:54,950 --> 00:02:58,100 Dr Shane Oliver: were buying about five billion dollars worth of government bonds 56 00:02:58,850 --> 00:03:01,940 Dr Shane Oliver: a week and these were buying bonds in the secondary market. 57 00:03:01,950 --> 00:03:04,190 Dr Shane Oliver: So they weren't actually giving the money straight to the government, 58 00:03:04,389 --> 00:03:06,320 Dr Shane Oliver: they were giving the money to banks and others who held those 59 00:03:06,320 --> 00:03:09,769 Dr Shane Oliver: bonds and injecting cash into the economy. They're now saying 60 00:03:09,889 --> 00:03:12,080 Dr Shane Oliver: that they're going to cut that back to four billion 61 00:03:12,080 --> 00:03:14,900 Dr Shane Oliver: dollars a week. So that's a relatively minor cut back 62 00:03:15,260 --> 00:03:18,679 Dr Shane Oliver: and that they would keep it going at least till November, 63 00:03:18,680 --> 00:03:22,190 Dr Shane Oliver: at which point in time they'll review it again, presumably 64 00:03:22,520 --> 00:03:25,760 Dr Shane Oliver: looking to see how quickly the economy continues to recover 65 00:03:25,970 --> 00:03:28,160 Dr Shane Oliver: and what the Fed does in terms of its own 66 00:03:28,160 --> 00:03:31,400 Dr Shane Oliver: bond buying and whether it indeed undertakes some sort of tapering, 67 00:03:32,240 --> 00:03:35,060 Dr Shane Oliver: which would enable, therefore, the Reserve Bank to continue to 68 00:03:35,060 --> 00:03:37,970 Dr Shane Oliver: slow their pace of bond buying. I guess the question is, 69 00:03:37,970 --> 00:03:40,580 Dr Shane Oliver: how does that affect the average Australian? Most people would 70 00:03:40,580 --> 00:03:43,300 Dr Shane Oliver: think this is all very technical, but when you buy 71 00:03:43,300 --> 00:03:46,070 Dr Shane Oliver: a government bond, when a Reserve Bank buys a government bond, 72 00:03:46,370 --> 00:03:49,490 Dr Shane Oliver: all things being equal, it pushes its price, higher. Demand, 73 00:03:49,760 --> 00:03:52,910 Dr Shane Oliver: more demand, higher price. And of course, when you push 74 00:03:52,910 --> 00:03:56,780 Dr Shane Oliver: a bond price higher, it pushes the yield lower or 75 00:03:56,780 --> 00:03:59,720 Dr Shane Oliver: keeps the yield lower than it would otherwise be. And that, 76 00:03:59,720 --> 00:04:03,230 Dr Shane Oliver: of course, has been a factor in keeping bond yields 77 00:04:03,230 --> 00:04:06,110 Dr Shane Oliver: lower than what otherwise might otherwise have been the case. 78 00:04:06,290 --> 00:04:09,230 Dr Shane Oliver: And it was also a factor contributing, therefore, to lower 79 00:04:09,230 --> 00:04:12,650 Dr Shane Oliver: fixed mortgage rates over the last six to nine months, 80 00:04:12,650 --> 00:04:15,050 Dr Shane Oliver: low bond yields have meant a low cost of funding 81 00:04:15,050 --> 00:04:17,719 Dr Shane Oliver: for the banks on a two, three, four or five 82 00:04:17,720 --> 00:04:20,390 Dr Shane Oliver: year horizon, which has meant that they've been able to 83 00:04:20,390 --> 00:04:25,609 Dr Shane Oliver: offer these extraordinarily low fixed mortgage rates, in fact, some 84 00:04:25,610 --> 00:04:28,400 Dr Shane Oliver: cases below two per cent. So the Reserve Bank is still 85 00:04:28,400 --> 00:04:30,620 Dr Shane Oliver: buying those bonds, but that downwards pressure on the bond 86 00:04:30,620 --> 00:04:32,750 Dr Shane Oliver: yield will start to abate as they buy less of 87 00:04:32,750 --> 00:04:35,870 Dr Shane Oliver: the bond. So it could mean over time higher fixed 88 00:04:35,870 --> 00:04:36,710 Dr Shane Oliver: mortgage rates. 89 00:04:37,010 --> 00:04:39,469 Adam Lang: And do you see that coming in the nearer term? 90 00:04:39,470 --> 00:04:41,330 Adam Lang: And by that I mean within 12 months, or do 91 00:04:41,330 --> 00:04:42,950 Adam Lang: you think it'll go a little longer than that? 92 00:04:43,160 --> 00:04:45,770 Dr Shane Oliver: I think it's going to be a very gradual process. 93 00:04:46,480 --> 00:04:49,520 Dr Shane Oliver: We've already seen some back up in long term bond yields. 94 00:04:49,640 --> 00:04:51,410 Dr Shane Oliver: At their low point last year, the 10 year bond 95 00:04:51,410 --> 00:04:53,060 Dr Shane Oliver: yield was down as low as 0.6 per cent. 96 00:04:53,060 --> 00:04:53,390 Adam Lang: Right. 97 00:04:53,839 --> 00:04:56,240 Dr Shane Oliver: In the last few days, it's been hovering just below 98 00:04:56,240 --> 00:04:58,580 Dr Shane Oliver: 1.5 per cent. So we've already seen a back up 99 00:04:58,600 --> 00:05:01,980 Dr Shane Oliver: in bond yields and in the process fixed mortgage rates 100 00:05:02,370 --> 00:05:05,910 Dr Shane Oliver: have moved higher, not dramatically so, but it has become 101 00:05:05,910 --> 00:05:08,110 Dr Shane Oliver: harder to get those deals where you can borrow for 102 00:05:08,110 --> 00:05:11,520 Dr Shane Oliver: four years at less than two per cent. I suspect that 103 00:05:11,520 --> 00:05:15,810 Dr Shane Oliver: as the recovery continues in Australia and globally, and I'm 104 00:05:15,810 --> 00:05:19,500 Dr Shane Oliver: assuming it will continue albeit with fits and starts along the way, 105 00:05:19,500 --> 00:05:22,860 Dr Shane Oliver: some of them determined by coronavirus, that that will mean 106 00:05:22,860 --> 00:05:26,339 Dr Shane Oliver: a gradual rise in bond yields and therefore, by implication, 107 00:05:26,339 --> 00:05:29,200 Dr Shane Oliver: a gradual rise in fixed mortgage rates in the process and 108 00:05:29,370 --> 00:05:31,660 Dr Shane Oliver: other longer term borrowing costs in the community, but it's 109 00:05:32,100 --> 00:05:34,859 Dr Shane Oliver: the emphasis will be on very gradual. Central banks are 110 00:05:34,860 --> 00:05:39,090 Dr Shane Oliver: not actually stopping their bond buying or they're not reversing it. 111 00:05:39,510 --> 00:05:42,120 Dr Shane Oliver: They are still buying bonds. So that will keep bond 112 00:05:42,120 --> 00:05:45,300 Dr Shane Oliver: yields lower than might otherwise have been the case than if 113 00:05:45,300 --> 00:05:46,560 Dr Shane Oliver: it were a normal recovery. 114 00:05:46,740 --> 00:05:49,950 Adam Lang: They are extraordinary settings, really. A billion dollars a week 115 00:05:49,950 --> 00:05:53,540 Adam Lang: less and that flows through to to the general economy. 116 00:05:53,940 --> 00:05:56,040 Adam Lang: And as you say, it's, some of it's perhaps even 117 00:05:56,040 --> 00:06:00,360 Adam Lang: visible now. No one was expecting interest rates to move yesterday, 118 00:06:00,360 --> 00:06:03,479 Adam Lang: given the Reserve Bank language and Governor Philip Lowe having 119 00:06:03,480 --> 00:06:07,170 Adam Lang: been very clear that they wouldn't change until 2024 at 120 00:06:07,170 --> 00:06:10,260 Adam Lang: the earliest, although the language around that target has started 121 00:06:10,260 --> 00:06:13,500 Adam Lang: to evolve somewhat. Shane, how are you reading the tone 122 00:06:13,500 --> 00:06:14,790 Adam Lang: of the Reserve Bank comments? 123 00:06:15,089 --> 00:06:19,700 Dr Shane Oliver: Well, the language basically switched from basically saying that we don't, 124 00:06:19,710 --> 00:06:21,570 Dr Shane Oliver: we don't expect the conditions to be in place for 125 00:06:21,570 --> 00:06:25,350 Dr Shane Oliver: a rate hike until 2024 at the earliest. Now, they've 126 00:06:25,350 --> 00:06:28,650 Dr Shane Oliver: changed that to saying and I'm going through the pages here, 127 00:06:28,650 --> 00:06:31,080 Dr Shane Oliver: that their central scenario is that the conditions for a 128 00:06:31,080 --> 00:06:33,990 Dr Shane Oliver: rate hike will not be met before 2024. So they've 129 00:06:33,990 --> 00:06:34,530 Dr Shane Oliver: tweaked it slightly. 130 00:06:34,529 --> 00:06:35,250 Adam Lang: Right. 131 00:06:35,640 --> 00:06:36,210 Dr Shane Oliver: I guess, to say... 132 00:06:36,210 --> 00:06:37,049 Adam Lang: We're watching. 133 00:06:37,770 --> 00:06:41,070 Dr Shane Oliver: ...that there's a chance it could be at least in 2024. And maybe 134 00:06:41,070 --> 00:06:44,000 Dr Shane Oliver: there are some scenarios where it could occur early, earlier, 135 00:06:44,010 --> 00:06:47,100 Dr Shane Oliver: but their central scenario is 2024. So they've sort of 136 00:06:47,490 --> 00:06:50,700 Dr Shane Oliver: opened up the possibility that a rate hike could come 137 00:06:50,700 --> 00:06:55,260 Dr Shane Oliver: earlier than 2024, whereas before they were saying 2024 at 138 00:06:55,260 --> 00:06:57,390 Dr Shane Oliver: the earliest. So in that sense, you could say this 139 00:06:57,390 --> 00:07:01,630 Dr Shane Oliver: is a somewhat more hawkish twist, other economists might have 140 00:07:01,630 --> 00:07:03,800 Dr Shane Oliver: their other views on that. Financial markets were a bit 141 00:07:03,810 --> 00:07:06,330 Dr Shane Oliver: mixed in terms of their interpretation. The Aussie dollar did 142 00:07:06,330 --> 00:07:09,300 Dr Shane Oliver: go up a little bit. It went from 0.7560 to 0.7590 143 00:07:11,190 --> 00:07:14,429 Dr Shane Oliver: (US cents) sort of thing. Not a huge move, but still a rise. 144 00:07:14,450 --> 00:07:17,340 Dr Shane Oliver: The share market came down a little bit and the 145 00:07:17,340 --> 00:07:20,340 Dr Shane Oliver: bond yields rose a little bit. None of those moves, 146 00:07:20,340 --> 00:07:24,340 Dr Shane Oliver: I'd say, were huge. But nevertheless, they're probably consistent with 147 00:07:24,340 --> 00:07:27,810 Dr Shane Oliver: the slight hawkish twist by the RBA. And the flip 148 00:07:27,810 --> 00:07:29,340 Dr Shane Oliver: side to all of that is you could say this 149 00:07:29,340 --> 00:07:32,250 Dr Shane Oliver: is all semantics. You're getting hung up on words here. 150 00:07:32,970 --> 00:07:37,470 Dr Shane Oliver: They're still talking about 2024. That's still several years away. Before 151 00:07:37,470 --> 00:07:39,360 Dr Shane Oliver: we get there might be three years away before we 152 00:07:39,360 --> 00:07:42,150 Dr Shane Oliver: get to that point. So you shouldn't get too hung 153 00:07:42,150 --> 00:07:44,940 Dr Shane Oliver: up on any of this stuff. That said, my own 154 00:07:44,940 --> 00:07:48,120 Dr Shane Oliver: view is that a rate hike will come earlier than 2024. 155 00:07:48,900 --> 00:07:50,720 Dr Shane Oliver: For most of this year we've been of the view 156 00:07:50,720 --> 00:07:54,300 Dr Shane Oliver: will probably come in2023. It's only recently that everybody started 157 00:07:54,300 --> 00:07:56,790 Dr Shane Oliver: to show much interest in that. And of course many 158 00:07:56,790 --> 00:08:00,750 Dr Shane Oliver: economists are now saying 2023. So it's become pretty much consensus. 159 00:08:00,900 --> 00:08:03,900 Dr Shane Oliver: And that's largely then because the economy has recovered faster 160 00:08:04,410 --> 00:08:08,460 Dr Shane Oliver: than the Reserve Bank was allowing for. We are one of the few developed 161 00:08:08,460 --> 00:08:12,510 Dr Shane Oliver: countries where GDP is above its pre coronavirus level, where 162 00:08:12,510 --> 00:08:15,420 Dr Shane Oliver: the jobs market is stronger than it was pre coronavirus. 163 00:08:15,510 --> 00:08:19,230 Dr Shane Oliver: And that, of course, has meant that the Reserve Bank 164 00:08:19,230 --> 00:08:21,470 Dr Shane Oliver: needs to reflect that. But it's also, I think, brought 165 00:08:21,480 --> 00:08:24,270 Dr Shane Oliver: forward to some degree the timing of the first rate hike. 166 00:08:24,780 --> 00:08:27,900 Dr Shane Oliver: And so even though 2023 itself is still a long 167 00:08:27,900 --> 00:08:29,880 Dr Shane Oliver: way away, I think it will occur a bit earlier 168 00:08:29,880 --> 00:08:32,640 Dr Shane Oliver: than the RBA's 2024. So you could go round in 169 00:08:32,640 --> 00:08:35,849 Dr Shane Oliver: circles trying to read things into these statements. But I 170 00:08:35,850 --> 00:08:38,069 Dr Shane Oliver: think at the end of the day, the Reserve Bank has, 171 00:08:38,070 --> 00:08:40,920 Dr Shane Oliver: if anything, become a little bit more hawkish. But in 172 00:08:40,920 --> 00:08:43,950 Dr Shane Oliver: a big picture sense, it's still ultra dovish to the 173 00:08:43,950 --> 00:08:47,250 Dr Shane Oliver: extent that it's still referring to 2024, which is still 174 00:08:47,250 --> 00:08:48,030 Dr Shane Oliver: a long way away. 175 00:08:48,270 --> 00:08:51,330 Adam Lang: And they have been emergency settings and they're now looking 176 00:08:51,330 --> 00:08:54,660 Adam Lang: or starting to ease those. In terms of the basket 177 00:08:54,660 --> 00:08:58,319 Adam Lang: of factors that the RBA is considering to shift rates, 178 00:08:58,320 --> 00:09:00,810 Adam Lang: do you have things that you really look closely at, 179 00:09:01,170 --> 00:09:03,030 Adam Lang: that you think, oh, these are the ones to watch, 180 00:09:03,030 --> 00:09:05,819 Adam Lang: in terms of what are the factors that are going to lead to 181 00:09:05,820 --> 00:09:06,930 Adam Lang: a shift in decision? 182 00:09:07,200 --> 00:09:09,569 Dr Shane Oliver: Yeah, normally I look at the state of the economy, 183 00:09:09,570 --> 00:09:14,550 Dr Shane Oliver: obviously levels of confidence, both business and consumers, the level 184 00:09:14,550 --> 00:09:18,480 Dr Shane Oliver: of GDP relative to where it was prior to the shock. 185 00:09:18,660 --> 00:09:21,000 Dr Shane Oliver: All of those things have moved in a direction consistent 186 00:09:21,000 --> 00:09:26,100 Dr Shane Oliver: with rate hikes coming onto the horizon. The more specific 187 00:09:26,100 --> 00:09:28,170 Dr Shane Oliver: things one would look at is the state of the 188 00:09:28,170 --> 00:09:31,679 Dr Shane Oliver: jobs market. And if you think about the last few years, 189 00:09:31,679 --> 00:09:34,410 Dr Shane Oliver: the problem for the Reserve Bank and indeed the Fed 190 00:09:34,920 --> 00:09:38,459 Dr Shane Oliver: is that wages growth has been too low relative to 191 00:09:38,460 --> 00:09:42,480 Dr Shane Oliver: their inflation targets. So the last time we had wages 192 00:09:42,480 --> 00:09:46,679 Dr Shane Oliver: growth above three per cent, I think was around 2012 or 2013. 193 00:09:47,309 --> 00:09:50,160 Dr Shane Oliver: So that was a long time ago. And then surprise, surprise, 194 00:09:50,490 --> 00:09:53,640 Dr Shane Oliver: the last time we had inflation consistently within the target 195 00:09:53,640 --> 00:09:57,750 Dr Shane Oliver: two the three per cent was around 2014. And so 196 00:09:57,750 --> 00:10:01,689 Dr Shane Oliver: we've had a long period where wages growth is too low. 197 00:10:01,690 --> 00:10:03,699 Dr Shane Oliver: If you sort of roughly assume that you're going to 198 00:10:03,700 --> 00:10:07,520 Dr Shane Oliver: have productivity growth of, say, one per cent, that's conservative. 199 00:10:07,540 --> 00:10:11,020 Dr Shane Oliver: The intergenerational report released by the government was assuming 1.5 200 00:10:11,470 --> 00:10:14,020 Dr Shane Oliver: per cent but let's go with one per cent. Assuming something 201 00:10:14,020 --> 00:10:17,140 Dr Shane Oliver: like that, then you at least need wages growth of 202 00:10:17,140 --> 00:10:21,070 Dr Shane Oliver: three per cent or more to be consistent with prices growth 203 00:10:21,340 --> 00:10:24,190 Dr Shane Oliver: of around two to three per cent. And you could argue 204 00:10:24,190 --> 00:10:27,580 Dr Shane Oliver: that three per cent will only give you two per cent inflation on 205 00:10:27,580 --> 00:10:30,370 Dr Shane Oliver: a sustained basis so you can understand where the Reserve 206 00:10:30,370 --> 00:10:33,220 Dr Shane Oliver: Bank is coming from here. They're basically saying that we 207 00:10:33,220 --> 00:10:36,090 Dr Shane Oliver: really need to get back to three per cent plus wages growth. 208 00:10:36,550 --> 00:10:39,250 Dr Shane Oliver: To do that, we need full employment. We need a 209 00:10:39,250 --> 00:10:42,780 Dr Shane Oliver: much tighter labour market. We've been debating about what the 210 00:10:42,790 --> 00:10:45,489 Dr Shane Oliver: level of unemployment is that would be consistent with three 211 00:10:45,490 --> 00:10:49,640 Dr Shane Oliver: per cent plus wages growth. And I suspect that it's, it's 212 00:10:49,660 --> 00:10:52,590 Dr Shane Oliver: probably closer to four per cent than just below five per cent. 213 00:10:53,170 --> 00:10:55,660 Dr Shane Oliver: So that's what I'm looking at. If we see the 214 00:10:55,660 --> 00:10:58,569 Dr Shane Oliver: jobs market continue to improve rapidly as it has lately, 215 00:10:58,960 --> 00:11:03,819 Dr Shane Oliver: unemployment heading towards four per cent and underemployment, which is currently 216 00:11:03,820 --> 00:11:07,720 Dr Shane Oliver: around 7.5 to 8, if that heads down towards 6, then I 217 00:11:07,720 --> 00:11:11,500 Dr Shane Oliver: think the conditions would be in place for wages growth 218 00:11:11,500 --> 00:11:14,559 Dr Shane Oliver: to be sustained above three per cent and therefore for 219 00:11:14,559 --> 00:11:17,140 Dr Shane Oliver: the Reserve Bank to raise interest rates. So that's the 220 00:11:17,140 --> 00:11:19,780 Dr Shane Oliver: way I'm reading it. They basically said that we're not 221 00:11:19,780 --> 00:11:22,390 Dr Shane Oliver: going to jack up interest rates just because we're forecasting 222 00:11:22,390 --> 00:11:25,599 Dr Shane Oliver: higher inflation, but they will only jack up interest rates 223 00:11:25,600 --> 00:11:28,780 Dr Shane Oliver: if they actually get sustained inflation in the two to 224 00:11:28,780 --> 00:11:31,569 Dr Shane Oliver: three per cent target. But the key to watch, I think, 225 00:11:31,570 --> 00:11:35,170 Dr Shane Oliver: is the jobs market, lower unemployment down towards four per 226 00:11:35,170 --> 00:11:38,560 Dr Shane Oliver: cent and wages growth being sustained above three per cent. 227 00:11:38,920 --> 00:11:41,440 Dr Shane Oliver: So obviously we get a bit of a spike in 228 00:11:41,440 --> 00:11:45,910 Dr Shane Oliver: inflation in the current quarter as the drop in childcare 229 00:11:45,910 --> 00:11:48,520 Dr Shane Oliver: over a year ago drops out of the annual calculation 230 00:11:48,910 --> 00:11:51,160 Dr Shane Oliver: and because of higher petrol prices. And the Reserve Bank 231 00:11:51,160 --> 00:11:53,290 Dr Shane Oliver: will simply look through that and say, well, that's not enough. 232 00:11:53,559 --> 00:11:56,620 Dr Shane Oliver: If we hear some wages going up in some areas 233 00:11:56,620 --> 00:11:59,860 Dr Shane Oliver: because of an absence of foreign workers or backpackers, then 234 00:11:59,860 --> 00:12:01,840 Dr Shane Oliver: the Reserve Bank would likewise say that's not enough. We 235 00:12:01,840 --> 00:12:05,620 Dr Shane Oliver: need to see sustained strength in the jobs market and 236 00:12:05,620 --> 00:12:08,050 Dr Shane Oliver: sustained wages growth above three per cent. 237 00:12:08,210 --> 00:12:11,200 Adam Lang: That's a great explanation. Thank you. Stay with me, Shane. 238 00:12:11,200 --> 00:12:12,280 Adam Lang: We'll be back in a minute. 239 00:12:17,280 --> 00:12:20,550 Adam Lang: My guest this morning is Dr Shane Oliver, Chief Economist 240 00:12:20,550 --> 00:12:23,970 Adam Lang: at AMP Capital. Now there was something of a tremor 241 00:12:23,970 --> 00:12:27,660 Adam Lang: in the force yesterday. The Reserve Bank is reasonably optimistic, 242 00:12:27,660 --> 00:12:33,600 Adam Lang: but confidence data out yesterday showed consumer confidence last week fell 243 00:12:33,600 --> 00:12:36,480 Adam Lang: following the introduction of lockdowns across the country and led 244 00:12:36,480 --> 00:12:41,130 Adam Lang: down by Sydney. No surprise there. Can falling consumer confidence 245 00:12:41,130 --> 00:12:42,179 Adam Lang: impact this recovery? 246 00:12:42,330 --> 00:12:46,380 Dr Shane Oliver: Well, it could. And that drop in confidence has been consistent, 247 00:12:46,380 --> 00:12:48,150 Dr Shane Oliver: I guess, with what we've seen for a while now, 248 00:12:48,150 --> 00:12:51,300 Dr Shane Oliver: that every so often we have these lockdowns. And of course, 249 00:12:51,300 --> 00:12:54,599 Dr Shane Oliver: when they happen, people get depressed and that impacts things 250 00:12:54,600 --> 00:12:58,020 Dr Shane Oliver: in the short term. Now, the track record since the 251 00:12:58,020 --> 00:13:01,920 Dr Shane Oliver: South Australian lockdown in November up until the recent Victorian one, 252 00:13:01,920 --> 00:13:05,340 Dr Shane Oliver: is that after each of the lockdowns, they're relatively short. 253 00:13:05,340 --> 00:13:08,219 Dr Shane Oliver: The number of cases comes under control and the restrictions 254 00:13:08,220 --> 00:13:14,640 Dr Shane Oliver: are removed and things quickly bounce back, including consumer confidence, spending, mobility, 255 00:13:14,640 --> 00:13:18,420 Dr Shane Oliver: which is measuring how many directions people ask for on 256 00:13:18,420 --> 00:13:20,910 Dr Shane Oliver: their mobile phones and so on. So that's been the 257 00:13:20,910 --> 00:13:23,370 Dr Shane Oliver: track record so far. But obviously, we're still waiting to 258 00:13:23,370 --> 00:13:27,179 Dr Shane Oliver: see what happens in Sydney. My feeling is that they 259 00:13:27,179 --> 00:13:29,910 Dr Shane Oliver: could have announced the lockdown earlier. I know there's a 260 00:13:29,910 --> 00:13:33,010 Dr Shane Oliver: whole range of dispersion of views on these things these days. 261 00:13:33,030 --> 00:13:34,260 Dr Shane Oliver: I mean, if you want to get into argument with 262 00:13:34,260 --> 00:13:37,410 Dr Shane Oliver: someone just mention lockdowns. Or Bitcoin, you know. Bitcoin is the other one. 263 00:13:39,780 --> 00:13:40,200 Adam Lang: Either one will do it. 264 00:13:40,559 --> 00:13:43,500 Dr Shane Oliver: Because you just say something negative about Bitcoin on Twitter, 265 00:13:43,500 --> 00:13:47,310 Dr Shane Oliver: you'll get pummeled. But lockdowns are fairly similar. I'm in 266 00:13:47,309 --> 00:13:51,510 Dr Shane Oliver: the camp that says that a healthy economy, a healthy nation 267 00:13:51,510 --> 00:13:54,690 Dr Shane Oliver: is consistent with a healthy economy. And if you can 268 00:13:54,690 --> 00:13:58,230 Dr Shane Oliver: keep coronavirus to a minimum, then you'll have decent economic 269 00:13:58,230 --> 00:14:01,800 Dr Shane Oliver: growth and decent economic activity. And we've done that by lockdowns, 270 00:14:02,190 --> 00:14:05,670 Dr Shane Oliver: by restrictions and those short lockdowns that headed off longer lockdowns. The one time where we 271 00:14:06,960 --> 00:14:09,660 Dr Shane Oliver: didn't do that properly was in Victoria. We left it too to 272 00:14:09,660 --> 00:14:13,290 Dr Shane Oliver: announce the lockdowns. The stage three lockdown in July only started 273 00:14:13,290 --> 00:14:17,310 Dr Shane Oliver: July 2020, only started when there were over 60 new cases. 274 00:14:17,309 --> 00:14:21,690 Dr Shane Oliver: And the stage four lockdown in Melbourne started in August 275 00:14:21,690 --> 00:14:24,180 Dr Shane Oliver: when there were over six 600 cases. Whereas New South Wales 276 00:14:24,180 --> 00:14:26,130 Dr Shane Oliver: has got in there a little bit later than they should have, 277 00:14:26,130 --> 00:14:29,820 Dr Shane Oliver: I reckon at around 20 new cases, but still far 278 00:14:29,850 --> 00:14:32,850 Dr Shane Oliver: better than Victoria did a year or so ago. So 279 00:14:33,030 --> 00:14:36,450 Dr Shane Oliver: that gives me confidence that it'll come under control and 280 00:14:36,450 --> 00:14:39,120 Dr Shane Oliver: the lockdown will be relatively short and therefore things will 281 00:14:39,120 --> 00:14:42,510 Dr Shane Oliver: bounce back. But it is a source of uncertainty. And 282 00:14:42,510 --> 00:14:46,110 Dr Shane Oliver: that was acknowledged by the Reserve Bank yesterday. But hopefully, 283 00:14:46,200 --> 00:14:49,040 Dr Shane Oliver: if we do the right thing and the lockdown ends soon, 284 00:14:49,320 --> 00:14:52,560 Dr Shane Oliver: then history tells us, the recent history anyway, that we 285 00:14:52,560 --> 00:14:55,140 Dr Shane Oliver: bounce back pretty quickly. I think it's different when you're 286 00:14:55,140 --> 00:14:59,820 Dr Shane Oliver: going into a lockdown of unknown duration and gross uncertainty 287 00:15:00,030 --> 00:15:01,680 Dr Shane Oliver: like we did in relation to the first one, you 288 00:15:01,680 --> 00:15:05,790 Dr Shane Oliver: need things like JobKeeper. But the snap lockdowns we've seen 289 00:15:05,790 --> 00:15:09,120 Dr Shane Oliver: more recently have all been pretty brief and they don't 290 00:15:09,120 --> 00:15:12,000 Dr Shane Oliver: have anywhere near the devastating economic impact. And I think 291 00:15:12,000 --> 00:15:15,240 Dr Shane Oliver: people mostly know that they're heading off a worse situation 292 00:15:15,240 --> 00:15:17,240 Dr Shane Oliver: and therefore they go along with them. And then you 293 00:15:17,250 --> 00:15:19,170 Dr Shane Oliver: have this pent up spending and it pops up on the 294 00:15:19,170 --> 00:15:21,420 Dr Shane Oliver: other side. I live in Avalon. I had my own 295 00:15:21,420 --> 00:15:25,630 Dr Shane Oliver: cluster over Christmas. I don't like having another lockdown now. But 296 00:15:25,650 --> 00:15:27,600 Dr Shane Oliver: by the same token, I reckon this is better than 297 00:15:27,870 --> 00:15:30,450 Dr Shane Oliver: enduring a four month lockdown like Victoria did in the 298 00:15:30,450 --> 00:15:32,460 Dr Shane Oliver: middle of, the middle of last year. 299 00:15:32,730 --> 00:15:35,970 Adam Lang: So amongst that, the lockdowns, one of the things that 300 00:15:35,970 --> 00:15:38,970 Adam Lang: has only just started to change a bit is house prices. 301 00:15:39,150 --> 00:15:42,740 Adam Lang: They're always a factor to note and they have been very strong this year. 302 00:15:42,990 --> 00:15:45,960 Adam Lang: What did you make of the RBA commentary on house prices? 303 00:15:46,350 --> 00:15:49,320 Dr Shane Oliver: Well, the RBA still seems rather relaxed about it, which 304 00:15:49,320 --> 00:15:53,730 Dr Shane Oliver: I think is surprising. Their paragraph on house prices wasn't 305 00:15:53,730 --> 00:15:56,580 Dr Shane Oliver: much different to what they said in the previous month, 306 00:15:56,760 --> 00:15:58,680 Dr Shane Oliver: which wasn't much different to the previous month. They're still 307 00:15:58,680 --> 00:16:02,190 Dr Shane Oliver: monitoring things and warning that lending standards need to be 308 00:16:02,190 --> 00:16:05,850 Dr Shane Oliver: maintained. I'm a little bit more concerned. I reckon when house 309 00:16:05,850 --> 00:16:10,920 Dr Shane Oliver: prices surge, inevitably that leads to a deterioration in lending standards. 310 00:16:10,920 --> 00:16:13,790 Dr Shane Oliver: I do worry that people are getting in with ever 311 00:16:13,800 --> 00:16:16,860 Dr Shane Oliver: higher debt levels. We hear all these calculations that if you 312 00:16:16,860 --> 00:16:19,050 Dr Shane Oliver: cut interest rates to these ultra low levels, it could 313 00:16:19,050 --> 00:16:21,780 Dr Shane Oliver: result in 30 per cent lift in house prices. That's just 314 00:16:21,780 --> 00:16:24,780 Dr Shane Oliver: simple maths. If you cut interest rates, people can borrow more. 315 00:16:24,780 --> 00:16:28,380 Dr Shane Oliver: They pay more for house prices. Initially, they might get in, 316 00:16:28,380 --> 00:16:30,660 Dr Shane Oliver: if they're first one in there they might get a bargain. But after a while, 317 00:16:30,660 --> 00:16:33,300 Dr Shane Oliver: everyone's doing it and the house price goes up and the 318 00:16:33,320 --> 00:16:36,810 Dr Shane Oliver: only winners are the baby boomers and the developers. So I'm 319 00:16:37,170 --> 00:16:40,220 Dr Shane Oliver: happy because I'm a baby boomer. But I do feel 320 00:16:40,240 --> 00:16:44,010 Dr Shane Oliver: that from a longer term economic sense that it's not necessarily 321 00:16:44,010 --> 00:16:48,030 Dr Shane Oliver: the best thing to do. And also from a distributional sense, 322 00:16:49,020 --> 00:16:51,780 Dr Shane Oliver: it's a bit unfair the way so many Australians are getting priced out 323 00:16:51,780 --> 00:16:54,150 Dr Shane Oliver: of the market. It's grossly unfair, to be honest with you. 324 00:16:54,720 --> 00:16:57,330 Dr Shane Oliver: I think younger people should have the same opportunities I had. 325 00:16:57,330 --> 00:17:00,120 Dr Shane Oliver: But the problem for the Reserve Bank is that they 326 00:17:00,120 --> 00:17:03,300 Dr Shane Oliver: don't target house prices, they target financial stability and they 327 00:17:03,300 --> 00:17:06,180 Dr Shane Oliver: target the broader economy so they can't raise interest rates 328 00:17:06,750 --> 00:17:09,770 Dr Shane Oliver: in this environment. Well, not yet anyway. At some point they may 329 00:17:09,820 --> 00:17:12,180 Dr Shane Oliver: be able to, but not yet. So they have to 330 00:17:12,359 --> 00:17:14,760 Dr Shane Oliver: turn to what you call macro prudential controls, which is 331 00:17:14,760 --> 00:17:17,990 Dr Shane Oliver: tightening lending standards. And I'm therefore a little bit surprised 332 00:17:17,990 --> 00:17:21,320 Dr Shane Oliver: that they're not doing that already because history tells us 333 00:17:21,320 --> 00:17:23,869 Dr Shane Oliver: that when house prices take off like they have, we've just had the 334 00:17:23,869 --> 00:17:27,929 Dr Shane Oliver: strongest growth rate over the last 12 months since 2004, 335 00:17:28,430 --> 00:17:32,780 Dr Shane Oliver: Sydney home prices, the Sydney house prices over six months 336 00:17:32,780 --> 00:17:35,780 Dr Shane Oliver: of this year have had their strongest gain since way 337 00:17:35,780 --> 00:17:38,540 Dr Shane Oliver: back in the 1980s. This is, this is real boom 338 00:17:38,540 --> 00:17:39,260 Dr Shane Oliver: time stuff. 339 00:17:39,410 --> 00:17:40,640 Adam Lang: And it's across the country. 340 00:17:40,760 --> 00:17:43,100 Dr Shane Oliver: It's pretty much across the country. The only areas which 341 00:17:43,100 --> 00:17:45,800 Dr Shane Oliver: are lagging a little bit are inner city units in 342 00:17:45,800 --> 00:17:49,310 Dr Shane Oliver: Sydney and Melbourne, but even they're starting to lift again. That, 343 00:17:49,310 --> 00:17:52,820 Dr Shane Oliver: I think will lead to longer term problems aside from 344 00:17:52,820 --> 00:17:55,520 Dr Shane Oliver: this poor affordability but it could lead to debt problems, 345 00:17:55,520 --> 00:17:58,540 Dr Shane Oliver: particularly when we're encouraging people to get in with loan 346 00:17:58,550 --> 00:18:01,970 Dr Shane Oliver: to valuation ratios of 95 per cent or in some 347 00:18:01,970 --> 00:18:05,270 Dr Shane Oliver: cases 98 per cent, that some of those people might 348 00:18:05,270 --> 00:18:07,970 Dr Shane Oliver: eventually run into trouble. So I don't think that's a 349 00:18:07,970 --> 00:18:10,540 Dr Shane Oliver: healthy thing and the only way to offset it is 350 00:18:10,700 --> 00:18:14,090 Dr Shane Oliver: macro prudential controls. Limit the supply of debt because you 351 00:18:14,090 --> 00:18:16,730 Dr Shane Oliver: can't unfortunately control the cost of that debt, given the 352 00:18:16,730 --> 00:18:18,480 Dr Shane Oliver: need for the rest of the economy to see still 353 00:18:18,530 --> 00:18:19,320 Dr Shane Oliver: low interest rates. 354 00:18:19,460 --> 00:18:21,200 Adam Lang: So, Shane, we'll have to keep in touch with you 355 00:18:21,200 --> 00:18:24,469 Adam Lang: on that particular one. Lastly, Shane, I know that you're 356 00:18:24,470 --> 00:18:28,700 Adam Lang: a big pop music fan. Ed Sheeran has confirmed recently 357 00:18:28,700 --> 00:18:32,389 Adam Lang: that Kylie Minogue and Jimmy Barnes will record backing vocals 358 00:18:32,630 --> 00:18:35,209 Adam Lang: on a new song he's written called Visiting Hours. He 359 00:18:35,210 --> 00:18:38,630 Adam Lang: wrote the song for Michael Gudinski, who sadly passed away 360 00:18:38,630 --> 00:18:43,590 Adam Lang: relatively recently. Jimmy and Kylie and Ed Sheeran together at last. 361 00:18:43,609 --> 00:18:44,630 Adam Lang: Are you looking forward to that one? 362 00:18:44,930 --> 00:18:49,430 Dr Shane Oliver: I am. I think that's a good move. I mean, Jimmy, like, 363 00:18:49,910 --> 00:18:52,760 Dr Shane Oliver: I'll be honest here, I'm not a pub rock fan, but I 364 00:18:52,760 --> 00:18:55,489 Dr Shane Oliver: like it. I'm not as heavily into it, but I 365 00:18:55,490 --> 00:18:57,800 Dr Shane Oliver: like it and I appreciate it. And whenever you listen 366 00:18:57,800 --> 00:19:03,230 Dr Shane Oliver: to that Australian sound that was associated with Mushroom Records 367 00:19:03,740 --> 00:19:06,020 Dr Shane Oliver: or Alberts, if you know Alberts? 368 00:19:06,369 --> 00:19:06,739 Adam Lang: Yeah. J Albert and Son. 369 00:19:09,680 --> 00:19:11,929 Dr Shane Oliver: Albert and Son and Ted Albert who was the guy who took them, one of 370 00:19:11,930 --> 00:19:15,080 Dr Shane Oliver: the sons who took them down that pop path in the 371 00:19:15,080 --> 00:19:18,619 Dr Shane Oliver: 1960s with The Easybeats. These are amazing stories when you 372 00:19:18,619 --> 00:19:21,740 Dr Shane Oliver: look into what Gudinski did for Australia, what you look at, 373 00:19:21,859 --> 00:19:25,130 Dr Shane Oliver: what Alberts did for Australian pop music. It's a fantastic 374 00:19:25,130 --> 00:19:30,200 Dr Shane Oliver: sound that I really appreciate. Ted Mulry and all of these others, when I think 375 00:19:30,200 --> 00:19:35,570 Dr Shane Oliver: back to the 1970s. Kylie, I have to say, I'm 376 00:19:35,570 --> 00:19:37,580 Dr Shane Oliver: a massive Kylie fan. I think I've been to every 377 00:19:37,580 --> 00:19:40,280 Dr Shane Oliver: concert she's done since 2000. 378 00:19:41,540 --> 00:19:43,010 Adam Lang: They're pretty big productions. 379 00:19:43,010 --> 00:19:46,730 Dr Shane Oliver: Since Light Years album came out and they're huge productions. 380 00:19:46,750 --> 00:19:49,160 Dr Shane Oliver: I was incredibly depressed when I heard that she was 381 00:19:49,160 --> 00:19:52,370 Dr Shane Oliver: ill over a decade ago now and the concert had 382 00:19:52,369 --> 00:19:54,530 Dr Shane Oliver: to be cancelled at the time. But to see her 383 00:19:54,530 --> 00:19:58,550 Dr Shane Oliver: just keep pushing on and coming up with new albums 384 00:19:58,550 --> 00:20:01,369 Dr Shane Oliver: year after year, going from country to disco. When you 385 00:20:01,369 --> 00:20:04,940 Dr Shane Oliver: look at the albums, her name is frequently against all 386 00:20:04,940 --> 00:20:08,690 Dr Shane Oliver: the songs. And that's impressive stuff and they're great songs. 387 00:20:09,109 --> 00:20:11,300 Dr Shane Oliver: And I think she's a great export for Australia, as 388 00:20:11,300 --> 00:20:13,970 Dr Shane Oliver: Jimmy is. So to see them come together with Ed Sheeran I 389 00:20:13,970 --> 00:20:15,800 Dr Shane Oliver: think it is a great thing. And I'll be out 390 00:20:15,800 --> 00:20:19,940 Dr Shane Oliver: there buying that or catching it via Spotify. Music is one 391 00:20:19,940 --> 00:20:21,560 Dr Shane Oliver: of the things that I think has kept me going 392 00:20:21,560 --> 00:20:23,420 Dr Shane Oliver: through this pandemic period, because ... 393 00:20:23,690 --> 00:20:26,270 Adam Lang: Oh, you're not alone there.  Sadly, they can't perform enough. 394 00:20:26,480 --> 00:20:29,030 Dr Shane Oliver: I know. You can't watch it. I mean, you try and support them. 395 00:20:29,270 --> 00:20:29,960 Adam Lang: Absolutely. 396 00:20:29,960 --> 00:20:31,970 Dr Shane Oliver: But it is a bit hard without the concert and 397 00:20:31,970 --> 00:20:37,219 Dr Shane Oliver: the performances occurring. But were it not for music and Kylie's disco album last year, 398 00:20:38,030 --> 00:20:41,030 Dr Shane Oliver: I would have had a tougher year. So thank God 399 00:20:41,030 --> 00:20:42,050 Dr Shane Oliver: that music kept coming. 400 00:20:42,230 --> 00:20:44,869 Adam Lang: Thank God for disco! Shane, thank you so much for 401 00:20:44,869 --> 00:20:46,000 Adam Lang: talking to Fear and Greed. 402 00:20:46,250 --> 00:20:47,600 Dr Shane Oliver: Thank you, Adam. Thanks for having me. 403 00:20:47,810 --> 00:20:51,200 Adam Lang: That was Dr Shane Oliver, Chief Economist at AMP Capital. 404 00:20:51,560 --> 00:20:54,410 Adam Lang: This is the Fear and Greed Daily Interview. Join Sean 405 00:20:54,410 --> 00:20:57,140 Adam Lang: Aylmer every morning for the full Fear and Greed podcast 406 00:20:57,140 --> 00:20:59,750 Adam Lang: with all the business news you need to know. I'm 407 00:20:59,750 --> 00:21:01,330 Adam Lang: Adam Lang. Enjoy your day.