1 00:00:03,990 --> 00:00:06,510 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,510 --> 00:00:09,990 Sean Aylmer: Aylmer. Yesterday afternoon, the Reserve Bank Board left the official 3 00:00:09,990 --> 00:00:14,429 Sean Aylmer: cash rate on hold at 4. 1%. It's a pause, 4 00:00:14,429 --> 00:00:16,829 Sean Aylmer: we know that, but it may not be the end 5 00:00:16,829 --> 00:00:19,200 Sean Aylmer: of rate hikes. We're not so sure about that. Stephen 6 00:00:19,200 --> 00:00:22,770 Sean Aylmer: Halmarick is the Commonwealth Bank Chief Economist. Stephen, welcome back 7 00:00:22,770 --> 00:00:23,550 Sean Aylmer: to Fear and Greed. 8 00:00:24,239 --> 00:00:26,369 Stephen Halmarick: Thank you, Sean. Very good to join you again. 9 00:00:26,790 --> 00:00:29,010 Sean Aylmer: You expected them to pause yesterday, Stephen? 10 00:00:29,429 --> 00:00:32,519 Stephen Halmarick: Yes, we did. So it was pleasing to see the 11 00:00:32,519 --> 00:00:36,180 Stephen Halmarick: pause, not desperate, the fact that we called that one 12 00:00:36,180 --> 00:00:41,040 Stephen Halmarick: correctly, but also I think for lots of Australians facing 13 00:00:41,310 --> 00:00:44,339 Stephen Halmarick: the pressure of higher interest rates, whether they've got mortgages 14 00:00:44,340 --> 00:00:48,330 Stephen Halmarick: or renting. I think the pause yesterday would be welcome news. 15 00:00:48,780 --> 00:00:50,460 Sean Aylmer: Okay. So why did they pause? 16 00:00:51,210 --> 00:00:54,930 Stephen Halmarick: Well, our reading of the statement from the Reserve Bank 17 00:00:55,200 --> 00:00:59,279 Stephen Halmarick: really has highlighted three reasons. The first was, well, they've 18 00:00:59,280 --> 00:01:01,860 Stephen Halmarick: done a lot already, so they note that interest rates 19 00:01:01,860 --> 00:01:05,518 Stephen Halmarick: are up 400 basis points since May last year. That's 20 00:01:05,520 --> 00:01:08,129 Stephen Halmarick: a lot of tightening. They wanted a bit of time 21 00:01:08,130 --> 00:01:12,840 Stephen Halmarick: to assess the ongoing impact of those higher rates. Secondly, 22 00:01:12,870 --> 00:01:18,030 Stephen Halmarick: they pointed towards the May consumer price index indicator, which 23 00:01:18,240 --> 00:01:22,110 Stephen Halmarick: did show a decline in the annual rate of inflation, 24 00:01:22,139 --> 00:01:26,339 Stephen Halmarick: by that measure at least, down to 5. 6% from high sixes 25 00:01:26,639 --> 00:01:30,299 Stephen Halmarick: previously. So they said that it showed a further decline, 26 00:01:30,299 --> 00:01:33,450 Stephen Halmarick: which was good to see. And then thirdly, they just 27 00:01:33,569 --> 00:01:38,010 Stephen Halmarick: reinforced the idea that by pausing yesterday, gives them a 28 00:01:38,010 --> 00:01:42,059 Stephen Halmarick: little bit more time to assess the impact of previous 29 00:01:42,059 --> 00:01:45,119 Stephen Halmarick: rate hikes, particularly the move in May and June. More 30 00:01:45,120 --> 00:01:47,759 Stephen Halmarick: information coming towards the end of this month, particularly on 31 00:01:47,760 --> 00:01:50,490 Stephen Halmarick: inflation. So just give them a little bit of extra 32 00:01:50,490 --> 00:01:53,490 Stephen Halmarick: time to decide the next move forward. 33 00:01:54,150 --> 00:01:57,510 Sean Aylmer: So the wait and see part of your answer there, 34 00:01:57,510 --> 00:01:59,700 Sean Aylmer: I mean, 20 years ago, I suppose when I was 35 00:01:59,700 --> 00:02:04,379 Sean Aylmer: following economics more closely working for the financial review, people 36 00:02:04,379 --> 00:02:06,119 Sean Aylmer: like Ian McFarland were always talking about, we're going to 37 00:02:06,119 --> 00:02:08,850 Sean Aylmer: wait and see what the numbers tell us. Phil Lowe 38 00:02:08,880 --> 00:02:13,020 Sean Aylmer: as a governor has been, well, I'm not quite sure 39 00:02:13,020 --> 00:02:15,749 Sean Aylmer: whether he is in the Ian McFarland category of waiting 40 00:02:15,750 --> 00:02:20,460 Sean Aylmer: and seeing or not, but it does seem that it's 41 00:02:20,460 --> 00:02:23,489 Sean Aylmer: possible that we might not get further rate rises if 42 00:02:23,490 --> 00:02:26,460 Sean Aylmer: they wait and seeing the numbers come in lower than they 43 00:02:26,460 --> 00:02:29,429 Sean Aylmer: expected, particularly inflation, or is that not likely? 44 00:02:30,120 --> 00:02:33,510 Stephen Halmarick: Well, as you say, this has been a very unusual 45 00:02:33,510 --> 00:02:37,860 Stephen Halmarick: tightening cycle in the fact that there's been a lot 46 00:02:37,860 --> 00:02:40,619 Stephen Halmarick: of tightenings in a row that they've missed a couple 47 00:02:40,619 --> 00:02:42,660 Stephen Halmarick: of months. Because they missed a month earlier this year, 48 00:02:43,020 --> 00:02:47,220 Stephen Halmarick: April, and now they've missed July. But the unusual thing 49 00:02:47,220 --> 00:02:49,680 Stephen Halmarick: about this tightening cycle is just really how rapid it's 50 00:02:49,680 --> 00:02:53,160 Stephen Halmarick: been and month after month after month, as you say, 51 00:02:53,160 --> 00:02:55,590 Stephen Halmarick: going back to governors like Ian McFarland and, well, I'm 52 00:02:55,590 --> 00:02:59,669 Stephen Halmarick: actually old enough to remember Bernie Fraser and even earlier 53 00:02:59,669 --> 00:03:02,100 Stephen Halmarick: than that, but I think it's fair for them to 54 00:03:02,100 --> 00:03:04,980 Stephen Halmarick: point to, well, we've done a lot of tightening. There's 55 00:03:04,980 --> 00:03:07,320 Stephen Halmarick: a lot of information coming up in the next few 56 00:03:07,320 --> 00:03:11,160 Stephen Halmarick: weeks, less wait to reassess that. So the critical data 57 00:03:11,160 --> 00:03:14,609 Stephen Halmarick: point is towards the end of this month, we get 58 00:03:14,610 --> 00:03:18,329 Stephen Halmarick: the June quarter CPI. Now, it's great that we're getting 59 00:03:18,660 --> 00:03:22,350 Stephen Halmarick: the CPI indicators now, but they're not the full picture. 60 00:03:22,440 --> 00:03:24,720 Stephen Halmarick: So getting the June quarter CPI towards the end of 61 00:03:24,720 --> 00:03:26,760 Stephen Halmarick: this month's going to be a really important piece of 62 00:03:26,760 --> 00:03:30,240 Stephen Halmarick: information. Of course, we also get another round of monthly 63 00:03:30,240 --> 00:03:34,799 Stephen Halmarick: retail sales employment numbers, and then at early August, the 64 00:03:34,799 --> 00:03:39,180 Stephen Halmarick: Reserve Bank will do its normal quarterly reassessment of all 65 00:03:39,180 --> 00:03:42,480 Stephen Halmarick: their forecasts. So they'll get the CPI numbers, they can 66 00:03:42,480 --> 00:03:46,079 Stephen Halmarick: reassess all their forecasts, and that's why you quite often 67 00:03:46,080 --> 00:03:50,190 Stephen Halmarick: find, particularly in previous cycles, interest rate changes either up 68 00:03:50,190 --> 00:03:53,430 Stephen Halmarick: or down in those quarters where they have their statement 69 00:03:53,430 --> 00:03:57,900 Stephen Halmarick: of monetary policy, including August. So we'll get one more 70 00:03:57,990 --> 00:03:59,130 Stephen Halmarick: at this August meeting. 71 00:03:59,940 --> 00:04:03,450 Sean Aylmer: So June quarter CPI is kind of the most critical 72 00:04:03,450 --> 00:04:05,460 Sean Aylmer: piece of data, Stephen? 73 00:04:06,420 --> 00:04:09,179 Stephen Halmarick: Yes, I think yes it is. The retail sales and 74 00:04:09,179 --> 00:04:12,539 Stephen Halmarick: the employment numbers and a few other data points will 75 00:04:12,540 --> 00:04:16,320 Stephen Halmarick: be important as well. But the quarterly CPI, I think 76 00:04:16,320 --> 00:04:20,219 Stephen Halmarick: that's the main number that the RBA and ourselves and 77 00:04:20,220 --> 00:04:22,320 Stephen Halmarick: the market will be focusing on between now and the 78 00:04:22,320 --> 00:04:27,089 Stephen Halmarick: August board meeting. So if that shows inflation is continuing 79 00:04:27,089 --> 00:04:30,929 Stephen Halmarick: to trend down consistent with the Reserve Banks forecast, they'll 80 00:04:30,990 --> 00:04:32,760 Stephen Halmarick: be very pleased to see that. And I think that 81 00:04:32,760 --> 00:04:35,400 Stephen Halmarick: means we are getting towards the end of the rate 82 00:04:35,400 --> 00:04:39,750 Stephen Halmarick: hike cycle that our base case forecast is one more 83 00:04:39,750 --> 00:04:40,320 Stephen Halmarick: in August. 84 00:04:40,860 --> 00:04:42,810 Sean Aylmer: Stay with me, Stephen, we'll be back in a minute. 85 00:04:48,960 --> 00:04:52,950 Sean Aylmer: I'm speaking to Commonwealth Bank Chief Economist, Stephen Halmarick. The 86 00:04:52,950 --> 00:04:57,150 Sean Aylmer: Reserve Bank talks about the painful squeeze that some households 87 00:04:57,150 --> 00:05:01,439 Sean Aylmer: are experiencing at the moment, and they clearly are keeping 88 00:05:01,440 --> 00:05:06,539 Sean Aylmer: an eye on consumption and household spending. What do you 89 00:05:06,539 --> 00:05:11,910 Sean Aylmer: think the prognosis for that is? I'm sure Commonwealth Bank 90 00:05:11,910 --> 00:05:15,030 Sean Aylmer: better than any other organization in the country understands mortgages. 91 00:05:15,389 --> 00:05:17,789 Sean Aylmer: You must be seeing some of that pain coming through. 92 00:05:18,240 --> 00:05:20,789 Stephen Halmarick: Well, yeah. So we do have the benefit of being 93 00:05:20,790 --> 00:05:24,810 Stephen Halmarick: able to get a really great feel and snapshot on 94 00:05:24,810 --> 00:05:29,370 Stephen Halmarick: the economy using the internally generated data. Particularly we can 95 00:05:29,370 --> 00:05:32,428 Stephen Halmarick: look at things like spending on Commonwealth Bank credit and 96 00:05:32,428 --> 00:05:37,349 Stephen Halmarick: debit cards. Now that's slowing. There's still some slowing to 97 00:05:37,349 --> 00:05:41,669 Stephen Halmarick: go. We think that the consumer spending will be quite 98 00:05:41,670 --> 00:05:45,390 Stephen Halmarick: soft over the next six to 12 months. Essentially, the 99 00:05:45,390 --> 00:05:46,890 Stephen Halmarick: way they think about it, or the way I think about 100 00:05:47,250 --> 00:05:52,620 Stephen Halmarick: it is people's real income is going backwards, as in 101 00:05:52,860 --> 00:05:56,309 Stephen Halmarick: wage rises are less than the rate of inflation. And 102 00:05:56,309 --> 00:06:00,089 Stephen Halmarick: certainly after you take account of higher interest rates, people 103 00:06:00,089 --> 00:06:03,660 Stephen Halmarick: being pushed up to higher tax brackets, real household disposable 104 00:06:03,660 --> 00:06:06,990 Stephen Halmarick: income is declining. And if people are having to spend 105 00:06:07,770 --> 00:06:11,040 Stephen Halmarick: more of their income on either servicing their mortgage or 106 00:06:11,040 --> 00:06:14,219 Stephen Halmarick: paying their rent, it just means less income to spend 107 00:06:14,219 --> 00:06:18,119 Stephen Halmarick: on everything else. And that's why we think consumer spending 108 00:06:18,119 --> 00:06:21,630 Stephen Halmarick: will continue to soften in the year ahead. And that's 109 00:06:21,630 --> 00:06:26,130 Stephen Halmarick: what they're wanting to see to help bring demand and 110 00:06:26,130 --> 00:06:28,800 Stephen Halmarick: supply in the economy back more into balance. 111 00:06:29,849 --> 00:06:33,029 Sean Aylmer: What about inflationary expectations? Can you explain to listeners why 112 00:06:33,059 --> 00:06:37,979 Sean Aylmer: they matter so much, and why Phil Lowe is definitely 113 00:06:37,980 --> 00:06:39,210 Sean Aylmer: worried about expectations? 114 00:06:40,080 --> 00:06:43,589 Stephen Halmarick: Yeah, for sure. So they highlighted that again today. So 115 00:06:43,589 --> 00:06:48,630 Stephen Halmarick: inflation expectations is really about, if you think inflation's going 116 00:06:48,630 --> 00:06:53,639 Stephen Halmarick: to stay, let's say around that 7% level, you will 117 00:06:53,639 --> 00:06:58,770 Stephen Halmarick: adjust your behavior for that expectation. So you will probably 118 00:06:58,770 --> 00:07:02,160 Stephen Halmarick: demand a higher wage. So you might want to spend 119 00:07:02,160 --> 00:07:05,099 Stephen Halmarick: now, you might want to buy things now, on the 120 00:07:05,099 --> 00:07:07,080 Stephen Halmarick: view that, well, in the future, you think they're going 121 00:07:07,080 --> 00:07:10,259 Stephen Halmarick: to be more expensive. So those (inaudible) expectations can 122 00:07:10,260 --> 00:07:13,320 Stephen Halmarick: get embedded in what people call a wage price spiral. 123 00:07:13,620 --> 00:07:17,010 Stephen Halmarick: So you're spending more money now, you're demanding higher wage 124 00:07:17,010 --> 00:07:18,900 Stephen Halmarick: now because you think inflation's going to be higher in the 125 00:07:18,900 --> 00:07:22,889 Stephen Halmarick: future. And that higher spending, that higher demand for wages, 126 00:07:22,889 --> 00:07:26,250 Stephen Halmarick: then helps cause that higher inflation that you're worried about. 127 00:07:26,250 --> 00:07:30,840 Stephen Halmarick: So it definitely wants to get inflation expectations lower and 128 00:07:30,840 --> 00:07:35,820 Stephen Halmarick: anchored around the target range. So generally people say, " Well, 129 00:07:35,880 --> 00:07:38,460 Stephen Halmarick: I know inflation's a bit high now, but over the 130 00:07:38,460 --> 00:07:40,620 Stephen Halmarick: next year or two, it's probably going to come back 131 00:07:40,620 --> 00:07:43,950 Stephen Halmarick: down again. Therefore, I don't need to adjust my behavior 132 00:07:43,950 --> 00:07:47,129 Stephen Halmarick: too much for those higher inflation rates." 133 00:07:47,430 --> 00:07:50,760 Sean Aylmer: And you mentioned wages. Again, the Reserve Bank yesterday talked 134 00:07:50,760 --> 00:07:54,360 Sean Aylmer: about wages, and we've had the Fair Work Commission decision 135 00:07:54,420 --> 00:07:57,480 Sean Aylmer: about six weeks ago or so. How worried should we 136 00:07:57,480 --> 00:08:01,080 Sean Aylmer: be about excessive wage increases? 137 00:08:01,830 --> 00:08:03,869 Stephen Halmarick: Well, I think the secret there, Sean, is what do 138 00:08:03,870 --> 00:08:08,550 Stephen Halmarick: you mean by excessive, right? So we've got a tight 139 00:08:08,550 --> 00:08:13,680 Stephen Halmarick: labor market. The unemployment rate is 3.6%, so almost a 50- year low. So it 140 00:08:13,680 --> 00:08:17,309 Stephen Halmarick: should come as no surprise that wages growth has been 141 00:08:17,309 --> 00:08:19,830 Stephen Halmarick: accelerating. And of course, we look at the things like 142 00:08:19,830 --> 00:08:24,000 Stephen Halmarick: the national wage case, extra income going to the lowest 143 00:08:24,000 --> 00:08:26,970 Stephen Halmarick: paid people in Australia in a very tight labor market. 144 00:08:27,480 --> 00:08:30,030 Stephen Halmarick: That makes a lot of sense. And we can see 145 00:08:30,030 --> 00:08:33,838 Stephen Halmarick: also, particularly in the public sector, some demands for a 146 00:08:33,840 --> 00:08:37,829 Stephen Halmarick: bit of catch- up after wage caps during the COVID 147 00:08:37,830 --> 00:08:41,519 Stephen Halmarick: period. But the Reserve Bank governor makes the point, which 148 00:08:41,520 --> 00:08:45,088 Stephen Halmarick: we would agree with that, you can't have wages growth 149 00:08:45,090 --> 00:08:50,189 Stephen Halmarick: running well above the rate of productivity growth for an 150 00:08:50,190 --> 00:08:55,230 Stephen Halmarick: extended period. The outcome would be higher inflation. So you 151 00:08:55,230 --> 00:08:58,500 Stephen Halmarick: want wages growth to be within the target range of 152 00:08:58,500 --> 00:09:03,449 Stephen Halmarick: inflation, plus whatever productivity growth is. So if inflation expected 153 00:09:03,450 --> 00:09:06,600 Stephen Halmarick: to average 2% to 3%, whatever productivity growth is on 154 00:09:06,600 --> 00:09:08,940 Stephen Halmarick: top of that, that's what wages growth can be. And 155 00:09:08,940 --> 00:09:12,420 Stephen Halmarick: the governor has talked about or pointed to levels around 156 00:09:12,420 --> 00:09:15,750 Stephen Halmarick: three and a half to 4%. So that would assume 157 00:09:16,379 --> 00:09:19,500 Stephen Halmarick: around about 1% productivity growth, inflation, two and half to 158 00:09:19,500 --> 00:09:22,530 Stephen Halmarick: three, productivity growth one, gives you three and half to 159 00:09:22,530 --> 00:09:25,740 Stephen Halmarick: four on wages growth. So over the medium term wages 160 00:09:25,740 --> 00:09:29,579 Stephen Halmarick: growth above that is really not consistent with the inflation target. 161 00:09:30,389 --> 00:09:33,809 Sean Aylmer: Okay. Stephen Halmarick, Chief Economist at the Commonwealth Bank, I 162 00:09:33,809 --> 00:09:36,570 Sean Aylmer: can't let you go without asking you about house prices, 163 00:09:36,570 --> 00:09:38,850 Sean Aylmer: and of course the Reserve Bank yesterday did mention house 164 00:09:38,850 --> 00:09:41,010 Sean Aylmer: prices. Where do you think they're going? 165 00:09:42,270 --> 00:09:45,660 Stephen Halmarick: Well, yeah, so house prices up another 1.1% across the 166 00:09:45,660 --> 00:09:49,230 Stephen Halmarick: country in the month of June, so it's a fourth 167 00:09:49,230 --> 00:09:51,570 Stephen Halmarick: month in a row. They've been rising, I should say, 168 00:09:51,570 --> 00:09:54,870 Stephen Halmarick: dwelling prices, so housing plus apartments. So that's a pretty 169 00:09:54,870 --> 00:09:58,050 Stephen Halmarick: unusual cycle where the dwelling prices have started to rise 170 00:09:58,050 --> 00:10:02,460 Stephen Halmarick: well before the RBA finishes (inaudible) rates. But I 171 00:10:02,460 --> 00:10:06,150 Stephen Halmarick: think for all your listeners who have done the economics, 172 00:10:06,270 --> 00:10:09,120 Stephen Halmarick: it's really just the laws of supply and demand. So 173 00:10:09,570 --> 00:10:13,319 Stephen Halmarick: demand for housing is rising, particularly because of the big 174 00:10:13,350 --> 00:10:18,330 Stephen Halmarick: increase in net migration this year, 400,000 net migrants expected 175 00:10:18,720 --> 00:10:20,970 Stephen Halmarick: as opposed to the pre COVID levels that were about 230, 176 00:10:20,970 --> 00:10:26,009 Stephen Halmarick: 000 every year. And despite a big increase in building 177 00:10:26,009 --> 00:10:29,549 Stephen Halmarick: approvals last month, the number of new dwellings being built 178 00:10:29,549 --> 00:10:32,700 Stephen Halmarick: who are approved and to be built is actually softening. 179 00:10:33,240 --> 00:10:36,360 Stephen Halmarick: So we're just not building enough new dwellings for the increase 180 00:10:36,360 --> 00:10:41,040 Stephen Halmarick: in population. So prices are rising. So we expect dwelling 181 00:10:41,040 --> 00:10:46,170 Stephen Halmarick: prices to be up about 3% in calendar '23, and 182 00:10:46,170 --> 00:10:50,460 Stephen Halmarick: up another 5% next year, after (inaudible) down 10% 183 00:10:50,460 --> 00:10:52,410 Stephen Halmarick: peak to trough in this cycle earlier on. 184 00:10:53,130 --> 00:10:54,990 Sean Aylmer: Stephen, thank you for talking to Fear and Greed. 185 00:10:55,679 --> 00:10:56,640 Stephen Halmarick: My pleasure. Thank you. 186 00:10:57,210 --> 00:11:00,389 Sean Aylmer: That's Stephen Halmarick, Commonwealth Bank Chief Economist. This is the 187 00:11:00,389 --> 00:11:02,940 Sean Aylmer: Fear and Greed Daily Interview. Join us every morning for 188 00:11:02,940 --> 00:11:05,549 Sean Aylmer: the full episode of Fear and Greed, Australia's most popular 189 00:11:05,549 --> 00:11:08,640 Sean Aylmer: business podcast. I'm Sean Aylmer. Enjoy your day.