1 00:00:04,050 --> 00:00:06,480 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,480 --> 00:00:10,920 Sean Aylmer: Aylmer. Well, after 10 consecutive interest rate increases, yesterday the 3 00:00:10,920 --> 00:00:14,010 Sean Aylmer: Reserve Bank decided it was time for a break. I 4 00:00:14,010 --> 00:00:16,020 Sean Aylmer: wanted to look at the factors that went into the 5 00:00:16,020 --> 00:00:18,510 Sean Aylmer: decision as well as when the next move might be 6 00:00:18,750 --> 00:00:21,630 Sean Aylmer: and which direction it might be. Diana Mousina is the 7 00:00:21,630 --> 00:00:25,620 Sean Aylmer: Deputy Chief Economist at AMP. Diana, welcome back to Fear 8 00:00:25,620 --> 00:00:26,010 Sean Aylmer: and Greed. 9 00:00:26,250 --> 00:00:27,630 Diana Mousina: Thank you so much for having me on. 10 00:00:28,200 --> 00:00:31,740 Sean Aylmer: So tell me, yesterday, what's the news from it? No 11 00:00:31,740 --> 00:00:33,420 Sean Aylmer: rate rise, but what's behind that? 12 00:00:33,960 --> 00:00:38,010 Diana Mousina: Well, ultimately the RBA said it wanted to wait and 13 00:00:38,010 --> 00:00:41,729 Diana Mousina: assess the impacts of prior rate hikes. As you know, 14 00:00:41,729 --> 00:00:46,080 Diana Mousina: we've had 350 basis points of interest rate increases since 15 00:00:46,080 --> 00:00:49,470 Diana Mousina: May last year. That's the fastest tightening cycle that we've 16 00:00:49,470 --> 00:00:52,770 Diana Mousina: had since the late eighties. And that was at a 17 00:00:52,770 --> 00:00:55,140 Diana Mousina: time when the RBA didn't even come out every month 18 00:00:55,140 --> 00:00:58,200 Diana Mousina: with a policy decision. It was more erratic and so 19 00:00:58,200 --> 00:01:01,470 Diana Mousina: it had less of an impact on mortgage rates. So 20 00:01:01,650 --> 00:01:03,780 Diana Mousina: in the recent memory of the RBA, this is the 21 00:01:03,780 --> 00:01:06,750 Diana Mousina: fastest tightening cycle that we've had and rates have gone 22 00:01:06,750 --> 00:01:08,910 Diana Mousina: to the highest level. So it makes sense for the 23 00:01:08,910 --> 00:01:13,110 Diana Mousina: RBA to pause and see the impacts because we know 24 00:01:13,110 --> 00:01:15,720 Diana Mousina: that there have been impacts of interest rate hikes. The 25 00:01:15,720 --> 00:01:18,660 Diana Mousina: economy is showing signs of slowing, inflation is on a 26 00:01:18,660 --> 00:01:21,600 Diana Mousina: down trend, and there's banking sector issues globally. 27 00:01:22,319 --> 00:01:25,710 Sean Aylmer: Okay, so you weren't surprised by the decision yesterday? 28 00:01:26,640 --> 00:01:30,929 Diana Mousina: It's been our view for a while that the RBA should be considering a pause and we 29 00:01:30,930 --> 00:01:35,429 Diana Mousina: expected a pause at today's meeting, but you never really 30 00:01:35,430 --> 00:01:38,760 Diana Mousina: know because inflation clearly is still way too high in Australia. 31 00:01:39,060 --> 00:01:42,090 Diana Mousina: So it's running at 6. 8% on an annual basis 32 00:01:42,090 --> 00:01:45,600 Diana Mousina: as of February. That's obviously well above the 2% to 3% 33 00:01:45,930 --> 00:01:49,440 Diana Mousina: target band. So there was always a risk that we 34 00:01:49,440 --> 00:01:52,740 Diana Mousina: would get another 0. 25% increase today, and I think that 35 00:01:52,740 --> 00:01:55,140 Diana Mousina: that's still a risk in coming months, but it's not 36 00:01:55,140 --> 00:01:55,950 Diana Mousina: our base case. 37 00:01:56,430 --> 00:01:58,770 Sean Aylmer: Okay. Before we get onto what's going to happen, something 38 00:01:58,770 --> 00:02:00,660 Sean Aylmer: that I noticed you talked about yesterday. You had a 39 00:02:00,660 --> 00:02:03,600 Sean Aylmer: great chart yesterday that shows how quickly the Reserve Bank 40 00:02:03,600 --> 00:02:06,450 Sean Aylmer: rate cycle or the hikes have been this cycle compared 41 00:02:06,450 --> 00:02:09,780 Sean Aylmer: to previous ones. Also, the impact of lags and how 42 00:02:09,780 --> 00:02:13,650 Sean Aylmer: the Reserve Bank made specific mention of that flow through 43 00:02:13,650 --> 00:02:14,639 Sean Aylmer: of monetary policy. 44 00:02:15,360 --> 00:02:19,560 Diana Mousina: So those lags are really around the fact that variable 45 00:02:19,560 --> 00:02:22,350 Diana Mousina: rates take about three months to adjust for people who 46 00:02:22,350 --> 00:02:25,169 Diana Mousina: have mortgage. And of course with fixed rates you don't 47 00:02:25,169 --> 00:02:27,359 Diana Mousina: adjust until you roll off. And we know that there's 48 00:02:27,360 --> 00:02:30,090 Diana Mousina: a very large number of households or loans that roll 49 00:02:30,090 --> 00:02:33,750 Diana Mousina: off this year. About 880, 000 loans will roll off from 50 00:02:33,840 --> 00:02:36,780 Diana Mousina: fixed to variable this year. So on the latest measure 51 00:02:36,780 --> 00:02:40,919 Diana Mousina: of outstanding mortgage rates as of February, the RBA had 52 00:02:40,919 --> 00:02:45,840 Diana Mousina: raised rates by 325 basis points and an average outstanding 53 00:02:45,840 --> 00:02:50,370 Diana Mousina: mortgage had only increased by 209 basis points or 2. 54 00:02:50,370 --> 00:02:56,100 Diana Mousina: 09%. So it's about 64% of the pass through. That's 55 00:02:56,100 --> 00:02:59,280 Diana Mousina: a pretty low pass through rate, which just shows you 56 00:02:59,280 --> 00:03:02,639 Diana Mousina: that in the coming months there's going to be more 57 00:03:02,639 --> 00:03:05,730 Diana Mousina: pain felt by households and we know that households will 58 00:03:05,730 --> 00:03:09,750 Diana Mousina: not adjust their spending until they feel those actual changes 59 00:03:09,750 --> 00:03:11,550 Diana Mousina: to their monthly repayments. 60 00:03:12,150 --> 00:03:14,190 Sean Aylmer: And the bank did actually talk about that and the cost 61 00:03:14,190 --> 00:03:15,959 Sean Aylmer: of living and those sorts of things yesterday. 62 00:03:16,590 --> 00:03:21,510 Diana Mousina: The post- meeting statement wasn't actually wildly different from recent 63 00:03:21,510 --> 00:03:25,500 Diana Mousina: months. It still spoke about the risks to the economy, 64 00:03:25,500 --> 00:03:30,000 Diana Mousina: both to the upside but also some more risks to 65 00:03:30,000 --> 00:03:33,180 Diana Mousina: the downside. And it mentioned what was happening in the 66 00:03:33,180 --> 00:03:37,380 Diana Mousina: banking sector globally, but it did soften it's tightening bias. 67 00:03:37,410 --> 00:03:41,460 Diana Mousina: Last month it said that the board expects that further 68 00:03:41,460 --> 00:03:44,820 Diana Mousina: increases in monetary policy will be needed, and this month it 69 00:03:44,820 --> 00:03:49,950 Diana Mousina: said that some further tightening may be needed. You can read of into that 70 00:03:49,950 --> 00:03:52,020 Diana Mousina: what you want. But I think it's a further sign 71 00:03:52,440 --> 00:03:56,339 Diana Mousina: that it's giving itself the room to potentially not increase 72 00:03:56,340 --> 00:03:58,650 Diana Mousina: the cash rate again in this cycle. 73 00:03:59,130 --> 00:04:01,020 Sean Aylmer: It is quite easy to laugh at the pedantics of 74 00:04:01,020 --> 00:04:04,350 Sean Aylmer: this, but that actually is significant, the fact that they said 75 00:04:04,620 --> 00:04:07,320 Sean Aylmer: may well be needed rather than will be needed, isn't it? 76 00:04:07,890 --> 00:04:10,920 Diana Mousina: I think it's significant and we've seen them... The March 77 00:04:10,980 --> 00:04:15,240 Diana Mousina: statement was already a softening on February because they responded 78 00:04:15,240 --> 00:04:17,640 Diana Mousina: to the weakness in the data that we were getting 79 00:04:17,640 --> 00:04:21,779 Diana Mousina: over that time. So I think that today's is another 80 00:04:21,779 --> 00:04:27,480 Diana Mousina: step towards potentially indicating that it will pause in interest 81 00:04:27,480 --> 00:04:30,240 Diana Mousina: rates from here. But I think that the RBA still needs 82 00:04:30,240 --> 00:04:33,720 Diana Mousina: to have a tightening bias because inflation is too high 83 00:04:33,720 --> 00:04:36,419 Diana Mousina: and it doesn't want to risk a rebound in economic 84 00:04:36,420 --> 00:04:40,080 Diana Mousina: activity, it doesn't want to see consumer sentiment go back 85 00:04:40,080 --> 00:04:42,810 Diana Mousina: up to high levels, and it probably doesn't want to 86 00:04:42,810 --> 00:04:45,450 Diana Mousina: see a big rebound in home prices either. It sounds 87 00:04:45,450 --> 00:04:47,640 Diana Mousina: a bit strange to say that, but it needs to 88 00:04:47,640 --> 00:04:50,549 Diana Mousina: keep downward pressure on the economy to get inflation lower 89 00:04:50,550 --> 00:04:50,970 Diana Mousina: from here. 90 00:04:51,510 --> 00:04:53,279 Sean Aylmer: Stay with me, Diana. We'll be back in a minute. 91 00:04:59,580 --> 00:05:03,270 Sean Aylmer: My guest this morning is AMP Deputy Chief Economist, Diana Mousina. 92 00:05:04,170 --> 00:05:06,089 Sean Aylmer: Okay. So what are the key indicators we need to 93 00:05:06,089 --> 00:05:08,339 Sean Aylmer: keep an eye on over the next four or six 94 00:05:08,339 --> 00:05:10,529 Sean Aylmer: weeks? Well, let's say the next four weeks before the 95 00:05:10,529 --> 00:05:11,580 Sean Aylmer: Reserve Bank meets again. 96 00:05:12,390 --> 00:05:16,470 Diana Mousina: Look, it's really three key indicators for me. Employment growth, 97 00:05:16,650 --> 00:05:19,410 Diana Mousina: the monthly inflation data, and retail sales growth. I think 98 00:05:19,410 --> 00:05:21,750 Diana Mousina: that tells you everything that you need to know that's 99 00:05:21,750 --> 00:05:24,750 Diana Mousina: key for the economy at the moment. Is inflation slowing? 100 00:05:24,839 --> 00:05:29,279 Diana Mousina: Are consumers responding? And will there be a wage breakout? 101 00:05:29,279 --> 00:05:32,460 Diana Mousina: If we continue to see employment growth run at very 102 00:05:32,460 --> 00:05:35,670 Diana Mousina: hot levels, high levels, then that could be a sign 103 00:05:35,670 --> 00:05:38,039 Diana Mousina: that wages growth is likely to rise from here, which 104 00:05:38,040 --> 00:05:42,330 Diana Mousina: will create more inflationary pressures, that's unwanted right now. So 105 00:05:42,570 --> 00:05:44,670 Diana Mousina: I would watch those three key indicators. 106 00:05:45,270 --> 00:05:50,370 Sean Aylmer: Okay. The recent discussion in recent days from different parties, 107 00:05:50,370 --> 00:05:53,640 Sean Aylmer: be it the Labor Party, the ACTU, about submissions to 108 00:05:53,640 --> 00:05:56,790 Sean Aylmer: the Fair Work Commission and having wage rises of anything 109 00:05:56,790 --> 00:05:59,520 Sean Aylmer: up to 7%, do those sorts of things worry you 110 00:05:59,520 --> 00:06:01,440 Sean Aylmer: when it comes to those wage price spirals? 111 00:06:02,310 --> 00:06:05,370 Diana Mousina: Yeah, it does worry me because one of those decisions 112 00:06:05,370 --> 00:06:09,450 Diana Mousina: can set off many of those decisions. I think if 113 00:06:09,450 --> 00:06:12,540 Diana Mousina: the minimum wage increase gets approved at six or 7%, 114 00:06:13,440 --> 00:06:16,830 Diana Mousina: that's different to award wages getting approved at that same 115 00:06:16,830 --> 00:06:21,600 Diana Mousina: level because award wages impact about 20 to 25% of the workforce, 116 00:06:21,600 --> 00:06:24,300 Diana Mousina: whereas minimum wage decisions impact less than 5% of the 117 00:06:24,300 --> 00:06:29,190 Diana Mousina: workforce. So it definitely depends on who approves what. So 118 00:06:29,370 --> 00:06:31,739 Diana Mousina: we just need to wait and see. We just don't 119 00:06:31,740 --> 00:06:34,739 Diana Mousina: know what the outcome will be. They can go to 120 00:06:34,740 --> 00:06:37,560 Diana Mousina: the Fair Work Commission and ask for really whatever they 121 00:06:37,560 --> 00:06:39,810 Diana Mousina: want, but it really depends on what actually gets handed 122 00:06:39,810 --> 00:06:43,080 Diana Mousina: down and also what happens to the public service wage 123 00:06:43,080 --> 00:06:45,060 Diana Mousina: caps. We know that Victoria's going to be lifting those 124 00:06:45,060 --> 00:06:47,610 Diana Mousina: from 1. 5 To 3%. New South Wales is still 125 00:06:47,610 --> 00:06:50,580 Diana Mousina: in discussion about what level that will get to. But 126 00:06:50,580 --> 00:06:53,610 Diana Mousina: that's also quite important because public sector wages growth has 127 00:06:53,610 --> 00:06:55,650 Diana Mousina: actually been quite constrained in the cycle. 128 00:06:56,339 --> 00:06:59,279 Sean Aylmer: And Diana Mousina, Deputy Chief Economist at AMP, I can't let you 129 00:06:59,279 --> 00:07:01,470 Sean Aylmer: go without asking about house prices. You guys have been 130 00:07:01,470 --> 00:07:05,580 Sean Aylmer: quite bearish on house prices. The most recent couple of 131 00:07:05,580 --> 00:07:09,000 Sean Aylmer: months in Sydney at least have been stable, at least. 132 00:07:09,180 --> 00:07:11,190 Sean Aylmer: In fact, a little bit better than that, although other 133 00:07:11,190 --> 00:07:13,890 Sean Aylmer: parts of the country still seem to be declining. 134 00:07:14,550 --> 00:07:16,590 Diana Mousina: Our view was that we would get a 15 to 135 00:07:16,590 --> 00:07:20,160 Diana Mousina: 20% fall peak- to- trough. We've had falls of about 8. 136 00:07:21,180 --> 00:07:25,200 Diana Mousina: 5%. So you could say that our forecast is too 137 00:07:25,200 --> 00:07:28,080 Diana Mousina: pessimistic given that we expect the RBA is probably going 138 00:07:28,080 --> 00:07:30,360 Diana Mousina: to be on hold from here. But at the same 139 00:07:30,360 --> 00:07:34,500 Diana Mousina: time, those lagged impacts of rate hikes are still working 140 00:07:34,500 --> 00:07:36,480 Diana Mousina: through the economy. And I am concerned that we might 141 00:07:36,480 --> 00:07:40,860 Diana Mousina: see some more stressed selling coming through. Households that got 142 00:07:40,860 --> 00:07:42,660 Diana Mousina: a mortgage in the last three years, which is actually 143 00:07:42,660 --> 00:07:46,230 Diana Mousina: about 60% of outstanding loans, they might be facing or 144 00:07:46,230 --> 00:07:49,080 Diana Mousina: getting up to those serviceability caps that they were assessed 145 00:07:49,080 --> 00:07:51,270 Diana Mousina: on, or even above those caps, that was 2. 5%, 146 00:07:51,900 --> 00:07:56,130 Diana Mousina: we've had 3.5% of rate hikes so far. So I think 147 00:07:56,130 --> 00:07:58,170 Diana Mousina: that they will be more signs of stress selling that 148 00:07:58,170 --> 00:08:01,380 Diana Mousina: will put further downward pressure on home prices. But maybe 149 00:08:01,380 --> 00:08:05,850 Diana Mousina: our forecast of 15 to 20% is too pessimistic and prices will 150 00:08:05,850 --> 00:08:08,580 Diana Mousina: only fall another two to 3% from here. But I 151 00:08:08,580 --> 00:08:10,530 Diana Mousina: do think that there is a little bit more downside 152 00:08:10,530 --> 00:08:10,980 Diana Mousina: to come. 153 00:08:11,580 --> 00:08:13,440 Sean Aylmer: Diana, thank you for talking to Fear and Greed. 154 00:08:13,620 --> 00:08:14,880 Diana Mousina: Thank you so much. It was a pleasure. 155 00:08:15,390 --> 00:08:17,910 Sean Aylmer: That was Diana Mousina, Deputy Chief Economist at AMP. This 156 00:08:17,910 --> 00:08:20,790 Sean Aylmer: is the Fear and Greed Daily Interview. Join us every 157 00:08:20,790 --> 00:08:23,550 Sean Aylmer: morning for the full episode of Fear and Greed, Australia's 158 00:08:23,550 --> 00:08:27,000 Sean Aylmer: most popular business podcast. I'm Sean Aylmer, enjoy your day.