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Speaker 1: Welcome to Fear and Greed Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Suan alma. An interest rate hike is looking much

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Speaker 1: more likely when the Reserve Bank Board meets next week

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Speaker 1: after a jumping inflation in the December quarter. CPI data

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Speaker 1: from the Bureau Statistics yesterday, so the headline annual figure

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Speaker 1: climbed from three point two to three point eight percent,

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Speaker 1: while the underlying inflation increased well, depending what's three point

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Speaker 1: two percent, it's either of the three point three percent

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Speaker 1: if you're using monthly data three point four percent if

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Speaker 1: you're using quarterly data. Warren Hogan is Managing director of

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Speaker 1: EQ Economics and Economic Advisor at Judo Bank. Warren, Welcome

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Speaker 1: back to Fearing Greed Q and A.

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Speaker 2: Thanks for having me.

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Speaker 1: Sean RT hike next week.

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Speaker 2: Yeah, I think so.

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Speaker 3: We're certainly getting inflation now picking up again, and you

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Speaker 3: know it's heading back towards four and maybe five percent

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Speaker 3: in headline terms in the next six to nine months.

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Speaker 3: So yeah, they need to get on with it. The

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Speaker 3: cashwrot it's not at the right level. The problem is

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Speaker 3: is that inflation now. I think we can say confidently,

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Speaker 3: I've been pretty confident of it for about three or

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Speaker 3: four months. But inflation troughed or bottomed out early in

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Speaker 3: twenty twenty five above their target. When you take out

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Speaker 3: the noise of government and everything, the underlying pulse of

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Speaker 3: inflation probably got down to three maybe two point nine

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Speaker 3: if you're lucky, And now it's rising and it's up

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Speaker 3: around three and a quarter to three and a half

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Speaker 3: and heading one way, especially given how strong the economy

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Speaker 3: was in Q four. So yeah, they have got to

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Speaker 3: first of all reverse the rate cuts of last year.

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Speaker 3: So that means getting on with it. And of course

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Speaker 3: the earlier you move, the less you have to do.

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Speaker 3: And I mean, if they want to relive that and

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Speaker 3: relearn that lesson from history, it's a real shame. But

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Speaker 3: that's the They should really go forty points next week.

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Speaker 2: But I doubt that were.

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Speaker 1: Where did they go wrong?

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Speaker 2: Warren?

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Speaker 1: Because we seemed six months ago to be on this

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Speaker 1: trajectory of lower rates. People were cont well, you're an

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Speaker 1: exception to this, so you know, to your credit, you

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Speaker 1: weren't along these lines. But you know, economists thought we'd be.

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Speaker 1: There'd be more rate cuts in the offing. Now you

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Speaker 1: always argued that they'd gone I mean, they shouldn't have

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Speaker 1: cut rates. Where did they go wrong? And they being

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Speaker 1: the Reserve Bank. But it's broader than that.

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Speaker 2: It is broader than that.

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Speaker 3: And you know, I could be very unfair on a

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Speaker 3: lot of people right now what I want, because you know,

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Speaker 3: I've been doing this for thirty years, and I spent

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Speaker 3: a good chunk of my career as a bond strategist,

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Speaker 3: which means half the work was having a view and

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Speaker 3: half the work was watching everyone else's view. So I've

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Speaker 3: been in a unique position to study other economists. And

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Speaker 3: I mean most people's view of the future is essentially

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Speaker 3: some version of the present colored by the recent past.

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Speaker 3: So the first point for all economists is I think

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Speaker 3: they're referencing the world and what is going to be

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Speaker 3: normal as the world it existed between the GFC and

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Speaker 3: the pandemic, and that is just simply that was the

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Speaker 3: unusual period. They need to at least go back to

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Speaker 3: that sort of nineties and noughties period. But I'd argue

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Speaker 3: you had taken even broader sweep. So the first thing

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Speaker 3: is as the inflation started to come down, as we

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Speaker 3: sort of did that massive increase in interest rates, which

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Speaker 3: all of us were surprised how little damage it did

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Speaker 3: to the economy four hundred plus basis points of rat hikes.

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Speaker 3: The fact is their reference point for where we're going

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Speaker 3: to settle is I think wrong. The other one is

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Speaker 3: we are seeing the most profound structural changes in our

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Speaker 3: economy in all economies are taking place because of demographic

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Speaker 3: changes changing the way the economy works. We've gone from

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Speaker 3: forty years of having excess supply of labor, a deficiency

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Speaker 3: of demand, and unemployment being the main macroeconomic challenge to

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Speaker 3: a world that's one hundred and eighty degrees different. It's

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Speaker 3: labor shortages. I've been going on about this, but it

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Speaker 3: just it's a hard concept to grasp for economists because

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Speaker 3: it's not in the Kynesian or monitorists or classical economic theories.

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Speaker 3: But it's real, and of course that gives you some

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Speaker 3: very important risk management guidelines about where you want to

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Speaker 3: get things wrong. And of course that was my point.

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Speaker 3: We needed it was not the time to do the

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Speaker 3: narrow path. If anything, we're moving to a world where

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Speaker 3: you needed to do more.

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Speaker 2: Not less. And you can see that.

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Speaker 3: I mean, we just simply didn't raise rates enough, and

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Speaker 3: cutting them last year was just madness.

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Speaker 1: Without getting too techy on us, Warren, when you say

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Speaker 1: we're in a period where labor markets are strong, unemployment

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Speaker 1: isn't really an issue, How does that mean an economist

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Speaker 1: needs to think differently vis a v when it's all

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Speaker 1: about inflation.

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Speaker 3: Yeah, well, I think that's the first thing, is that

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Speaker 3: we decided to sort of put the emphasis of monetary

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Speaker 3: policy towards unemployment and inflation, or a little bit away

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Speaker 3: from inflation towards unemployment at just the wrong time, you know.

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Speaker 3: And I suppose that's just the human condition that after

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Speaker 3: thirty years of unemployment being the problem, you finally get

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Speaker 3: around us sort of trying to deal with it, and

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Speaker 3: it's changes. But the fact is that we knew this anyway,

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Speaker 3: so it's not an excuse. Inflation has always got to

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Speaker 3: be dealt with first. And Michelle Bullock has said this

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Speaker 3: time and again, you guarantee the lowest possible unemployment rate

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Speaker 3: over time by not letting inflation undermine the effectiveness of

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Speaker 3: your economy.

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Speaker 2: So you just and I.

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Speaker 3: Think there's also just a broader cultural political thing out

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Speaker 3: there where no one wants to say things like a

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Speaker 3: tough love. I mean, when I started in the nineties,

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Speaker 3: bank economists seem to not have a problem getting out

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Speaker 3: there and giving prescriptions that would be quite painful adjustments

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Speaker 3: in the economy, and of course our economy was going

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Speaker 3: through painful adjustments in the ninety but that's just not

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Speaker 3: something that people seem to be willing to do. I mean,

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Speaker 3: we could see it with the market forecast for the

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Speaker 3: inflation numbers, where they are all sitting on the RBA's

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Speaker 3: forecast a point eight or a whole bunch of people were,

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Speaker 3: but none of the evidence is telling us that was

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Speaker 3: the right number anyway.

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Speaker 2: I think there's just this lack.

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Speaker 3: Of willingness to sort of talk about being confrontational and

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Speaker 3: say things that will be frowned upon and found upon

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Speaker 3: by the government too. I mean, we've got to remember

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Speaker 3: this narrow pass strategy was essentially endorsed and probably driven

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Speaker 3: by the government. I mean, the government has to take

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Speaker 3: responsibility here as well, not just for their spending and

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Speaker 3: the state governments as well, because that's all playing a role,

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Speaker 3: but of course for endorsing the RBA strategy. I mean,

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Speaker 3: if I was in government, I would have said, deal

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Speaker 3: with this inflation now now they didn't have the judgments

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Speaker 3: around four point thirty five as a peak cash rope

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Speaker 3: versus five versus where everyone else went to, which was

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Speaker 3: about five and a half. That was a judgment call

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Speaker 3: which failed. I think it was the wrong call. But

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Speaker 3: here we are, and the problem now is I mean,

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Speaker 3: my analogy is you've got a sow on your leg.

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Speaker 3: You can put some stinging antiseptic on it, but if

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Speaker 3: you choose not to, then you're probably going to have

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Speaker 3: to have an operation. And if you choose not to

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Speaker 3: have the operation, the leg's going to be removed. Well,

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Speaker 3: we've missed the stinging antiseptic. We're currently in the operation phase,

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Speaker 3: and that's going to probably result in a garden variety

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Speaker 3: recession at some stage in the next two years. But

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Speaker 3: if we do not face this challenge now and take

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Speaker 3: the cash right back well about four probably to five,

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Speaker 3: we're risking letting it get away from us like we

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Speaker 3: did in the late nineteen eighties, and we will end

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Speaker 3: up having that leg taken off, which that's the disaster

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Speaker 3: a financial crisis. This country is not well placed to

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Speaker 3: deal with a major financial crisis in the next five years.

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Speaker 1: How much has fiscal policy got to do with this.

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Speaker 2: At least half.

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Speaker 3: I think the failures of monetary policy, both the structural

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Speaker 3: and that of execution. You know, if they were doing

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Speaker 3: what they should do, and that is take the world

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Speaker 3: as given and just get it done. You take the

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Speaker 3: cash right to five and a half and have a

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Speaker 3: mild recession and then would bounce out of it. Then

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Speaker 3: I think we'd still have some issues. But the combination

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Speaker 3: of the rbaight and not trying this experiment, as well

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Speaker 3: as the government's governments, not just the federal but the

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Speaker 3: states doing this. The recurrent spending. They had a massive

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Speaker 3: infrastructure taskt investment task, and I will never get in

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Speaker 3: front of a government that wants to build effective infrastructure.

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Speaker 2: We're a growing nation, we need it.

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Speaker 3: But they had an obligation to hold back on their

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Speaker 3: recurrent spending, their consumption spending, but they didn't. They all

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Speaker 3: expanded the size of their not some of the states did,

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Speaker 3: the public service and public sector. But there's the federal

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Speaker 3: government of all these programs, and of course the inflation's

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Speaker 3: now driving those program costs up and that's causing their budget.

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Speaker 2: So we're in a vicious cycle.

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Speaker 3: And that's what the whole point of an interest rate

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Speaker 3: is is that we have an economy that is a

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Speaker 3: self adjusting has all these self adjusting mechanisms to try

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Speaker 3: and seek an equilibrium, but a key one of those

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Speaker 3: interest rates. Now, we don't let markets determine those interest rates.

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Speaker 3: The central bank does, but it has to be good

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Speaker 3: and be prepared to raise rates when things are going

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Speaker 3: really well. I take the punch bol away from the

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Speaker 3: party and vice versa, but there's just no dumach for it,

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Speaker 3: and we're going to pay the price for that.

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Speaker 1: So it's so the same question asked in two ways,

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Speaker 1: what should the Reserve Bank do in the next eight

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Speaker 1: eight months? The first part part two? What will they

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Speaker 1: do in the next eight een month? And is there

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Speaker 1: a difference?

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Speaker 3: If I was walking into the board meeting next Monday,

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Speaker 3: I would be suggesting forty and thinking about two twenty

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Speaker 3: fives at the following term meetings. That is, get the

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Speaker 3: cash right to four and a half percent by the

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Speaker 3: time of the budget in May.

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Speaker 2: That's about, I think, as.

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Speaker 3: Aggressive as you'd want to be, because that's going to

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Speaker 3: have a big short term impact. But as we know,

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Speaker 3: that short term impact, that cash file effect and that

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Speaker 3: confidence effect doesn't necessarily last. So you've got to do it.

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Speaker 3: You've got to bite the bullet, you've got to hold

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Speaker 3: your breath. Whatever it is is going to take a

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Speaker 3: year to we'll find out, but you got to do that.

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Speaker 3: But then your pause and your hope that that's enough.

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Speaker 3: There's a lot of things that are moving around in

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Speaker 3: this world, including our currency and trade and geopolitics, but

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Speaker 3: they we need to take control of our country and

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Speaker 3: our economy. You can't sit there and worry about what

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Speaker 3: Trump's doing. When the RBA statement from May last year

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Speaker 3: was one of the worst I've ever seen. It's just

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Speaker 3: the way they just drop their bundle in front of

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Speaker 3: the Trump tariffs.

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Speaker 2: It's just unbelievable.

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Speaker 3: I mean, anyway, the point is they need to go

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Speaker 3: hard now and if they can get seventy five to

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Speaker 3: one hundred points of tightening into the economy, we might

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Speaker 3: get out of this with a mild recession. And the

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Speaker 3: other thing is the jobs that we're going to lose

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Speaker 3: in this downturn. We're going to lose anyway, the government

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Speaker 3: should be focused on how to reskill, reorientate these people

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Speaker 3: who are going to lose old economy jobs. For the

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Speaker 3: thousands and hundreds of thousands of vacancies that are sitting

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Speaker 3: in this economy for the human centered jobs that have

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Speaker 3: purpose and will pay well in the future. But it's hard.

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Speaker 3: Reskilling is hard. None of us is good at it.

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Speaker 3: I don't want to do it, but that's what we

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Speaker 3: got to do.

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Speaker 1: So that's what they should do. But I presume you

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Speaker 1: don't think they will do that.

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Speaker 3: Well, I don't know what they're going to do because

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Speaker 3: they're operating in a model we just don't know. I mean,

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Speaker 3: that's the thing. The model's changed. They're not the RBA

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Speaker 3: we once knew, you know. I think this is the

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Speaker 3: last opportunity the RBA board and the senior management of

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Speaker 3: the RBA have to prove themselves if they if they

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Speaker 3: shirk this, then if the next change of government will

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Speaker 3: just ask for us for them so and look, even

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Speaker 3: without it, if this government politically decides to play funny buggers,

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Speaker 3: they could try and lay a lot of blame on them.

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Speaker 3: So either way, they've they've got to take responsibility. But

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Speaker 3: I think they'll probably go twenty five twenty five. Actually,

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Speaker 3: I think they probably will do three twenty fives in

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Speaker 3: a row. I think it's that serious. I mean, it

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Speaker 3: depends on the data they're going to the problem is

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Speaker 3: they've used every excuse in the book, every global event,

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Speaker 3: every soft data reading has an excuse not to do

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Speaker 3: what they needed to do, and the media is egged

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Speaker 3: the mine as government, and no one wants to speak

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Speaker 3: out about it because, as I saw on Twitter for

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Speaker 3: much of the last two years, you get attacked because

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Speaker 3: our society can't handle what experts.

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Speaker 2: I've got to say.

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Speaker 1: Now, while I'm changing Tachi totally, you've just launched your

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Speaker 1: own series of equ briefings and workshops basically helping businesses

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Speaker 1: and leaders navigate the changing economy. Anyone listening understands that

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Speaker 1: you are very frank in your views. What are the

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Speaker 1: workshops about?

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Speaker 2: Yeah?

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Speaker 3: So, look, I just think that twenty years into social

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Speaker 3: media and what we've just talked about means that businesses

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Speaker 3: have had thirty years whether the economy has been pretty good,

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Speaker 3: and you know, they focus on their own business and

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Speaker 3: things should go all right. But now the macro environment

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Speaker 3: is changing. Labor shortages, margin pressures, cost pressures, this is

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Speaker 3: the new operating environment. Business leaders need to stay on

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Speaker 3: top of it. I'm not suggesting they need to be

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Speaker 3: an expert, but they need good advice that they can trust.

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Speaker 3: And I think there's a I think there's going to

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Speaker 3: be a demand in the market for independent advice like this.

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Speaker 3: So the EQ Briefings a starting point for this to

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Speaker 3: to give a broad audience access to the work that

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Speaker 3: I'm doing and my team's doing, and that is best endeavors.

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Speaker 3: And I've always found through my thirty years the best

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Speaker 3: endeavors is more appreciated than people than accuracy or anything else.

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Speaker 2: Yeah.

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Speaker 1: Yeah, So EQ Briefings a sort of search engine. EQ

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Speaker 1: Briefings will get people.

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Speaker 3: Eqeconomics dot au. You can sign up there. I've got

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Speaker 3: a briefing today, but it's probably a bit late notice

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Speaker 3: for most. But there'll be month a month, there'll be

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Speaker 3: special topic briefings, and there's workshops which will be one

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Speaker 3: day in person workshops which are aimed at people who

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Speaker 3: wanted the deep dive into the background those structural factors,

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Speaker 3: those non economic factors that are reshaping the economy and

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Speaker 3: the business operating environment. So equeconomics dot au you can sign.

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Speaker 2: Up for all of them. They're up and running as

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Speaker 2: of tomorrow.

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Speaker 1: Fantastic Warren, Thanks for talking to Fear and.

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Speaker 2: Greed thanks Sean. Great to be on the show.

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Speaker 1: That was Warren Hogan, managing director of EQ Economics. I'm sure, Alma.

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Speaker 1: And this is fear and greed Q and a