1 00:00:03,420 --> 00:00:07,100 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. While 2 00:00:07,100 --> 00:00:11,050 Sean Aylmer: much of Australia was watching Flemington yesterday, for the dismal scientists, 3 00:00:11,050 --> 00:00:14,130 Sean Aylmer: the economists, all the action was at Martin Place. The 4 00:00:14,130 --> 00:00:17,110 Sean Aylmer: Reserve Bank held its monthly board meeting, leaving official interest 5 00:00:17,110 --> 00:00:20,619 Sean Aylmer: rates on hold at 0. 1%, but signalling they may 6 00:00:20,620 --> 00:00:24,170 Sean Aylmer: rise earlier than the bank at least had previously forecast. 7 00:00:24,400 --> 00:00:27,770 Sean Aylmer: Stephen Halmarick is the Commonwealth Bank's chief economist. Stephen, welcome 8 00:00:27,770 --> 00:00:28,670 Sean Aylmer: back to Fear and Greed. 9 00:00:29,050 --> 00:00:29,900 Stephen Halmarick: Thanks, Sean. Good to be with you. 10 00:00:30,620 --> 00:00:32,540 Sean Aylmer: What were the key messages out of the Reserve Bank 11 00:00:32,540 --> 00:00:33,699 Sean Aylmer: board meeting yesterday? 12 00:00:34,090 --> 00:00:37,140 Stephen Halmarick: Well, I think the Reserve Bank governor walked the line 13 00:00:37,140 --> 00:00:42,339 Stephen Halmarick: between being quite optimistic about the economic recovery, but still very 14 00:00:42,340 --> 00:00:45,540 Stephen Halmarick: dovish on interest rates. So, expecting the economy to continue 15 00:00:45,610 --> 00:00:49,229 Stephen Halmarick: to recover, the unemployment rate to decline, but saying they 16 00:00:49,229 --> 00:00:53,159 Stephen Halmarick: still don't expect inflation to be 2. 5% until the 17 00:00:53,270 --> 00:00:59,370 Stephen Halmarick: end of 2023, and therefore interest rate rises are unlikely 18 00:00:59,710 --> 00:01:01,720 Stephen Halmarick: in the near term. He said it's plausible we could 19 00:01:01,720 --> 00:01:04,310 Stephen Halmarick: get a rate rise in 2023, it's also plausible it 20 00:01:04,310 --> 00:01:07,459 Stephen Halmarick: could be 2024, but he doesn't agree with the market 21 00:01:07,459 --> 00:01:09,700 Stephen Halmarick: pricing that it could be as early as next year. 22 00:01:10,090 --> 00:01:12,250 Sean Aylmer: Was it a surprise that they are so dovish? 23 00:01:12,709 --> 00:01:15,619 Stephen Halmarick: Well, that's pretty consistent with the way they've been for 24 00:01:15,700 --> 00:01:18,790 Stephen Halmarick: all through the COVID- 19 pandemic and I think it 25 00:01:18,790 --> 00:01:22,929 Stephen Halmarick: really does reinforce that the governor really wants inflation sustainably 26 00:01:22,930 --> 00:01:25,429 Stephen Halmarick: back in the target range. But we are of the 27 00:01:25,430 --> 00:01:28,590 Stephen Halmarick: view that the inflation pressures are building faster than the 28 00:01:28,590 --> 00:01:33,569 Stephen Halmarick: RBA thinks. We think we'll have inflation 2. 5% by 29 00:01:33,569 --> 00:01:36,259 Stephen Halmarick: the middle of next year and we've got the first 30 00:01:36,260 --> 00:01:41,150 Stephen Halmarick: rate hike in November, 2022. So, their forecasts are different 31 00:01:41,150 --> 00:01:44,190 Stephen Halmarick: to ours, but we're happy with our expectations. 32 00:01:44,560 --> 00:01:47,209 Sean Aylmer: Okay. When he was talking about inflation yesterday in the 33 00:01:47,209 --> 00:01:51,130 Sean Aylmer: statement afterwards, it talked about that price pressures weren't as 34 00:01:51,130 --> 00:01:54,840 Sean Aylmer: great in Australia as other places. He also talked about 35 00:01:54,900 --> 00:01:57,610 Sean Aylmer: the employment market and participation not being as high in 36 00:01:57,610 --> 00:02:01,590 Sean Aylmer: Australia as other markets and supply disruptions not being as 37 00:02:01,590 --> 00:02:04,180 Sean Aylmer: great. Why is he reading ... I mean, you can't tell 38 00:02:04,180 --> 00:02:06,810 Sean Aylmer: me what Phil Lowe's thinking, but it's just interesting that 39 00:02:06,810 --> 00:02:09,420 Sean Aylmer: he's reading it that way, whereas many others aren't. 40 00:02:09,870 --> 00:02:13,210 Stephen Halmarick: Well, yes. The question about why Australia's different to the 41 00:02:13,210 --> 00:02:15,600 Stephen Halmarick: rest of the world was actually the question I asked him. So, 42 00:02:15,660 --> 00:02:18,800 Stephen Halmarick: he said that in the US, employers were having to 43 00:02:18,800 --> 00:02:23,530 Stephen Halmarick: pay higher wages to keep their workers attached to their companies, 44 00:02:23,990 --> 00:02:27,540 Stephen Halmarick: whereas in Australia, we had JobKeeper that kept workers attached to 45 00:02:27,540 --> 00:02:31,450 Stephen Halmarick: their companies. And he also said that in countries or 46 00:02:31,450 --> 00:02:35,840 Stephen Halmarick: areas like Europe, there was higher electricity and gas charges 47 00:02:35,840 --> 00:02:38,520 Stephen Halmarick: that were feeding into inflation. But the issue that we 48 00:02:38,520 --> 00:02:43,130 Stephen Halmarick: have with their inflation forecast is that they have wages 49 00:02:43,130 --> 00:02:47,820 Stephen Halmarick: growth as the driving force behind sustainably higher inflation. He 50 00:02:47,820 --> 00:02:50,270 Stephen Halmarick: keeps saying we need to get wages growth around 3% 51 00:02:51,110 --> 00:02:54,139 Stephen Halmarick: before you're going to have sustainably higher inflation. Now that 52 00:02:54,139 --> 00:02:56,560 Stephen Halmarick: might be partly true, but we think there's going to 53 00:02:56,560 --> 00:03:00,639 Stephen Halmarick: be other sources of inflation pressures. So, supply side issues, 54 00:03:00,940 --> 00:03:03,730 Stephen Halmarick: we can see there's been clearly an uptick in prices, 55 00:03:03,870 --> 00:03:09,940 Stephen Halmarick: inputs to manufacturing, inputs to the construction sector, so those 56 00:03:09,940 --> 00:03:13,270 Stephen Halmarick: global supply chain issues we think will push inflation higher. 57 00:03:13,950 --> 00:03:16,310 Stephen Halmarick: That's definitely the feedback I get from the businesses I 58 00:03:16,310 --> 00:03:19,590 Stephen Halmarick: speak to regularly. The other source of inflation is actually 59 00:03:19,730 --> 00:03:23,360 Stephen Halmarick: the quantitative easing program and the Reserve Bank's actions. So, 60 00:03:23,360 --> 00:03:27,230 Stephen Halmarick: the interplay between the government with large budget deficits, borrowing 61 00:03:27,230 --> 00:03:31,100 Stephen Halmarick: lots of money in markets, the Reserve Bank essentially funding 62 00:03:31,100 --> 00:03:34,350 Stephen Halmarick: that debt through its quantitative easing program, we think that 63 00:03:34,350 --> 00:03:37,830 Stephen Halmarick: money will turn up. And spending. So, savings has increased 64 00:03:37,830 --> 00:03:39,900 Stephen Halmarick: a lot. We think it's now going to move into spending, 65 00:03:40,220 --> 00:03:42,470 Stephen Halmarick: and that will put some upward pressure on inflation as well. 66 00:03:43,010 --> 00:03:47,220 Sean Aylmer: Okay. Do you think last week's inflation data, which just showed 67 00:03:47,220 --> 00:03:50,010 Sean Aylmer: that at least in underlying terms, there was momentum in 68 00:03:50,010 --> 00:03:53,460 Sean Aylmer: price increases, he seemed to play that down, or the 69 00:03:53,460 --> 00:03:55,810 Sean Aylmer: Reserve Bank seemed to play that down a bit yesterday. 70 00:03:56,330 --> 00:04:00,380 Stephen Halmarick: Well, yes. He said underlying inflation's 2.1%, that's only one reading. 71 00:04:00,380 --> 00:04:02,950 Stephen Halmarick: It's only just in the target range, but I think 72 00:04:02,950 --> 00:04:05,920 Stephen Halmarick: the key point there is the market forecast was 1. 8% 73 00:04:07,170 --> 00:04:10,770 Stephen Halmarick: and the Reserve Bank's forecast was closer to 1. 5% for 74 00:04:10,770 --> 00:04:14,930 Stephen Halmarick: inflation around about now. So, 2.1% is quite a bit higher 75 00:04:14,930 --> 00:04:18,430 Stephen Halmarick: than the Reserve Bank's previous forecast. We think that it's 76 00:04:18,430 --> 00:04:21,520 Stephen Halmarick: a sign of more inflation pressures coming through the end 77 00:04:21,520 --> 00:04:24,430 Stephen Halmarick: of this year and next year. So, we are not 78 00:04:24,430 --> 00:04:27,990 Stephen Halmarick: so fast to dismiss that as just one number. We 79 00:04:27,990 --> 00:04:30,950 Stephen Halmarick: think we'll see some follow -ups of inflation in the 80 00:04:30,950 --> 00:04:33,700 Stephen Halmarick: target range late this year and into 2022. 81 00:04:34,210 --> 00:04:38,520 Sean Aylmer: Okay, for people like me who have nowhere near the 82 00:04:38,520 --> 00:04:41,950 Sean Aylmer: experience as people like you Stephen, explain what pulling back 83 00:04:41,950 --> 00:04:44,520 Sean Aylmer: on the bond buying program actually means and how that 84 00:04:44,520 --> 00:04:46,020 Sean Aylmer: affects homeowners? 85 00:04:46,730 --> 00:04:49,450 Stephen Halmarick: Well, there's two things here. One was the yield curve control. 86 00:04:49,450 --> 00:04:54,529 Stephen Halmarick: So they were keeping the April 2024 government bond at 0. 1%, 87 00:04:55,640 --> 00:04:59,670 Stephen Halmarick: so just under three years maturity. That bond is now 88 00:04:59,670 --> 00:05:03,290 Stephen Halmarick: yielding somewhere close to 70 basis points, so 0. 7%. 89 00:05:03,750 --> 00:05:06,300 Stephen Halmarick: So it's gone up a long way and that and 90 00:05:06,300 --> 00:05:09,560 Stephen Halmarick: the so- called bond purchase program, where they're buying $ 4 91 00:05:09,560 --> 00:05:13,529 Stephen Halmarick: billion of bonds a week, is designed to keep bond yield, 92 00:05:13,529 --> 00:05:17,669 Stephen Halmarick: so interest rates, low for maturity is much longer than 93 00:05:17,670 --> 00:05:20,610 Stephen Halmarick: the cash rate, cash rate being only overnight, but the 94 00:05:20,610 --> 00:05:23,450 Stephen Halmarick: yield curve control per program and the bond purchase program 95 00:05:23,910 --> 00:05:26,180 Stephen Halmarick: are designed to have very low interest rates further out 96 00:05:26,180 --> 00:05:30,160 Stephen Halmarick: the yield curve, one year, two year, three year, five year, beyond. So, 97 00:05:30,160 --> 00:05:33,680 Stephen Halmarick: those interest rates are now beginning to rise in expectation 98 00:05:33,680 --> 00:05:37,240 Stephen Halmarick: of the cash rate rising. So that will increase borrowing 99 00:05:37,240 --> 00:05:41,270 Stephen Halmarick: costs right across the economy from governments to corporates, to 100 00:05:41,360 --> 00:05:44,010 Stephen Halmarick: those borrowing money from financial institutions. 101 00:05:44,320 --> 00:05:46,560 Sean Aylmer: So in a sense, the fact that it isn't trying 102 00:05:46,560 --> 00:05:49,110 Sean Aylmer: to control the yield curve. I mean, it's a sense 103 00:05:49,110 --> 00:05:50,980 Sean Aylmer: that it's changing its mind, but it didn't really have 104 00:05:50,980 --> 00:05:53,080 Sean Aylmer: much option did it, because the market had done it for it? 105 00:05:53,630 --> 00:05:56,800 Stephen Halmarick: Well, I think that's right. The governor said he doesn't put it 106 00:05:56,800 --> 00:06:00,920 Stephen Halmarick: in terms of the market forced them to abandon the 107 00:06:00,920 --> 00:06:03,750 Stephen Halmarick: yield curve control. He puts it in terms of, well, the 108 00:06:03,750 --> 00:06:06,650 Stephen Halmarick: economy is now recovering. There's a little bit of inflation 109 00:06:06,650 --> 00:06:09,550 Stephen Halmarick: pressure. Things are looking much better than they were when 110 00:06:09,550 --> 00:06:12,370 Stephen Halmarick: COVID first arrived and the economy was in deep recession. 111 00:06:12,750 --> 00:06:15,620 Stephen Halmarick: So, the time is right now to move on from 112 00:06:15,620 --> 00:06:20,160 Stephen Halmarick: that program because it had outlasted its usefulness. So, that's 113 00:06:20,160 --> 00:06:23,810 Stephen Halmarick: the governor's perspective, but the market had already spoken with 114 00:06:23,810 --> 00:06:26,900 Stephen Halmarick: its feet, so to speak, and had pushed the yield 115 00:06:26,900 --> 00:06:29,460 Stephen Halmarick: on that bond substantially higher in the last couple of 116 00:06:29,460 --> 00:06:30,160 Stephen Halmarick: days anyway. 117 00:06:30,480 --> 00:06:32,400 Sean Aylmer: Stay with me, Stephen, we'll be back in a minute. 118 00:06:37,470 --> 00:06:40,630 Sean Aylmer: I'm talking to Stephen Halmarick, Chief Economist at Commonwealth Bank. 119 00:06:41,160 --> 00:06:44,150 Sean Aylmer: You mentioned before that he was quite optimistic about the economy, 120 00:06:44,150 --> 00:06:50,010 Sean Aylmer: Governor Lowe. Their economic forecasts, 5. 5% next year, what 121 00:06:50,010 --> 00:06:50,690 Sean Aylmer: do you think of that? 122 00:06:51,170 --> 00:06:54,299 Stephen Halmarick: Well, that's actually more optimistic than our view. So, we've 123 00:06:54,300 --> 00:06:59,320 Stephen Halmarick: got 3.5% growth for this year and to 4. 5% for next 124 00:06:59,320 --> 00:07:03,130 Stephen Halmarick: year. They're a bit over 3% and then over 5%. 125 00:07:03,560 --> 00:07:07,870 Stephen Halmarick: So, as I mentioned at the start, he's simultaneously very 126 00:07:07,870 --> 00:07:11,420 Stephen Halmarick: optimistic on the recovery, but still very dovish on interest 127 00:07:11,420 --> 00:07:13,950 Stephen Halmarick: rates, keeping interest rates low for an extended period. 128 00:07:14,230 --> 00:07:17,810 Sean Aylmer: Do you think that there's more pressure in wage markets 129 00:07:18,050 --> 00:07:19,670 Sean Aylmer: than he's suggesting? 130 00:07:20,130 --> 00:07:22,690 Stephen Halmarick: Well, that's the feedback I get from the companies I 131 00:07:22,690 --> 00:07:25,530 Stephen Halmarick: speak to. So, I speak to a lot of corporates 132 00:07:25,530 --> 00:07:29,090 Stephen Halmarick: across Australia and they are telling me that one of 133 00:07:29,090 --> 00:07:33,730 Stephen Halmarick: their main issues is the ability to attract labour and therefore, 134 00:07:33,730 --> 00:07:36,930 Stephen Halmarick: wages pressures are being felt. So, I do think we'll 135 00:07:36,930 --> 00:07:39,470 Stephen Halmarick: begin to see that in the official data, particularly as we go 136 00:07:39,470 --> 00:07:40,210 Stephen Halmarick: through next year. 137 00:07:40,520 --> 00:07:42,170 Sean Aylmer: And of course, what many of us want to know, 138 00:07:42,420 --> 00:07:44,100 Sean Aylmer: what's it mean for house prices? I mean, he did 139 00:07:44,100 --> 00:07:46,810 Sean Aylmer: say that he liked the idea of the serviceability buffer 140 00:07:46,960 --> 00:07:49,420 Sean Aylmer: increasing. Now, Commonwealth Bank had already done that prior to 141 00:07:49,420 --> 00:07:53,400 Sean Aylmer: that announcement from the Australian Prudential Regulation Authority anyway, that 142 00:07:53,400 --> 00:07:55,950 Sean Aylmer: does it just suggest that they're keeping a close watch 143 00:07:55,950 --> 00:07:57,810 Sean Aylmer: at least on the home loan market? 144 00:07:58,100 --> 00:08:01,230 Stephen Halmarick: Well, house price data, which we got earlier this week 145 00:08:01,230 --> 00:08:06,230 Stephen Halmarick: showed prices up over 20% year to October. That was 146 00:08:06,230 --> 00:08:09,870 Stephen Halmarick: our forecast for all of 2021, so we've already beaten 147 00:08:09,870 --> 00:08:13,960 Stephen Halmarick: it by October. For 2022, we do expect house prices 148 00:08:13,960 --> 00:08:16,850 Stephen Halmarick: to be up a further 7%. So, what we're seeing 149 00:08:16,850 --> 00:08:20,280 Stephen Halmarick: is house prices are still rising but they're rising at 150 00:08:20,280 --> 00:08:24,000 Stephen Halmarick: a slightly lower rate. I think now is that higher 151 00:08:24,000 --> 00:08:28,690 Stephen Halmarick: serviceability buffer is in place, interest rates for mortgages may 152 00:08:28,690 --> 00:08:32,010 Stephen Halmarick: now also begin to increase as the market's pricing in 153 00:08:32,380 --> 00:08:35,540 Stephen Halmarick: higher interest rates in the future, that will likely see 154 00:08:35,540 --> 00:08:39,179 Stephen Halmarick: the pace of house price increase continue to moderate. So 155 00:08:39,179 --> 00:08:41,560 Stephen Halmarick: still going up, but going up at a slightly slower rate. 156 00:08:42,120 --> 00:08:43,790 Sean Aylmer: Stephen, I've got to ask you and I have known you 157 00:08:43,790 --> 00:08:45,929 Sean Aylmer: for quite a few years, do you enjoy days like 158 00:08:45,929 --> 00:08:49,170 Sean Aylmer: yesterday? It is really frantic and particularly when you're making 159 00:08:49,540 --> 00:08:53,730 Sean Aylmer: calls that have real money implications. Do you enjoy it? 160 00:08:53,730 --> 00:08:55,610 Sean Aylmer: Is there a buzz in it or is it just 161 00:08:55,610 --> 00:08:56,100 Sean Aylmer: too busy? 162 00:08:56,559 --> 00:08:59,960 Stephen Halmarick: Well, both. Yeah, I certainly do enjoy it. I've been 163 00:08:59,960 --> 00:09:03,010 Stephen Halmarick: doing it for 36 years, so it's good to enjoy 164 00:09:03,010 --> 00:09:07,339 Stephen Halmarick: that. But for this RBA board meeting, I was at 165 00:09:07,340 --> 00:09:09,320 Stephen Halmarick: home, working from home. So, it was a very different 166 00:09:09,320 --> 00:09:12,610 Stephen Halmarick: experience to work in the office or a dealing room. 167 00:09:13,520 --> 00:09:15,559 Stephen Halmarick: But many of us have very different experiences in the 168 00:09:15,559 --> 00:09:19,410 Stephen Halmarick: last year and a half. But when markets are moving, 169 00:09:19,410 --> 00:09:22,790 Stephen Halmarick: when the Reserve Bank's making big decisions, I really enjoy 170 00:09:22,790 --> 00:09:25,670 Stephen Halmarick: being part of that process. Of course, we've got a 171 00:09:25,670 --> 00:09:29,469 Stephen Halmarick: very large customer base at the Commonwealth Bank that we support 172 00:09:29,900 --> 00:09:32,140 Stephen Halmarick: and it really gives me a lot of satisfaction to 173 00:09:32,140 --> 00:09:33,810 Stephen Halmarick: support our very large customer base. 174 00:09:34,240 --> 00:09:36,050 Sean Aylmer: Stephen, thank you for talking to Fear and Greed. 175 00:09:36,340 --> 00:09:37,330 Stephen Halmarick: My pleasure, thanks Sean. 176 00:09:37,730 --> 00:09:40,960 Sean Aylmer: That was Stephen Halmarick, chief economist at Commonwealth Bank. This 177 00:09:40,960 --> 00:09:43,160 Sean Aylmer: is a Fear and Greed daily interview, join me every 178 00:09:43,160 --> 00:09:45,620 Sean Aylmer: morning for the full Fear and Greed podcast with all 179 00:09:45,620 --> 00:09:48,130 Sean Aylmer: the business news you need to know. I'm Sean Aylmer, 180 00:09:48,450 --> 00:09:49,059 Sean Aylmer: enjoy your day.