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Speaker 1: Welcome to the Fear and Greed business Interview. I'm Sean ale.

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Speaker 1: Inflation rose by one percent in the three months to

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Speaker 1: the end of June this year and three point eight

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Speaker 1: percent for the full year, according to the Australian Bureau

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Speaker 1: of Statistics. The annual figure is the first uptick since

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Speaker 1: late twenty twenty two, though it was expected. The trimmed

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Speaker 1: mean annual inflation rate, which takes out some of the

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Speaker 1: more volatile items, fell slightly to three point nine percent.

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Speaker 1: That was less expected. So with a Reserve Bank board

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Speaker 1: meeting next week, what's it all mean for interest rates?

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Speaker 1: Gareth ed Is, Commonwealth Bank's head of Australian Economics. Gareth,

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Speaker 1: welcome back to Fear and Greed.

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Speaker 2: It's nice to be back with you, Sean.

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Speaker 1: What do those numbers yesterday mean? What do they mean

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Speaker 1: for interest rates? That's what we all want to know.

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Speaker 2: Well, look, I think in the very short run, which

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Speaker 2: is all lies on the board meeting next week, I

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Speaker 2: think they rub a stamp the Reserve Bank on hold.

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Speaker 2: There was a fear heading into yesterday's inflation numbers that

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Speaker 2: they would come in a little bit stronger than where

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Speaker 2: they actually landed, and that would potentially mean the RBA

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Speaker 2: would pull the rate high trigger, but fortunately the ABS

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Speaker 2: has told us that headline inflation has risen in line

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Speaker 2: with the Reserve Bank's forecasts and also in line with

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Speaker 2: market expectations, but critically, the policy relevant trim mean, which

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Speaker 2: is a CPI the Reserve Bank tends to put more

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Speaker 2: weight on that came in at point eight percent on

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Speaker 2: the quarter, which was in line with the RBA's expectations

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Speaker 2: from back in May. It was actually below where the

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Speaker 2: market thought the number would come in. So I think

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Speaker 2: the numbers that we got yesterday basically mean the RBA

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Speaker 2: will feel comfortable to leave the cashtrat on hold when

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Speaker 2: the board meets next week.

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Speaker 1: Very prescient of the Reserve Bank a few months ago.

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Speaker 1: What about services inflation? That's what we seem to be

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Speaker 1: talking about all the time at the moment. What's happening

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Speaker 1: there because that seemed to be the area where prices

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Speaker 1: were rising at an unacceptable rate.

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Speaker 2: Yeah, look, it's still pretty strong, and we tend to

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Speaker 2: focus on annual rates when we're talking about inflation, and

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Speaker 2: it does take time for an annual rate to actually

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Speaker 2: come down, particularly if you've got some bigger numbers sitting

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Speaker 2: in the twelve month calculation, and that's what we've currently

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Speaker 2: got given in Q three of last year we saw

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Speaker 2: quite a solid increase in inflation, particularly driven by services

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Speaker 2: because there was a big lift in the minimum wage

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Speaker 2: which came through last year. We didn't have anything like

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Speaker 2: that this year, and so next quarter we'll actually see

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Speaker 2: services inflation step down again. But just in terms of

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Speaker 2: the annual rates market, services inflation has been the key

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Speaker 2: focus or key area of concern for the Reserve Bank,

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Speaker 2: and that actually stepped down from four point three percent

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Speaker 2: to four point one percent. So I think the best

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Speaker 2: way to think about all this is that the overall

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Speaker 2: rate of inflation is still higher than we'd like, but

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Speaker 2: directionally we're going the right way.

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Speaker 1: So we're not quite out of the woods yet, but

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Speaker 1: we're not in the deep dark forest.

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Speaker 2: I think that's a decent way to paint the picture.

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Speaker 2: And I think importantly, when we think about the inflation

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Speaker 2: dynamics in the context of the border economy, we've got

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Speaker 2: one that has very little growth at the moment from

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Speaker 2: a GDP perspective. We've got a labor market which is

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Speaker 2: very gradually loosening with an uptrend in the unemployment rate,

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Speaker 2: we've got wages growth slowly coming down, and then all

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Speaker 2: of those forces are actually helping to pull inflation lower. Now,

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Speaker 2: there's still some components of the inflation basket that are

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Speaker 2: pretty sticky, the housing side of things in particular, especially

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Speaker 2: via the rental market. There's very little that the RBA

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Speaker 2: can do about that. But in terms of the impact

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Speaker 2: that their restrictive policy setting is having on demand growth

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Speaker 2: in the economy, it's clearly helping to bring the rate

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Speaker 2: of inflation down.

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Speaker 1: Say with me, Gareth, we'll be back in a minute.

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Speaker 1: I'm speaking to Gareth Aired common Off Banks of Australian Economics.

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Speaker 1: So no change to interest rates next week when the

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Speaker 1: Reserve Bank meets. What about later in the year, early

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Speaker 1: into next year. I mean, I suppose the first question

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Speaker 1: is the next moved down?

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Speaker 2: And if so, when, Yeah, look we think the next

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Speaker 2: move is down, and the market agrees with us. There

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Speaker 2: was concern heading into those figures yesterday that the next

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Speaker 2: move could actually be up, but given the way the

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Speaker 2: data printed, if you're not going to go up next,

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Speaker 2: then you're going to be going down because we're not

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Speaker 2: going to hold this policy stance in definitely where the

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Speaker 2: cash rate is and so most analysts now will think

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Speaker 2: the next move is down. We very much agree. Then

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Speaker 2: it comes down to when we're on the more dubbish

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Speaker 2: side of the market at comald Bank thinking we could

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Speaker 2: get a rate cut by the end of this year,

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Speaker 2: and we've got November penciled in for a first interest

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Speaker 2: rate cut, and really that's basically premised on our economic forecasts.

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Speaker 2: We've got a forecast for Q three inflation the TRIUM

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Speaker 2: mean of a point seven percent, and if you get

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Speaker 2: a zero point seven percent followed by or proceeded rather

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Speaker 2: by the point eight percent which we got yesterday, then

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Speaker 2: you're looking at six month annualized inflation pretty much close

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Speaker 2: to the top of the target band. And headline inflation

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Speaker 2: will actually step down quite considerably next quarter due to

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Speaker 2: the energy rebates which the government has put through. Now,

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Speaker 2: if we get that configuration on the inflation side, and

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Speaker 2: the unemployment rate continues to trend up, we think the

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Speaker 2: RBA can actually start to take policy away from its

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Speaker 2: restrictive setting, like we've seen some other central banks already do.

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Speaker 2: It's worth keeping in mind that the Bank of Canada

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Speaker 2: has already cut rates. We've had an interest rate cut

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Speaker 2: from the European Central Bank. Expectations out there that the

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Speaker 2: FED is pretty close to cutting rates, and the market

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Speaker 2: is also priced for the Bank of England and the

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Speaker 2: Reserve Bank of New Zealand to all start cutting rates

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Speaker 2: by the end of the year. We think the RBA

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Speaker 2: can end up basically following that global easing cycle, which

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Speaker 2: is why we're sitting on the side of the fence

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Speaker 2: to look for a rate cut by year end.

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Speaker 1: Okay, garre So, then in three months time we get

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Speaker 1: the September quarter inflation data, we'll then have six months

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Speaker 1: annualized at the top of the target band. I mean,

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Speaker 1: is there a risk that the Reserve Bank is going

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Speaker 1: too slow? Michelle Bullock has actually said that. The governor

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Speaker 1: has actually said it doesn't have to be in the

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Speaker 1: target band. It just has to be heading towards the

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Speaker 1: target ban before they move. But potentially if they don't

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Speaker 1: do anything till November, it could already be in the

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Speaker 1: target ban basically.

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Speaker 2: Well, look, we think headline inflation on a three d

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Speaker 2: year basis will be in the target band by the

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Speaker 2: September quarter, essentially because these energy rebates are going to

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Speaker 2: drop headline inflation quite a lot, but in terms of

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Speaker 2: core inflation on our forecast, we're going to end up

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Speaker 2: with a six month annualized rate pretty much at the

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Speaker 2: top of the RBA's target band after we get the

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Speaker 2: September quarter figures. If the RBA was to then start

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Speaker 2: cutting from that point, we wouldn't say they're too because

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Speaker 2: they've still got to make sure that inflation actually comes

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Speaker 2: down and they don't want to go too early. But

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Speaker 2: if they do end up delivering a rate cut by

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Speaker 2: the end of this year, then we probably are on

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Speaker 2: course for the soft landing because we'll still have gradually

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Speaker 2: rising unemployment, but not to the kind of levels we

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Speaker 2: had pre pandemic, and we should see in time and

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Speaker 2: uptick in terms of growth based on rates coming down.

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Speaker 2: It's a very hard sort of balancing act for the

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Speaker 2: RBA at the moment, because they want to glide path

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Speaker 2: the economy to a soft landing and they also want

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Speaker 2: to pull inflation down. They don't want to cut rates

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Speaker 2: too early in case the job's not done on inflation,

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Speaker 2: But by the same token, they don't want to keep

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Speaker 2: rates restrictive for longer than is necessary because they know

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Speaker 2: that that's causing pain out there in the economy, and

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Speaker 2: then it does run the risk that unemployment ends up

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Speaker 2: rising that too much further than what is desired. And

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Speaker 2: the big issue in all of this is that inflation

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Speaker 2: and unemployment are lagging inters. So if you're setting policy

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Speaker 2: off actual data, as in the data that's just printed,

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Speaker 2: but it's actually a lagging indicator, then it really does

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Speaker 2: make it hard to kind of calibrate when is the

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Speaker 2: right time to actually be changing policy settings. And we

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Speaker 2: saw that happen basically at the start of the tightening cycle,

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Speaker 2: where the RBA waited too long before getting going because

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Speaker 2: they waited to actually see the inflation data say that

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Speaker 2: inflation's high, rather than basically preemptively move given there was

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Speaker 2: an expectation in inflation was going to pick up.

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Speaker 1: Okay, so let's say we do get a cut in

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Speaker 1: November or early next year. Do you expect then that

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Speaker 1: we'll see a run of rate reductions over the next

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Speaker 1: twelve months or so.

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Speaker 2: Look, if we didn't get more than one cut. Once

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Speaker 2: the RBA starts cutting, then the implication would be they

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Speaker 2: probably shouldn't have cut rates. One interest rate cut in

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Speaker 2: and of itself is not going to take policy away

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Speaker 2: from a restrictive setting. So if the RBA moved once

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Speaker 2: and then was on hold for twelve months, it would

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Speaker 2: end up proving to be the case in inflation had

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Speaker 2: ended up getting stuck above the target band. So our

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Speaker 2: view is basically, once they're comfortable and they start cutting rates,

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Speaker 2: they'll cut policy down to something that looks like a

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Speaker 2: neutral interest rate or a normal interest rate. We think

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Speaker 2: that's a bit over three percent, so kind of looking

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Speaker 2: at about one hundred to one hundred and twenty five

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Speaker 2: basis points of cuts once they get going, But we

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Speaker 2: see them cutting in a pretty conservative type fashion. So

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Speaker 2: at the risk of kind of sounding like this is

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Speaker 2: an exact science, our profile is basically, once they start

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Speaker 2: their cutting cycle, they're delivering one twenty five basis point

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Speaker 2: cut a quarter until we get a little bit over

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Speaker 2: three percent by a year end of next year.

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Speaker 1: If we got to that point in the end of

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Speaker 1: twenty twenty five early twenty twenty six, we're looking at

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Speaker 1: a benchmark rate of you know, a little over three

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Speaker 1: percent or thereabouts. That wouldn't be a bad the effort

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Speaker 1: for the previous two years, would it to actually get

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Speaker 1: inflation down so the post pandemic get inflation down without

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Speaker 1: throwing the economy into a recession. Would be pretty happy

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Speaker 1: with that, wouldn't.

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Speaker 2: We look I think we would. We'd still look back

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Speaker 2: on this period as being a very tough time for

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Speaker 2: a lot of households out there, particularly those that are

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Speaker 2: more recent entrance into the housing market, and also it's

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Speaker 2: been a tough time for renters, and I suppose just

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Speaker 2: more generally households in general have had to deal with

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Speaker 2: higher inflation. So it has been a painful process up

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Speaker 2: until this point, and there's a little bit further on

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Speaker 2: that to run. But I think if we can get

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Speaker 2: to the end of next year, rates have come down,

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Speaker 2: unemployment hasn't gotten too much above where we are right now,

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Speaker 2: and inflation is back to the target bean, then you'd

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Speaker 2: have to say its job done in probably what is

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Speaker 2: the best case from this point.

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Speaker 1: Gareth, thank you for talking to Fear and Greed.

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Speaker 2: It's nice to chat as always.

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Speaker 1: That was Gareth ed, Commonwealth Banks, Head of Australian Economics.

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Speaker 1: This is a Fear and Greed business interview. Join us

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Speaker 1: every morning for the full episode of Fear and Greed.

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Speaker 1: Daily business news for people who make their own decisions.

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Speaker 1: I'm Sean a elma enjoy your day,