1 00:00:03,640 --> 00:00:06,240 Speaker 1: Welcome to Ask Fear and Greed, where we answer questions 2 00:00:06,240 --> 00:00:10,160 Speaker 1: about business, investing, economics, politics, and more. I'm Michael Thompson 3 00:00:10,360 --> 00:00:15,320 Speaker 1: and hello Sean Ailmer. Hello Michael, Sean. Today's question. I 4 00:00:15,320 --> 00:00:17,759 Speaker 1: mean it's very much an economics question. I think it 5 00:00:17,840 --> 00:00:20,440 Speaker 1: might be so put on your professor's cap. Good good, 6 00:00:20,440 --> 00:00:24,560 Speaker 1: Good to Alma. Given we expect interest rates to fall 7 00:00:24,840 --> 00:00:31,200 Speaker 1: in coming months, can you please explain monetary policy what 8 00:00:31,360 --> 00:00:36,159 Speaker 1: it is. We're starting with the basics, how it works, 9 00:00:36,880 --> 00:00:41,280 Speaker 1: and how the Reserve bank controls the economy. Now there's 10 00:00:41,280 --> 00:00:43,680 Speaker 1: a lot in that. You have about five minutes to 11 00:00:43,720 --> 00:00:44,000 Speaker 1: do it. 12 00:00:44,520 --> 00:00:45,760 Speaker 2: I'm confident I can do it. 13 00:00:46,120 --> 00:00:49,839 Speaker 3: Okay, you can sort of interchange monetary policy and interest rates. 14 00:00:49,880 --> 00:00:52,040 Speaker 3: It's not one hundred percent correct, Okay, but when people 15 00:00:52,040 --> 00:00:54,760 Speaker 3: talk about monetary policy, we're talking about interest rates mostly, 16 00:00:55,200 --> 00:00:57,360 Speaker 3: and we were talking about fiscal policy. We're talking about 17 00:00:57,400 --> 00:00:59,240 Speaker 3: taxation and revenue and that type of stuff. 18 00:00:59,360 --> 00:00:59,600 Speaker 2: Okay. 19 00:01:00,440 --> 00:01:02,600 Speaker 3: So what we're trying to do, what the reserve banks 20 00:01:02,640 --> 00:01:06,080 Speaker 3: trying to do with monetary policy, is influence aggregate demand 21 00:01:06,280 --> 00:01:07,000 Speaker 3: in the economy. 22 00:01:07,040 --> 00:01:09,759 Speaker 2: That's a very technical term. Look at your eyes. It's 23 00:01:09,800 --> 00:01:11,759 Speaker 2: just basically how much people buy and sell. 24 00:01:12,360 --> 00:01:16,720 Speaker 3: Okay, So we got that they're trying to influence employment. 25 00:01:17,600 --> 00:01:18,160 Speaker 2: Got that one. 26 00:01:18,880 --> 00:01:24,920 Speaker 3: And they're trying to influence inflation prices, so prices, jobs, output. 27 00:01:24,560 --> 00:01:26,160 Speaker 1: So it's like a trident. 28 00:01:27,640 --> 00:01:28,280 Speaker 2: Yes, that's it. 29 00:01:29,120 --> 00:01:33,800 Speaker 3: The Reserve Bank is responsible for montrepoloity in Australia. It 30 00:01:33,959 --> 00:01:38,160 Speaker 3: decided that it wants to target a rate and it 31 00:01:38,200 --> 00:01:40,960 Speaker 3: doesn't target a specific number. It targets a ban two 32 00:01:41,000 --> 00:01:42,839 Speaker 3: to three percent, So we talk about the Reserve banks 33 00:01:42,959 --> 00:01:45,679 Speaker 3: two to three percent target ban. That's what it's all about. 34 00:01:47,200 --> 00:01:49,480 Speaker 3: It can use other stuff and it has done during 35 00:01:49,480 --> 00:01:53,200 Speaker 3: the pandemic, things like term funding to the banking systems, 36 00:01:53,320 --> 00:01:56,800 Speaker 3: so providing money for the banking system sort of targets 37 00:01:56,840 --> 00:01:58,120 Speaker 3: for the purchase of comment bonds. 38 00:01:58,160 --> 00:01:59,280 Speaker 2: But all gets big technical. 39 00:01:59,320 --> 00:02:02,880 Speaker 1: So let's just park and that's more exceptional circumstances, is it, 40 00:02:02,960 --> 00:02:03,520 Speaker 1: rather than kind of. 41 00:02:03,520 --> 00:02:05,040 Speaker 2: Running the mill stuff That is not running the mill 42 00:02:05,080 --> 00:02:05,600 Speaker 2: starf at all. 43 00:02:05,640 --> 00:02:07,480 Speaker 1: All right, we'll put that to one site. 44 00:02:07,600 --> 00:02:11,320 Speaker 3: So the whole goal economic prosperity, and under the Reserve 45 00:02:11,360 --> 00:02:15,280 Speaker 3: Bank Act it's looking for price stability and full employment. 46 00:02:15,800 --> 00:02:18,720 Speaker 3: They're both as important as each other. Been a lot 47 00:02:18,760 --> 00:02:20,920 Speaker 3: of debating in recent years. They don't care about full employment. 48 00:02:20,960 --> 00:02:24,400 Speaker 3: They don't care about price stability. That's not true. I 49 00:02:24,440 --> 00:02:26,960 Speaker 3: mean we've had full employment, so they certainly haven't failed 50 00:02:27,040 --> 00:02:29,280 Speaker 3: on that. But what the Reserve Bank of Michelle book 51 00:02:29,320 --> 00:02:32,080 Speaker 3: the government has said is that price stability at this point, 52 00:02:33,080 --> 00:02:35,640 Speaker 3: up until now, but maybe not going forward, but up 53 00:02:35,680 --> 00:02:38,160 Speaker 3: until now, price stability has been the most important of 54 00:02:38,200 --> 00:02:42,480 Speaker 3: those two things understood. Essentially just manages the trade off 55 00:02:42,520 --> 00:02:46,760 Speaker 3: between growth, employment and inflation. It's also responsible officially for 56 00:02:46,840 --> 00:02:50,440 Speaker 3: financial stability, so things like run on banks and making 57 00:02:50,440 --> 00:02:53,280 Speaker 3: sure money flows through the economy properly. The reserve banks 58 00:02:53,320 --> 00:02:56,840 Speaker 3: responsible for that. So monetary policy is also supposed to 59 00:02:56,840 --> 00:02:59,480 Speaker 3: look after financial stability. 60 00:02:59,280 --> 00:03:00,720 Speaker 2: So they all get in. 61 00:03:00,760 --> 00:03:03,960 Speaker 3: A room, God doess a lot, have a power chat 62 00:03:04,000 --> 00:03:09,000 Speaker 3: about employment, chat about inflation, chat about economic growth. They say, oh, 63 00:03:09,080 --> 00:03:11,040 Speaker 3: we might lift interest rates today because we need to 64 00:03:11,040 --> 00:03:14,160 Speaker 3: slow down economic growth and we worry about inflation. Or 65 00:03:14,160 --> 00:03:17,440 Speaker 3: they might say we wouldn't mind cutting interest rates because 66 00:03:17,560 --> 00:03:19,720 Speaker 3: we aren't so worried about inflation and we need to 67 00:03:19,760 --> 00:03:25,000 Speaker 3: boost economic growth. What is not unique in Australia, but 68 00:03:25,040 --> 00:03:27,120 Speaker 3: certainly a benefit of our system is that the Reserve 69 00:03:27,120 --> 00:03:28,520 Speaker 3: Bank is independent of government. 70 00:03:28,880 --> 00:03:29,800 Speaker 2: It can do that. 71 00:03:30,360 --> 00:03:35,680 Speaker 3: Without any favor or fear of retribution from government. So 72 00:03:35,760 --> 00:03:38,600 Speaker 3: the big debate in the US is Donald Trump putting 73 00:03:38,720 --> 00:03:41,880 Speaker 3: pressure on their central bank, the US Federal Reserve. About that, now, 74 00:03:42,040 --> 00:03:44,520 Speaker 3: the guy who's running down, a guy called J. Powell, 75 00:03:44,680 --> 00:03:47,880 Speaker 3: is pretty determined to filler, and he is determined to 76 00:03:47,920 --> 00:03:50,760 Speaker 3: be independent. And he's one of the great things about 77 00:03:50,920 --> 00:03:54,840 Speaker 3: modern democracies that their central banks are independent. 78 00:03:56,160 --> 00:04:00,400 Speaker 1: Okay, all right. If there is a lot in all 79 00:04:00,440 --> 00:04:06,960 Speaker 1: of that, right, boil it down too. At its essence, 80 00:04:07,280 --> 00:04:09,680 Speaker 1: what is going to affect me most of all is 81 00:04:09,760 --> 00:04:16,160 Speaker 1: interest rates. Right, So the single most important factor affecting 82 00:04:16,200 --> 00:04:17,919 Speaker 1: interest rates inflation. 83 00:04:18,800 --> 00:04:21,320 Speaker 3: It depends where we are in the cycle. It has 84 00:04:21,440 --> 00:04:24,480 Speaker 3: been inflation for the last few years, without a doubt. 85 00:04:24,920 --> 00:04:27,799 Speaker 3: What we've heard from Reserve Bank is then now worried 86 00:04:27,839 --> 00:04:32,880 Speaker 3: about economic growth and economic growth slash full employment. If 87 00:04:32,880 --> 00:04:34,560 Speaker 3: you have slow growth, you are likely to get a 88 00:04:34,600 --> 00:04:36,960 Speaker 3: tick up in the labor market. Hasn't really happened yet, 89 00:04:37,000 --> 00:04:39,800 Speaker 3: but that's what people think. So I think going forward, 90 00:04:39,960 --> 00:04:41,839 Speaker 3: the Reserve Bank's going to talk more about economic growth 91 00:04:41,880 --> 00:04:44,239 Speaker 3: and full employment. Previously it's all been about inflation. 92 00:04:44,400 --> 00:04:49,599 Speaker 1: Okay, all right, let's take that as all understood, right. 93 00:04:50,200 --> 00:04:53,360 Speaker 3: Don't laugh, BA think about economics is you just assume 94 00:04:53,360 --> 00:04:54,920 Speaker 3: away anything is just a bit tricky. 95 00:04:55,520 --> 00:04:57,760 Speaker 2: Just pretend we know about you're assuming we understand that, 96 00:04:57,920 --> 00:04:58,720 Speaker 2: and hopefully. 97 00:04:58,400 --> 00:05:01,239 Speaker 1: There won't be a quiz at the end. Who makes 98 00:05:01,279 --> 00:05:04,080 Speaker 1: these decisions? Who are who are the actual people behind 99 00:05:04,520 --> 00:05:07,160 Speaker 1: behind all of this because at the end they at 100 00:05:07,160 --> 00:05:10,279 Speaker 1: the end of the day, they are just people trying 101 00:05:10,279 --> 00:05:12,640 Speaker 1: to take in a huge amount of information and make 102 00:05:12,720 --> 00:05:15,800 Speaker 1: decisions that can change the course of the Australian economy. 103 00:05:16,240 --> 00:05:18,840 Speaker 3: Yes, so there was a change to the Reserve Bank 104 00:05:18,960 --> 00:05:21,840 Speaker 3: last year. We ended up now this year we ended 105 00:05:21,920 --> 00:05:25,960 Speaker 3: up with a Monetary Policy Board. The Montary Policy Board 106 00:05:25,960 --> 00:05:28,880 Speaker 3: has the Governor, a woman called Michelle Bullock, the Deputy 107 00:05:28,920 --> 00:05:34,000 Speaker 3: Governor Andrew Housen from his British guy, the Secretary to 108 00:05:34,160 --> 00:05:38,880 Speaker 3: the Treasury, and then sit in the Secretary to the Treasuries, 109 00:05:38,880 --> 00:05:41,800 Speaker 3: the guy called seven Kennedy, and then six non executive 110 00:05:41,800 --> 00:05:44,440 Speaker 3: members basically business leaders. So Marnie Baker, she's been on 111 00:05:44,480 --> 00:05:46,800 Speaker 3: the show. He used to run Ben Benning on Adelaide Bank. 112 00:05:47,000 --> 00:05:51,559 Speaker 3: She's one of those six people. In harp Overy, well known, 113 00:05:51,800 --> 00:05:55,800 Speaker 3: highly credentialed academic Carolyn Hewson Allison Watkins used to run 114 00:05:55,839 --> 00:05:56,800 Speaker 3: Coca Colorametal. 115 00:05:57,240 --> 00:05:59,040 Speaker 2: So they're the guys that get in there. 116 00:05:59,680 --> 00:06:01,440 Speaker 3: There is irbank boffins come in and say this is 117 00:06:01,440 --> 00:06:03,560 Speaker 3: what we think is happening, put up a lot of charts, 118 00:06:03,920 --> 00:06:05,880 Speaker 3: you know, chat about the weather, do whatever. 119 00:06:06,240 --> 00:06:07,520 Speaker 2: At the end of it, the Reserve Bank. 120 00:06:07,400 --> 00:06:09,839 Speaker 3: Probably comes down with I'm sure they would come out 121 00:06:09,920 --> 00:06:13,720 Speaker 3: with a recommendation based on what the chief economists of 122 00:06:13,720 --> 00:06:16,599 Speaker 3: the Reserve Bank says, a woman called Sarah Hunter, and 123 00:06:16,640 --> 00:06:18,400 Speaker 3: then the members vote on it. 124 00:06:18,400 --> 00:06:20,400 Speaker 2: It has doesn't have to be a unanimous decision. It 125 00:06:20,400 --> 00:06:21,600 Speaker 2: has to be a majority of decision. 126 00:06:21,720 --> 00:06:24,200 Speaker 1: How important is it that there are those business leaders 127 00:06:24,240 --> 00:06:27,320 Speaker 1: part of this decision because of that real world experience 128 00:06:27,400 --> 00:06:29,160 Speaker 1: beyond the walls of the Reserve Bank. 129 00:06:29,279 --> 00:06:31,360 Speaker 3: So the Reserve Bank would argue that they've got these 130 00:06:31,400 --> 00:06:35,279 Speaker 3: great business liaison programs going on, so they know what's 131 00:06:35,320 --> 00:06:35,720 Speaker 3: going on. 132 00:06:35,839 --> 00:06:38,800 Speaker 1: The way you said that suggests that you don't necessarily agree. 133 00:06:38,839 --> 00:06:40,599 Speaker 3: They have worked at the Reserve Bank, and I know, 134 00:06:41,520 --> 00:06:45,040 Speaker 3: I mean, I know Michelle Bullock, I don't know Andrew Howser, 135 00:06:45,480 --> 00:06:47,560 Speaker 3: but I know a bunch of their leaders and they 136 00:06:47,640 --> 00:06:51,120 Speaker 3: had their lifelong Reserve bankers. So I think having people 137 00:06:51,160 --> 00:06:53,919 Speaker 3: from outside coming in and saying what they're you know, 138 00:06:54,080 --> 00:06:58,360 Speaker 3: seeing in real life is a really really good idea. 139 00:06:58,440 --> 00:07:01,599 Speaker 1: Okay, especially someone like maney Aker who has worked at 140 00:07:01,640 --> 00:07:05,640 Speaker 1: a bank and has seen mortgages in action and the 141 00:07:05,720 --> 00:07:08,760 Speaker 1: impact of interest rates going up and down on real 142 00:07:08,800 --> 00:07:09,720 Speaker 1: world customers. 143 00:07:09,800 --> 00:07:13,640 Speaker 2: Yeah, absolutely, okay, I. 144 00:07:13,320 --> 00:07:16,560 Speaker 1: Think I mean, you exceeded the five minute time limit, sorry, 145 00:07:17,000 --> 00:07:20,480 Speaker 1: just marginally, And that might have might have been also 146 00:07:20,520 --> 00:07:22,560 Speaker 1: because of my contribution. If it had just if we 147 00:07:22,720 --> 00:07:24,600 Speaker 1: just cut me out and just focused on you, you were 148 00:07:24,600 --> 00:07:26,920 Speaker 1: probably within the five minutes. I think we've answered the 149 00:07:26,960 --> 00:07:29,960 Speaker 1: question out considering it was a three part question, and 150 00:07:30,040 --> 00:07:33,520 Speaker 1: it also led to the remarkable image of the Reserve 151 00:07:33,600 --> 00:07:38,800 Speaker 1: Bank as a as a trident kind of no, no, 152 00:07:38,880 --> 00:07:39,640 Speaker 1: you disagree with that? 153 00:07:39,800 --> 00:07:40,840 Speaker 2: Oh no, no, we can go with that. 154 00:07:41,920 --> 00:07:45,360 Speaker 1: I pickedure the Little Mermaid, you know, and King Triton 155 00:07:45,480 --> 00:07:48,200 Speaker 1: with his trident. You remember that, it's very. 156 00:07:48,200 --> 00:07:50,600 Speaker 2: An obscure reference when it comes to the Reserve Bank. 157 00:07:50,640 --> 00:07:52,880 Speaker 1: There, I'm trying to put it in terms that I 158 00:07:52,960 --> 00:07:55,560 Speaker 1: will remember and I will forever. Now remember those three 159 00:07:55,600 --> 00:07:57,200 Speaker 1: goals of the Reserve Bank, and I will use them 160 00:07:57,240 --> 00:07:58,320 Speaker 1: little Mermaid to do so. 161 00:07:58,720 --> 00:08:00,600 Speaker 2: All right, Thank you very much, Sean, Thank you Michael. 162 00:08:00,920 --> 00:08:02,480 Speaker 1: Remember if you've got your own question that you would 163 00:08:02,560 --> 00:08:04,120 Speaker 1: like us to answer them, please send it on through 164 00:08:04,200 --> 00:08:06,760 Speaker 1: via the website Fearangreed dot com dot au or jump 165 00:08:06,840 --> 00:08:08,800 Speaker 1: onto any of the social media platforms and we will 166 00:08:08,800 --> 00:08:10,680 Speaker 1: pop it on the list our Michael Thompson and this 167 00:08:10,800 --> 00:08:11,840 Speaker 1: is ask Fear and Great