1 00:00:03,900 --> 00:00:06,240 Sean Aylmer: Welcome to the Fear and Greed Business interview. I'm Sean 2 00:00:06,240 --> 00:00:09,209 Sean Aylmer: Aylmer. It's been a big week for the Australian economy. 3 00:00:09,210 --> 00:00:12,719 Sean Aylmer: Yesterday's CPI data revealed inflation has fallen to a two- 4 00:00:12,719 --> 00:00:16,439 Sean Aylmer: year low with an annual rate of 4.1%. The December 5 00:00:16,440 --> 00:00:20,010 Sean Aylmer: quarter increase of 0. 6% was the lowest quarterly increase 6 00:00:20,160 --> 00:00:23,310 Sean Aylmer: since March 2021 and earlier in the week we learned 7 00:00:23,340 --> 00:00:27,599 Sean Aylmer: retail sales slumped 2. 7% in December, the sharpest monthly 8 00:00:27,599 --> 00:00:31,530 Sean Aylmer: drop since the pandemic lockdowns in mid- 2020. Retail sales 9 00:00:31,530 --> 00:00:34,109 Sean Aylmer: per capita are actually down about 4% year- on- year. 10 00:00:34,409 --> 00:00:36,299 Sean Aylmer: So what's it all mean for interest rates, for business, 11 00:00:36,299 --> 00:00:39,210 Sean Aylmer: for consumers, for the economy more broadly? Gareth Aird is 12 00:00:39,210 --> 00:00:43,140 Sean Aylmer: the Commonwealth Bank's head of Australian economics. Gareth, welcome back 13 00:00:43,140 --> 00:00:45,570 Sean Aylmer: to Fear and Greed. You're almost a regular Gareth, I'd say. 14 00:00:45,960 --> 00:00:47,909 Gareth Aird: Good day, Sean. Look, it's nice to be back. I 15 00:00:47,909 --> 00:00:50,400 Gareth Aird: haven't been on for a while, but was on pretty 16 00:00:50,400 --> 00:00:51,930 Gareth Aird: regular through last year, which was good. 17 00:00:52,619 --> 00:00:57,120 Sean Aylmer: Well, we appreciate it. Yesterday's December quarter CPI data, what 18 00:00:57,120 --> 00:00:57,960 Sean Aylmer: does it tell us? 19 00:00:58,590 --> 00:01:01,200 Gareth Aird: Well, it was good news. Story it tells us that 20 00:01:01,200 --> 00:01:05,249 Gareth Aird: inflation has continued to moderate in Australia and the rate 21 00:01:05,250 --> 00:01:08,099 Gareth Aird: of inflation has actually come down more than most analysts 22 00:01:08,099 --> 00:01:11,670 Gareth Aird: expected and I think, importantly, from a Reserve Bank perspective, 23 00:01:12,150 --> 00:01:14,010 Gareth Aird: the rate of inflation has come down more than the 24 00:01:14,010 --> 00:01:18,209 Gareth Aird: central bank anticipated. What the data is basically showing is that rate 25 00:01:18,209 --> 00:01:21,569 Gareth Aird: hikes work, the economic data more broadly has been slowing, 26 00:01:21,840 --> 00:01:25,620 Gareth Aird: growth in demand has eased. You mention retail sales at 27 00:01:25,620 --> 00:01:28,350 Gareth Aird: the opening. That's picking up the fact that the consumer 28 00:01:28,350 --> 00:01:31,320 Gareth Aird: is slowing and, by extension, it then becomes harder for 29 00:01:31,350 --> 00:01:34,920 Gareth Aird: businesses to put price rises through. So, some pretty encouraging 30 00:01:34,920 --> 00:01:38,730 Gareth Aird: data there and I think it's welcome news really for consumers out there. 31 00:01:39,870 --> 00:01:42,929 Sean Aylmer: We hear a lot about services versus goods inflation and that's 32 00:01:42,929 --> 00:01:45,328 Sean Aylmer: something that we seem to have been a bit focused 33 00:01:45,330 --> 00:01:47,069 Sean Aylmer: on over the past 6 months. The idea that goods 34 00:01:47,069 --> 00:01:49,290 Sean Aylmer: inflation has come down as supply chains have opened up. 35 00:01:49,470 --> 00:01:52,890 Sean Aylmer: Services inflation a little stickier, what happened there? 36 00:01:53,700 --> 00:01:56,220 Gareth Aird: Well, I think it's helpful to think back what happened 37 00:01:56,220 --> 00:01:58,800 Gareth Aird: several years ago when we came out of the pandemic. 38 00:01:58,860 --> 00:02:03,000 Gareth Aird: That was goods inflation picked up very quickly, but service 39 00:02:03,000 --> 00:02:06,840 Gareth Aird: inflation lagged. We had some issues with some supply chains 40 00:02:06,840 --> 00:02:09,419 Gareth Aird: during the pandemic. We also had a lot more demand 41 00:02:09,419 --> 00:02:12,149 Gareth Aird: than usual for goods because that was basically the consumer 42 00:02:12,150 --> 00:02:14,790 Gareth Aird: items that we could purchase, whereas we couldn't do a 43 00:02:14,790 --> 00:02:17,040 Gareth Aird: lot on the services side. So we had this big 44 00:02:17,040 --> 00:02:19,950 Gareth Aird: lift in goods inflation. And then, around about 6 to 45 00:02:19,950 --> 00:02:23,340 Gareth Aird: 9 months later, services inflation started to really pick up. 46 00:02:23,969 --> 00:02:25,740 Gareth Aird: Then, if we look back at the past year, what 47 00:02:25,740 --> 00:02:27,900 Gareth Aird: we can see is that goods inflation has come down 48 00:02:27,900 --> 00:02:32,130 Gareth Aird: more swiftly than services inflation. That's not just a story 49 00:02:32,130 --> 00:02:34,800 Gareth Aird: in Australia, that's a global one, but I think it's 50 00:02:34,800 --> 00:02:37,709 Gareth Aird: helpful to just think about the fact that goods inflation 51 00:02:37,710 --> 00:02:40,589 Gareth Aird: did start lifting earlier and, therefore, it was always going 52 00:02:40,590 --> 00:02:42,780 Gareth Aird: to come down a little bit more quickly than the services 53 00:02:42,780 --> 00:02:43,559 Gareth Aird: side of the economy. 54 00:02:45,750 --> 00:02:47,940 Sean Aylmer: What's it all mean for interest rates, Gareth? 55 00:02:48,570 --> 00:02:50,429 Gareth Aird: Well, I think in the very short term, it means 56 00:02:50,429 --> 00:02:53,459 Gareth Aird: that we're going to see policy on hold next week 57 00:02:53,669 --> 00:02:57,900 Gareth Aird: with the Reserve Bank's first meeting of 2024. Heading into 58 00:02:57,960 --> 00:03:01,830 Gareth Aird: the data print yesterday, the focus was really on whether 59 00:03:01,830 --> 00:03:04,889 Gareth Aird: or not we got a CPI which was stronger in 60 00:03:04,889 --> 00:03:08,160 Gareth Aird: line or weaker than the Reserve Bank had been expecting, 61 00:03:08,160 --> 00:03:11,219 Gareth Aird: because that would guide analysts in the markets as to 62 00:03:11,219 --> 00:03:13,080 Gareth Aird: whether or not the RBA would leave the cash rate 63 00:03:13,080 --> 00:03:15,660 Gareth Aird: on hold or hike. But the fact that we've had 64 00:03:15,660 --> 00:03:19,770 Gareth Aird: quite a miss relative to the RBAs forecast on the 65 00:03:19,770 --> 00:03:22,500 Gareth Aird: softer side means that the Reserve Bank will leave the 66 00:03:22,500 --> 00:03:25,860 Gareth Aird: cash rate on hold and we think they're done in terms 67 00:03:25,860 --> 00:03:29,070 Gareth Aird: of their tightening cycle. They've put a lot through and they put 68 00:03:29,070 --> 00:03:31,830 Gareth Aird: a lot through very quickly, and it does take time 69 00:03:31,830 --> 00:03:34,469 Gareth Aird: for the inflation data to respond to what the RBAs 70 00:03:34,469 --> 00:03:38,850 Gareth Aird: done, but the central bank will clearly welcome yesterday's inflation 71 00:03:38,850 --> 00:03:41,880 Gareth Aird: report. It will enable them to keep the cash rate 72 00:03:41,880 --> 00:03:45,720 Gareth Aird: on hold. They'll downwardly revise their inflation forecast as well, 73 00:03:46,080 --> 00:03:48,690 Gareth Aird: simply for the fact that inflation has come in below 74 00:03:48,690 --> 00:03:52,199 Gareth Aird: where they expected to see it. I think, as we 75 00:03:52,199 --> 00:03:54,330 Gareth Aird: go through this year, it'll just be a matter of 76 00:03:54,330 --> 00:03:57,210 Gareth Aird: time as to when we're all debating when the first 77 00:03:57,210 --> 00:03:59,880 Gareth Aird: cut in the cash rate is actually likely to occur. 78 00:04:00,270 --> 00:04:02,040 Gareth Aird: We've got a call out there we think it'll be 79 00:04:02,040 --> 00:04:04,320 Gareth Aird: September. There's still a fair bit of water to pass 80 00:04:04,320 --> 00:04:06,629 Gareth Aird: under the bridge before we get there, but we're pretty 81 00:04:06,630 --> 00:04:08,639 Gareth Aird: comfortable now with the idea that the next move is 82 00:04:08,639 --> 00:04:11,250 Gareth Aird: down and it'll happen in the second half of this year. 83 00:04:11,910 --> 00:04:13,620 Sean Aylmer: Stay with me, Gareth. We'll be back in a minute. 84 00:04:20,099 --> 00:04:23,610 Sean Aylmer: I'm speaking to Gareth Aird, Commonwealth Bank's head of Australian 85 00:04:23,610 --> 00:04:29,490 Sean Aylmer: Economics. So a cut potentially in September. A lot of 86 00:04:29,490 --> 00:04:31,680 Sean Aylmer: water to flow under the bridge, as you said. What 87 00:04:31,680 --> 00:04:34,200 Sean Aylmer: is it that the Reserve Bank will be... I mean, 88 00:04:34,200 --> 00:04:37,410 Sean Aylmer: is it inflation that it's going to be focused on? Does it 89 00:04:37,410 --> 00:04:39,928 Sean Aylmer: want to get to that 2 to 3% target band 90 00:04:39,928 --> 00:04:43,170 Sean Aylmer: before it does anything? Is the last percentage point the 91 00:04:43,170 --> 00:04:46,318 Sean Aylmer: hardest? I'm just wondering what the flow from here is like. 92 00:04:46,829 --> 00:04:50,640 Gareth Aird: Look, it's a good question and it's a broad question. The central 93 00:04:50,640 --> 00:04:53,880 Gareth Aird: Bank is focused on a lot of things. Their primary 94 00:04:53,880 --> 00:04:57,178 Gareth Aird: focus is the rate of inflation and getting inflation back 95 00:04:57,178 --> 00:05:00,209 Gareth Aird: to target, but they know that inflation is a lagging 96 00:05:00,210 --> 00:05:05,219 Gareth Aird: indicator. The rate of change in inflation is very heavily 97 00:05:05,219 --> 00:05:07,800 Gareth Aird: influenced by what's happening in terms of demand growth in 98 00:05:07,800 --> 00:05:11,130 Gareth Aird: the economy, and then also the labor market. The Reserve 99 00:05:11,130 --> 00:05:13,589 Gareth Aird: Bank is trying to keep or preserve, as they say, 100 00:05:13,589 --> 00:05:16,770 Gareth Aird: as many gains in employment as possible as they get 101 00:05:16,770 --> 00:05:20,520 Gareth Aird: inflation back to target. What we've seen over the backend 102 00:05:20,520 --> 00:05:22,919 Gareth Aird: of last year is the unemployment rate has been rising,: 103 00:05:23,190 --> 00:05:26,040 Gareth Aird: hit a cyclical low of just under 3.5% and it's 104 00:05:26,040 --> 00:05:29,430 Gareth Aird: now 3. 9%. So, this stage, the RBA would not 105 00:05:29,430 --> 00:05:31,890 Gareth Aird: be concerned about the lift in unemployment, but I think 106 00:05:31,890 --> 00:05:34,710 Gareth Aird: as we go through this year with our forecast that 107 00:05:34,710 --> 00:05:37,589 Gareth Aird: the unemployment rate will continue to rise, there will come 108 00:05:37,589 --> 00:05:39,750 Gareth Aird: a point where the Reserve Bank puts a little bit 109 00:05:39,750 --> 00:05:42,510 Gareth Aird: more weight on what's happening in terms of the uptrend in 110 00:05:42,600 --> 00:05:45,510 Gareth Aird: the unemployment rate, and then overlays that with what they're 111 00:05:45,510 --> 00:05:49,409 Gareth Aird: seeing on the prices side of things. Our expectation here 112 00:05:49,410 --> 00:05:51,690 Gareth Aird: is that the central bank will not actually wait for 113 00:05:51,690 --> 00:05:54,959 Gareth Aird: inflation to get back to target before cutting the cash 114 00:05:54,960 --> 00:05:57,599 Gareth Aird: rate. Because if they were to do that, they wouldn't 115 00:05:57,599 --> 00:06:00,779 Gareth Aird: be cutting the cash rate this year because it's very 116 00:06:00,779 --> 00:06:02,549 Gareth Aird: hard to get the annual rate back to 2 to 117 00:06:02,550 --> 00:06:06,600 Gareth Aird: 3% simply because we've got a big 1. 2% quarterly 118 00:06:06,600 --> 00:06:09,000 Gareth Aird: increase from the September quarter of last year stuck in 119 00:06:09,000 --> 00:06:12,419 Gareth Aird: the annual calculations. So we'll still see inflation above target 120 00:06:12,420 --> 00:06:14,969 Gareth Aird: as we go through this year, but I think as 121 00:06:14,969 --> 00:06:17,429 Gareth Aird: we go through the year with the unemployment rate rising, 122 00:06:17,789 --> 00:06:20,640 Gareth Aird: the Reserve Bank will put more weight on the recent 123 00:06:20,640 --> 00:06:24,960 Gareth Aird: inflation data. And if they can see a clear disinflationary 124 00:06:24,960 --> 00:06:28,018 Gareth Aird: trend still apparent in the data, keeping in mind we 125 00:06:28,020 --> 00:06:31,200 Gareth Aird: got 0.8% on the quarter yesterday, if they then see that 126 00:06:31,200 --> 00:06:34,529 Gareth Aird: step down to 0. 7%, even with the annual rate still 127 00:06:34,529 --> 00:06:37,499 Gareth Aird: above 3%, they can look at inflation on a 6 128 00:06:37,500 --> 00:06:40,320 Gareth Aird: month annualized basis and say, " It's pretty much job done. 129 00:06:40,830 --> 00:06:43,229 Gareth Aird: We don't want the unemployment rate to rise too much. 130 00:06:43,500 --> 00:06:47,159 Gareth Aird: We know inflation will respond in time with what we 131 00:06:47,160 --> 00:06:49,889 Gareth Aird: do on the rates side, so we really should step 132 00:06:49,889 --> 00:06:52,198 Gareth Aird: in front of it now, take policy away from its 133 00:06:52,199 --> 00:06:54,779 Gareth Aird: restrictive setting, and that way we can aim for the 134 00:06:54,779 --> 00:06:55,410 Gareth Aird: soft landing." 135 00:06:56,250 --> 00:06:58,229 Sean Aylmer: This year, we're going to have a bit of a 136 00:06:58,230 --> 00:07:01,140 Sean Aylmer: different Reserve Bank. We have a new governor, Michele Bullock, 137 00:07:01,140 --> 00:07:03,118 Sean Aylmer: but we also have a board who are going to 138 00:07:03,120 --> 00:07:04,770 Sean Aylmer: have to vote and we're going to find out how 139 00:07:04,770 --> 00:07:07,200 Sean Aylmer: they voted. We're going to have a press conference afterwards. 140 00:07:07,650 --> 00:07:11,279 Sean Aylmer: The bank itself has a brand new chief economist and a 141 00:07:11,369 --> 00:07:13,800 Sean Aylmer: new deputy governor, all that stuff. Is it going to 142 00:07:13,800 --> 00:07:15,960 Sean Aylmer: make much of a difference, do you think, to how 143 00:07:15,960 --> 00:07:16,530 Sean Aylmer: it works? 144 00:07:17,160 --> 00:07:20,639 Gareth Aird: I think the short answer is no, it shouldn't in 145 00:07:20,639 --> 00:07:23,939 Gareth Aird: terms of the decisions. The central bank still has the 146 00:07:23,940 --> 00:07:26,789 Gareth Aird: inflation target. They still have the objective of full employment. 147 00:07:27,270 --> 00:07:31,020 Gareth Aird: There has been a focus though in the recent communication 148 00:07:31,020 --> 00:07:33,150 Gareth Aird: between the government and the central bank in terms of 149 00:07:33,150 --> 00:07:35,460 Gareth Aird: its charter to stress the midpoint of the target, but 150 00:07:35,460 --> 00:07:38,249 Gareth Aird: I think that's more just what you aim for. If 151 00:07:38,250 --> 00:07:39,870 Gareth Aird: you want to get inflation in the 2 to 3% 152 00:07:40,230 --> 00:07:43,229 Gareth Aird: band, it makes sense to aim for 2. 5%. In 153 00:07:43,230 --> 00:07:45,959 Gareth Aird: terms of the changes that are coming in this year, 154 00:07:45,960 --> 00:07:49,380 Gareth Aird: they're not all happening in one go. So we first 155 00:07:49,380 --> 00:07:53,610 Gareth Aird: get the press conference after the board meeting, on the 156 00:07:53,610 --> 00:07:55,440 Gareth Aird: day of the board meeting, at 3: 30. So that'll 157 00:07:55,440 --> 00:07:58,289 Gareth Aird: happen next week and we'll get the statement of monetary 158 00:07:58,290 --> 00:08:02,130 Gareth Aird: policy as well. That'll be published at the same time 159 00:08:02,130 --> 00:08:05,069 Gareth Aird: as the decision is announced and we move to the 160 00:08:05,070 --> 00:08:07,860 Gareth Aird: new schedule of a meeting every 6 weeks from next 161 00:08:07,860 --> 00:08:11,280 Gareth Aird: week, but we don't actually get the new monetary policy 162 00:08:11,280 --> 00:08:14,130 Gareth Aird: board coming in until the second half of this year. 163 00:08:14,340 --> 00:08:17,550 Gareth Aird: It'll probably be around July. So we're going to have 164 00:08:18,000 --> 00:08:20,610 Gareth Aird: changes taking place at a couple of times throughout the 165 00:08:20,610 --> 00:08:24,090 Gareth Aird: year. I think what'll be more interesting is when we 166 00:08:24,090 --> 00:08:26,220 Gareth Aird: get the new monetary policy board, because we don't know 167 00:08:26,220 --> 00:08:28,530 Gareth Aird: what that's going to look like at the moment. And 168 00:08:28,530 --> 00:08:30,480 Gareth Aird: the fact that there's going to be a published vote 169 00:08:30,540 --> 00:08:34,588 Gareth Aird: once that board is voting, I think creates a little 170 00:08:34,590 --> 00:08:36,840 Gareth Aird: bit of interest out there as to how united or 171 00:08:36,840 --> 00:08:39,269 Gareth Aird: not the board is. I think the governor will straight 172 00:08:39,270 --> 00:08:42,600 Gareth Aird: away be asked who voted for what and was the 173 00:08:42,600 --> 00:08:45,809 Gareth Aird: RBA on the majority side of the vote. Because it 174 00:08:45,809 --> 00:08:48,478 Gareth Aird: is possible that the RBA, so the governor and the 175 00:08:48,480 --> 00:08:52,109 Gareth Aird: deputy governor, vote actually in the minority, which would create 176 00:08:52,110 --> 00:08:56,070 Gareth Aird: a pretty interesting dynamic. But I think that's probably the 177 00:08:56,070 --> 00:08:59,699 Gareth Aird: more interesting event when the new monetary policy board takes 178 00:08:59,699 --> 00:09:01,980 Gareth Aird: up its role as opposed to just the change in 179 00:09:01,980 --> 00:09:03,840 Gareth Aird: the meeting schedule and the press conferences. 180 00:09:04,260 --> 00:09:07,319 Sean Aylmer: A final question, and perhaps it's a bit unfair, you 181 00:09:07,320 --> 00:09:09,840 Sean Aylmer: have been an economist for a while, Gareth, and you're 182 00:09:09,840 --> 00:09:12,540 Sean Aylmer: head of Australian economics at Commonwealth Bank, you know the 183 00:09:12,540 --> 00:09:15,000 Sean Aylmer: Reserve Bank. Do you think it's done a good job 184 00:09:15,000 --> 00:09:19,020 Sean Aylmer: in the last 18 months post... and I'm saying post 185 00:09:19,020 --> 00:09:22,679 Sean Aylmer: the comment by then Governor Phil Lowe that rates wouldn't 186 00:09:22,679 --> 00:09:25,800 Sean Aylmer: rise. Once rates started to rise, from that point to 187 00:09:25,800 --> 00:09:27,630 Sean Aylmer: now, do you think they've done a good job? 188 00:09:28,290 --> 00:09:32,009 Gareth Aird: Look, that's obviously a subjective question. I think they've basically 189 00:09:32,009 --> 00:09:35,129 Gareth Aird: done what they've had to do, which is raise rates 190 00:09:35,309 --> 00:09:38,429 Gareth Aird: pretty aggressively given they were late to the party. That 191 00:09:38,429 --> 00:09:42,270 Gareth Aird: always meant they were going to increase rates very quickly. 192 00:09:42,690 --> 00:09:46,469 Gareth Aird: They've done that and the result of those decisions has 193 00:09:46,469 --> 00:09:49,319 Gareth Aird: resulted in a slow down the economy. Inflation now is 194 00:09:49,320 --> 00:09:53,069 Gareth Aird: coming down. So their policy decisions have clearly worked to 195 00:09:53,070 --> 00:09:57,390 Gareth Aird: slow the economy. They've tried to thread the needle here 196 00:09:57,390 --> 00:10:00,660 Gareth Aird: of keeping the unemployment rate as low as possible while 197 00:10:00,660 --> 00:10:03,360 Gareth Aird: slowing the economy. And if you look at the data 198 00:10:03,360 --> 00:10:06,150 Gareth Aird: at the moment, you'd say, " Things are going to plan." 199 00:10:06,240 --> 00:10:08,789 Gareth Aird: The unemployment rate is still very low and the rate 200 00:10:08,790 --> 00:10:12,569 Gareth Aird: of inflation is coming down. So if they can manage 201 00:10:12,570 --> 00:10:15,718 Gareth Aird: to time the easing correctly and get the rate- cutting 202 00:10:15,720 --> 00:10:19,980 Gareth Aird: cycle calibrated correctly, then they should be able to return 203 00:10:19,980 --> 00:10:23,670 Gareth Aird: inflation to target and keep the unemployment rate relatively low. 204 00:10:23,759 --> 00:10:25,349 Gareth Aird: I think if that happens, we'd have to say they've 205 00:10:25,349 --> 00:10:27,779 Gareth Aird: done a particularly good job through this cycle. 206 00:10:28,590 --> 00:10:30,299 Sean Aylmer: Gareth, thank you for talking to Fear and Greed. 207 00:10:30,690 --> 00:10:31,350 Gareth Aird: Nice to have a chat. 208 00:10:31,710 --> 00:10:35,880 Sean Aylmer: That's Gareth Aird, Commonwealth Bank's head of Australian Economics. This 209 00:10:35,880 --> 00:10:38,010 Sean Aylmer: is the Fear and Greed Business Interview. Join us every 210 00:10:38,010 --> 00:10:40,379 Sean Aylmer: morning for the full episode of Fear and Greed, Australia's 211 00:10:40,380 --> 00:10:43,439 Sean Aylmer: best business podcast. I'm Sean Aylmer. Enjoy your day.