1 00:00:03,460 --> 00:00:06,010 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,030 --> 00:00:09,490 Sean Aylmer: Aylmer. The Reserve Bank of Australia's board held its final 3 00:00:09,490 --> 00:00:12,740 Sean Aylmer: meeting for 2021 yesterday. It's ending the year with a 4 00:00:12,740 --> 00:00:16,970 Sean Aylmer: vastly different situation than how it began. Inflationary pressures are 5 00:00:16,970 --> 00:00:20,370 Sean Aylmer: building, the housing market is coming off an extraordinary boom, 6 00:00:20,570 --> 00:00:23,210 Sean Aylmer: and the economy is recovering from the Delta strain, thanks 7 00:00:23,210 --> 00:00:26,900 Sean Aylmer: to a national vaccination rate of more than 88%. So 8 00:00:27,210 --> 00:00:29,500 Sean Aylmer: what's it all mean for the decision making at the 9 00:00:29,500 --> 00:00:32,750 Sean Aylmer: Central Bank? Gareth Aird, is head of Australian Economics at 10 00:00:32,750 --> 00:00:34,900 Sean Aylmer: the Commonwealth Bank. Gareth, welcome back to Fear and Greed. 11 00:00:35,390 --> 00:00:36,390 Gareth Aird: Good day, it's nice to be here. 12 00:00:37,159 --> 00:00:39,300 Sean Aylmer: So tell me the main points out of the Reserve 13 00:00:39,300 --> 00:00:40,680 Sean Aylmer: Bank's board meeting yesterday. 14 00:00:41,159 --> 00:00:43,180 Gareth Aird: Well look, we probably didn't learn a lot to some 15 00:00:43,180 --> 00:00:46,909 Gareth Aird: extent the reserve bank left monetary policy unchanged as was 16 00:00:46,909 --> 00:00:50,560 Gareth Aird: expected. They reiterated their view that they think it's going 17 00:00:50,560 --> 00:00:53,290 Gareth Aird: to still take a long time for inflation pressures to 18 00:00:53,290 --> 00:00:56,170 Gareth Aird: emerge. They think inflation's only going to pick up gradually. 19 00:00:56,550 --> 00:00:59,630 Gareth Aird: They think that wages will also only pick up gradually, 20 00:01:00,000 --> 00:01:02,250 Gareth Aird: and that means they think a rate hike is still 21 00:01:02,290 --> 00:01:04,770 Gareth Aird: quite a way away. I mean, I would just sort 22 00:01:04,770 --> 00:01:07,500 Gareth Aird: of note something though in the statement, which I thought 23 00:01:07,500 --> 00:01:10,700 Gareth Aird: was pretty important. And that is that the bank has sort 24 00:01:10,700 --> 00:01:14,809 Gareth Aird: of subtly shifted their rhetoric around state based Ford guidance 25 00:01:14,810 --> 00:01:17,660 Gareth Aird: versus calendar based Ford guidance. And what I mean by 26 00:01:17,660 --> 00:01:20,640 Gareth Aird: is that the Reserve Bank has constantly said that they want 27 00:01:20,640 --> 00:01:24,010 Gareth Aird: to see inflation sustainably within the target and wages up 28 00:01:24,010 --> 00:01:27,030 Gareth Aird: around 3% before they increase the cash rate. And they would 29 00:01:27,030 --> 00:01:30,270 Gareth Aird: then say that they don't think that's happening before 2024. 30 00:01:30,640 --> 00:01:32,850 Gareth Aird: Well, this time around, they just took that part out. 31 00:01:32,850 --> 00:01:34,750 Gareth Aird: So they still said they want to see those same 32 00:01:34,750 --> 00:01:37,830 Gareth Aird: conditions, but they haven't stressed the timing of that. And 33 00:01:37,830 --> 00:01:39,979 Gareth Aird: I think that gives them a little bit more flexibility. 34 00:01:40,410 --> 00:01:43,110 Sean Aylmer: Okay. I mean, one thing about Reserve Bank speak, everyone 35 00:01:43,110 --> 00:01:46,740 Sean Aylmer: pores over the words, so anything in what came out 36 00:01:46,740 --> 00:01:49,210 Sean Aylmer: yesterday was deliberate. That's fair to say? 37 00:01:49,760 --> 00:01:52,960 Gareth Aird: That's exactly right. They don't make these changes without thinking 38 00:01:52,960 --> 00:01:56,000 Gareth Aird: about them a lot. So as an economist that's trying 39 00:01:56,000 --> 00:01:58,210 Gareth Aird: to work out exactly what message they're trying to send, 40 00:01:58,210 --> 00:02:00,820 Gareth Aird: you look at really what has been changed from the 41 00:02:00,820 --> 00:02:03,770 Gareth Aird: previous month. And so the fact that they did make 42 00:02:03,770 --> 00:02:06,960 Gareth Aird: that tweak, I think is really just wanting to stress 43 00:02:06,960 --> 00:02:10,109 Gareth Aird: that it's really going to be outcomes that drive their 44 00:02:10,110 --> 00:02:13,359 Gareth Aird: policy decisions, not so much the timeline that they've put 45 00:02:13,360 --> 00:02:15,620 Gareth Aird: around when they think things will happen. And that of 46 00:02:15,620 --> 00:02:18,030 Gareth Aird: course is where, comes in with our view, we think 47 00:02:18,030 --> 00:02:20,990 Gareth Aird: that those conditions that they've set themselves to meet before 48 00:02:20,990 --> 00:02:23,680 Gareth Aird: raising the cash rate will be met by the end 49 00:02:23,680 --> 00:02:25,669 Gareth Aird: of next year, which is different to what they've been 50 00:02:25,669 --> 00:02:28,280 Gareth Aird: saying. They think that it's still taking a while before 51 00:02:28,280 --> 00:02:30,150 Gareth Aird: we get to that point where they'll actually need to 52 00:02:30,150 --> 00:02:30,920 Gareth Aird: raise the cash rate. 53 00:02:31,550 --> 00:02:34,840 Sean Aylmer: Okay. Just before we get onto interest rates. If I 54 00:02:34,840 --> 00:02:37,270 Sean Aylmer: read it as a lay person though, I probably have 55 00:02:37,270 --> 00:02:40,139 Sean Aylmer: an economics background, but like someone far down the totem 56 00:02:40,139 --> 00:02:43,590 Sean Aylmer: pole compared to you. I would think, wow, they're really 57 00:02:43,590 --> 00:02:46,260 Sean Aylmer: upbeat about the economy. They're talking about household spending, business 58 00:02:46,260 --> 00:02:47,980 Sean Aylmer: investment, and then kind of at the end of the 59 00:02:47,980 --> 00:02:52,019 Sean Aylmer: paragraph, they have this but line. It does look at 60 00:02:52,020 --> 00:02:54,041 Sean Aylmer: times now that the Reserve Bank is pretty confident about the outlook. 61 00:02:54,040 --> 00:03:00,919 Gareth Aird: I think that's a good assessment. They are confident about the outlook. I mean, they've recognized the risk 62 00:03:00,919 --> 00:03:03,500 Gareth Aird: because of COVID all through this, but they are confident 63 00:03:03,500 --> 00:03:07,019 Gareth Aird: around the outlook. I mean their economic forecasts around GDP, 64 00:03:07,090 --> 00:03:10,620 Gareth Aird: and the unemployment rate are really optimistic. And we agree 65 00:03:10,620 --> 00:03:13,440 Gareth Aird: with that optimism, but where we differ is around what 66 00:03:13,440 --> 00:03:15,880 Gareth Aird: that means for inflation and wages. I mean, they're effectively 67 00:03:15,880 --> 00:03:19,560 Gareth Aird: saying that the economy can do incredibly well, but we 68 00:03:19,590 --> 00:03:21,669 Gareth Aird: won't really get much of a lift in inflation or 69 00:03:21,669 --> 00:03:24,960 Gareth Aird: wages from that. Whereas our view is that yes, the 70 00:03:24,960 --> 00:03:28,350 Gareth Aird: economy can do very well, but also expect higher inflation and 71 00:03:28,480 --> 00:03:30,910 Gareth Aird: higher wages outcomes if we're doing that well. 72 00:03:31,370 --> 00:03:33,579 Sean Aylmer: Okay. And that's why the Commonwealth Bank and Ugo, I 73 00:03:33,660 --> 00:03:36,450 Sean Aylmer: think, said that the official cash rate is more likely 74 00:03:36,720 --> 00:03:39,040 Sean Aylmer: to increase late next year. 75 00:03:39,540 --> 00:03:41,410 Gareth Aird: Yeah, that's right. It just really comes down to a 76 00:03:41,410 --> 00:03:46,160 Gareth Aird: different view on what the profile for wages and inflation outcomes 77 00:03:46,160 --> 00:03:48,940 Gareth Aird: will look like. It's worth sort of saying that in the September 78 00:03:48,940 --> 00:03:53,730 Gareth Aird: quarter, underlying inflation in Australia rose by 0. 7% over the 79 00:03:53,730 --> 00:03:56,450 Gareth Aird: quarter. And if you annualize that, that's getting up around 3%. 80 00:03:57,160 --> 00:04:00,450 Gareth Aird: So we already think inflation's run, at least at the 81 00:04:00,450 --> 00:04:03,220 Gareth Aird: midpoint of the target band. We'll need to see another 82 00:04:03,220 --> 00:04:05,500 Gareth Aird: quarterly print or two to actually get that annual rate 83 00:04:05,500 --> 00:04:07,470 Gareth Aird: up. But if you look at either the last quarterly 84 00:04:07,470 --> 00:04:09,780 Gareth Aird: rate or on a six month annualized rate, you can 85 00:04:09,780 --> 00:04:12,330 Gareth Aird: see that inflation has already picked up, and that was 86 00:04:12,330 --> 00:04:14,970 Gareth Aird: during a lockdown. So we think that inflation's going to 87 00:04:14,970 --> 00:04:17,659 Gareth Aird: come and surprise to the upside. We also think that 88 00:04:17,660 --> 00:04:20,239 Gareth Aird: the labor market is going to end up tight enough 89 00:04:20,240 --> 00:04:23,650 Gareth Aird: that proper wages, inflation and wages pressures will come through. 90 00:04:24,150 --> 00:04:26,510 Gareth Aird: It's probably worth keeping mind too. We've just had these 91 00:04:26,510 --> 00:04:29,960 Gareth Aird: recent strikes, and that's a sign that workers are getting 92 00:04:29,960 --> 00:04:33,200 Gareth Aird: restless and want higher pay. I think all of that's 93 00:04:33,200 --> 00:04:35,740 Gareth Aird: going to end up generating higher wages outcomes. And if 94 00:04:35,740 --> 00:04:38,640 Gareth Aird: inflation moves higher, as we expect, I think what it'll 95 00:04:38,640 --> 00:04:42,170 Gareth Aird: mean for workers and also for unions and the like 96 00:04:42,170 --> 00:04:44,779 Gareth Aird: that negotiate on behalf of workers, that they'll end up 97 00:04:44,860 --> 00:04:48,460 Gareth Aird: pointing to higher actual inflation. And saying, well look, this 98 00:04:48,510 --> 00:04:51,510 Gareth Aird: is where inflation's running. Workers should be getting at least 99 00:04:51,510 --> 00:04:53,380 Gareth Aird: that in terms of a pay rise, and then a little 100 00:04:53,630 --> 00:04:56,380 Gareth Aird: bit more so that real wages aren't going backwards. And 101 00:04:56,380 --> 00:04:58,510 Gareth Aird: that's what we've sort of characterized as being a little 102 00:04:58,510 --> 00:05:01,360 Gareth Aird: bit of a chicken and the egg relationship with inflation 103 00:05:01,360 --> 00:05:03,850 Gareth Aird: and wages. You can sort of get it where as 104 00:05:03,850 --> 00:05:07,020 Gareth Aird: long as if inflation actually moves first, that can help 105 00:05:07,020 --> 00:05:11,060 Gareth Aird: push up wages. Rather than the Reserve Bank's view, which 106 00:05:11,060 --> 00:05:13,230 Gareth Aird: is essentially that wages have got to move up before 107 00:05:13,230 --> 00:05:14,419 Gareth Aird: inflation will move higher. 108 00:05:14,720 --> 00:05:16,490 Sean Aylmer: Stay with me, Gareth, we'll be back in a minute. 109 00:05:21,720 --> 00:05:24,489 Sean Aylmer: My guest this morning is Gareth Aird, head of Australian 110 00:05:24,500 --> 00:05:27,330 Sean Aylmer: Economics at the Commonwealth Bank. Is there a chance that, because a 111 00:05:27,710 --> 00:05:30,670 Sean Aylmer: Reserve Bank also says that it looks at what's happening 112 00:05:30,770 --> 00:05:34,350 Sean Aylmer: overseas. We've seen recently Gerome Powell, the chair of the 113 00:05:34,350 --> 00:05:37,940 Sean Aylmer: Federal Reserve talk about tapering bond buying, and the markets 114 00:05:37,940 --> 00:05:40,909 Sean Aylmer: expect US interest rates to rise a couple of times 115 00:05:40,910 --> 00:05:43,730 Sean Aylmer: next year. We've seen it happened in New Zealand, Canada, 116 00:05:44,110 --> 00:05:48,080 Sean Aylmer: other places. Is it possible that a rising tide lifts 117 00:05:48,080 --> 00:05:50,520 Sean Aylmer: all boats in the next 12 months or 18 months? 118 00:05:51,120 --> 00:05:53,970 Gareth Aird: Absolutely. And in a lot of ways that's our thinking 119 00:05:53,970 --> 00:05:56,350 Gareth Aird: here. I mean, I think the oddity would be if 120 00:05:56,350 --> 00:05:58,980 Gareth Aird: we didn't end up seeing inflation move up, given it's 121 00:05:58,980 --> 00:06:03,100 Gareth Aird: moved materially higher all around the world. Particularly in Western 122 00:06:03,100 --> 00:06:06,790 Gareth Aird: nations where there's been large fiscal expansions. I mean, we 123 00:06:06,790 --> 00:06:10,160 Gareth Aird: have had a very large fiscal expansion here. The data 124 00:06:10,160 --> 00:06:13,529 Gareth Aird: has started to heat up, and we've had COVID related 125 00:06:13,529 --> 00:06:17,010 Gareth Aird: disruptions, not least a lockdown that lasted for three to 126 00:06:17,010 --> 00:06:19,880 Gareth Aird: four months for half the country. So if we can 127 00:06:19,880 --> 00:06:22,710 Gareth Aird: get clear air from COVID next year, I think the 128 00:06:22,710 --> 00:06:25,190 Gareth Aird: economy's going to boom, and I think with it will 129 00:06:25,190 --> 00:06:28,300 Gareth Aird: come inflation pressures. And I think we'll find that we're at 130 00:06:28,300 --> 00:06:30,479 Gareth Aird: full employment by the end of next year, the economy 131 00:06:30,480 --> 00:06:32,710 Gareth Aird: will be red hot. And that is very much the 132 00:06:32,710 --> 00:06:35,960 Gareth Aird: appropriate time then to normalize the cash rate off what 133 00:06:35,960 --> 00:06:37,330 Gareth Aird: is a record low level of just 0. 1%. 134 00:06:38,529 --> 00:06:41,779 Sean Aylmer: So what is the prognosis for the cash rate beyond 135 00:06:41,779 --> 00:06:44,670 Sean Aylmer: 2022? And if the bank doesn't do it, the Reserve 136 00:06:44,670 --> 00:06:46,490 Sean Aylmer: Bank doesn't do it, is there a chance that it'll 137 00:06:46,490 --> 00:06:48,050 Sean Aylmer: have to go harder later? 138 00:06:48,640 --> 00:06:50,969 Gareth Aird: Yeah, look, there is a risk that they leave it 139 00:06:50,970 --> 00:06:52,560 Gareth Aird: too late and have to do a little bit more, 140 00:06:52,560 --> 00:06:55,440 Gareth Aird: although they have spelled out the conditions for when they 141 00:06:55,650 --> 00:06:57,659 Gareth Aird: expect to raise the cash rate. So I don't think 142 00:06:57,660 --> 00:06:59,669 Gareth Aird: will end up in a situation like in the US 143 00:06:59,670 --> 00:07:03,370 Gareth Aird: where inflation is up around 6%, and the Fed hasn't yet 144 00:07:03,430 --> 00:07:05,760 Gareth Aird: started to tighten policy. I think the Reserve Bank will 145 00:07:05,760 --> 00:07:09,570 Gareth Aird: end up tightening policy when we get those outcomes. Our 146 00:07:09,570 --> 00:07:12,030 Gareth Aird: view though, is that they're not going to have to move the cash 147 00:07:12,030 --> 00:07:15,100 Gareth Aird: rate that high, to have a pretty material impact on 148 00:07:15,100 --> 00:07:18,800 Gareth Aird: the economy and household finances. Households in this Australia carry a 149 00:07:18,800 --> 00:07:21,450 Gareth Aird: lot of debt, and that's in part because interest rates 150 00:07:21,450 --> 00:07:24,360 Gareth Aird: for many, many years have been coming down. So what 151 00:07:24,360 --> 00:07:27,640 Gareth Aird: that means is when interest rates go up, the interest 152 00:07:27,640 --> 00:07:31,840 Gareth Aird: cost on servicing debt actually rises quite quickly, particularly given 153 00:07:31,840 --> 00:07:34,580 Gareth Aird: you're coming off a very low interest rates. So the percentage 154 00:07:34,580 --> 00:07:37,530 Gareth Aird: change in rates is actually quite material for those first 155 00:07:37,530 --> 00:07:40,200 Gareth Aird: few rate hikes. So what I think that means is 156 00:07:40,200 --> 00:07:42,640 Gareth Aird: we'll see that, and when the Reserve Bank gets around 157 00:07:42,640 --> 00:07:44,990 Gareth Aird: to raising rates, they're not going to have to do 158 00:07:44,990 --> 00:07:48,100 Gareth Aird: a lot for it to start to have a pretty material 159 00:07:48,100 --> 00:07:50,580 Gareth Aird: impact on the economy. And that's where we think that this 160 00:07:50,910 --> 00:07:53,180 Gareth Aird: interest rate cycles only going to end up taking the 161 00:07:53,180 --> 00:07:56,040 Gareth Aird: cash rate around a hundred basis points higher from where 162 00:07:56,040 --> 00:07:58,740 Gareth Aird: it is now. A lift in the cash rate of 163 00:07:58,740 --> 00:08:02,960 Gareth Aird: a bit over 1% would be enough to take mortgage payments 164 00:08:02,960 --> 00:08:05,430 Gareth Aird: as a share of household disposable income to a kind 165 00:08:05,430 --> 00:08:08,310 Gareth Aird: of average level. And we think that's the natural point 166 00:08:08,310 --> 00:08:10,160 Gareth Aird: for the Reserve Bank to stop. I mean, if the 167 00:08:10,160 --> 00:08:14,020 Gareth Aird: economy was genuinely overheating and they were really worried about 168 00:08:14,180 --> 00:08:16,830 Gareth Aird: inflation being too high, well then they might have to 169 00:08:16,830 --> 00:08:19,230 Gareth Aird: go higher than that. But at the moment we think 170 00:08:19,330 --> 00:08:21,640 Gareth Aird: all they'll be seeking to do is normalize the cash 171 00:08:21,640 --> 00:08:24,040 Gareth Aird: rate. And we think that's lifting the cash rate to 172 00:08:24,040 --> 00:08:25,370 Gareth Aird: around one and a quarter percent. 173 00:08:25,930 --> 00:08:28,360 Sean Aylmer: So I can't talk to the head of Australian Economics 174 00:08:28,360 --> 00:08:31,500 Sean Aylmer: at the Commonwealth Bank and not ask about the mortgage 175 00:08:31,500 --> 00:08:34,090 Sean Aylmer: market. The Commonwealth Bank of course, being the biggest lender 176 00:08:34,090 --> 00:08:37,160 Sean Aylmer: in the country. You had some figs out today that 177 00:08:37,360 --> 00:08:39,550 Sean Aylmer: kind of suggested that there weren't as many buyers out there. 178 00:08:40,360 --> 00:08:44,070 Gareth Aird: Well look, the housing market is still pretty hot. We 179 00:08:44,190 --> 00:08:46,569 Gareth Aird: need to be clear here, but it has cooled a 180 00:08:46,570 --> 00:08:48,920 Gareth Aird: little bit. And I think the reason that it's cooling 181 00:08:48,920 --> 00:08:53,179 Gareth Aird: is because fixed rates have gone up. And up until 182 00:08:53,179 --> 00:08:56,420 Gareth Aird: quite recently, as in over the COVID period, far more 183 00:08:56,420 --> 00:08:59,850 Gareth Aird: lending than normal was taking place in that fixed rate 184 00:08:59,850 --> 00:09:02,160 Gareth Aird: space. And that was really a function of the fact 185 00:09:02,160 --> 00:09:04,699 Gareth Aird: that fixed rates were lower than the standard variable rate, 186 00:09:04,700 --> 00:09:08,120 Gareth Aird: because the reserve bank had this term funding facility at 187 00:09:08,120 --> 00:09:10,760 Gareth Aird: work. But what we've seen over the last six weeks 188 00:09:10,760 --> 00:09:13,790 Gareth Aird: is that the fixed rates are boom, moving higher, not 189 00:09:13,790 --> 00:09:16,660 Gareth Aird: just because the term funding facilities expired, but also because 190 00:09:16,660 --> 00:09:19,959 Gareth Aird: the money market are pricing in higher interest rates. And I think that 191 00:09:19,960 --> 00:09:22,620 Gareth Aird: in turn is going to act to cool the housing 192 00:09:22,620 --> 00:09:25,690 Gareth Aird: market. Of course, we also had APRA come in about 193 00:09:25,690 --> 00:09:29,010 Gareth Aird: a month or so ago, and lift the minimum serviceability 194 00:09:29,010 --> 00:09:31,290 Gareth Aird: rates. So all of those forces, as well as some, 195 00:09:31,290 --> 00:09:34,000 Gareth Aird: I think just fatigue in the market will likely cool 196 00:09:34,000 --> 00:09:36,590 Gareth Aird: the market. Our view though is that prices will continue 197 00:09:36,610 --> 00:09:38,150 Gareth Aird: to push higher in the early part of next year. 198 00:09:38,670 --> 00:09:41,010 Gareth Aird: Probably peak around the second half of next year. And 199 00:09:41,010 --> 00:09:43,829 Gareth Aird: then if we're right on the reserve bank, raising interest rates, 200 00:09:43,830 --> 00:09:45,620 Gareth Aird: well, I think that means home prices are going to 201 00:09:45,620 --> 00:09:47,570 Gareth Aird: move lower over 2023. 202 00:09:47,990 --> 00:09:49,760 Sean Aylmer: Gareth, thank you for talking to Fear and Greed. 203 00:09:50,120 --> 00:09:51,069 Gareth Aird: Nice to have a chat again. 204 00:09:51,340 --> 00:09:53,929 Sean Aylmer: That was Gareth Aird, head of Australian Economics at the 205 00:09:53,929 --> 00:09:56,980 Sean Aylmer: Commonwealth Bank. This is a Fear and Greed Daily Interview. Join 206 00:09:56,980 --> 00:09:59,380 Sean Aylmer: me every morning for the full Fear and Greed podcast, 207 00:09:59,380 --> 00:10:01,490 Sean Aylmer: with all the business news you need to know. I'm 208 00:10:01,490 --> 00:10:02,950 Sean Aylmer: Sean Aylmer, enjoy your day.