1 00:00:03,440 --> 00:00:06,080 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,080 --> 00:00:10,160 Sean Aylmer: Aylmer. Everybody's talking about interest rates at the moment. 24 hours ago, 3 00:00:10,460 --> 00:00:13,550 Sean Aylmer: the U. S. Federal Reserve, the most influential Central Bank 4 00:00:13,550 --> 00:00:16,970 Sean Aylmer: in the world indicated it could start lifting interest rates 5 00:00:16,970 --> 00:00:19,760 Sean Aylmer: as soon as March and several hikes are in the 6 00:00:19,760 --> 00:00:23,049 Sean Aylmer: pipeline this year. Back home, the reserve bank has previously 7 00:00:23,050 --> 00:00:27,540 Sean Aylmer: declared interest rates would be unlikely to rise before 2024 8 00:00:27,540 --> 00:00:29,760 Sean Aylmer: or at least the end of next year. A surge 9 00:00:29,950 --> 00:00:33,780 Sean Aylmer: inflation now has many economists declaring we could see arise 10 00:00:33,780 --> 00:00:36,470 Sean Aylmer: as early as this year. In fact, in coming months. 11 00:00:36,870 --> 00:00:40,250 Sean Aylmer: Gareth Aird is Commonwealth Bank's Head of Australian Economics. Gareth, 12 00:00:40,250 --> 00:00:41,350 Sean Aylmer: welcome back to Fear and Greed. 13 00:00:41,780 --> 00:00:42,770 Gareth Aird: It's nice to have a chat again. 14 00:00:43,370 --> 00:00:45,930 Sean Aylmer: Let's jump into the U. S. first before we get 15 00:00:45,930 --> 00:00:48,269 Sean Aylmer: to Australia. Jerome Powell, the head of the U. S. 16 00:00:48,270 --> 00:00:50,670 Sean Aylmer: fed has made it pretty clear that rates are rising 17 00:00:50,920 --> 00:00:53,120 Sean Aylmer: in the world's biggest economy. Gareth, you'd agree with that? 18 00:00:54,310 --> 00:00:56,880 Gareth Aird: Absolutely. He certainly set the tone for the year. In a 19 00:00:56,880 --> 00:00:58,760 Gareth Aird: lot of ways, he set a lot of what people 20 00:00:58,760 --> 00:01:02,670 Gareth Aird: had anticipated him to say. It's very clear that inflation 21 00:01:02,670 --> 00:01:05,160 Gareth Aird: in the U. S. has been running hot well ahead 22 00:01:05,160 --> 00:01:07,800 Gareth Aird: of where the fed thought it would be. At some 23 00:01:07,800 --> 00:01:10,890 Gareth Aird: point, he had to fully acknowledge that and he did 24 00:01:10,890 --> 00:01:14,010 Gareth Aird: that in his press conference. It's very clear that the fed 25 00:01:14,010 --> 00:01:17,280 Gareth Aird: will be raising interest rates imminently and the house field 26 00:01:17,290 --> 00:01:20,080 Gareth Aird: CBA said we'll see, lift off in the fed's funds 27 00:01:20,080 --> 00:01:21,670 Gareth Aird: rate at the next meeting in March. 28 00:01:22,069 --> 00:01:26,120 Sean Aylmer: Okay. Financial markets have been very volatile. Does the fact 29 00:01:26,120 --> 00:01:27,930 Sean Aylmer: that the fed has made it clear what it's going 30 00:01:27,930 --> 00:01:31,640 Sean Aylmer: to do in a sense help that volatility or at 31 00:01:31,640 --> 00:01:32,940 Sean Aylmer: least lessen that volatility? 32 00:01:33,410 --> 00:01:36,480 Gareth Aird: Potentially. Markets are moving around for a lot of reasons 33 00:01:36,480 --> 00:01:39,539 Gareth Aird: at the moment. The expectation of rising U. S. interest 34 00:01:39,540 --> 00:01:42,900 Gareth Aird: rates is one thing driving in markets. There's some geopolitical 35 00:01:42,900 --> 00:01:46,120 Gareth Aird: concerns at the moment given what's going on in Russia 36 00:01:46,120 --> 00:01:50,590 Gareth Aird: with the Ukraine and markets respond to events and the 37 00:01:50,590 --> 00:01:53,430 Gareth Aird: greater the uncertainty, the more volatility you get in markets. 38 00:01:53,430 --> 00:01:56,190 Gareth Aird: I think probably the big one, just in terms of 39 00:01:56,190 --> 00:01:59,210 Gareth Aird: where markets are trying to almost get a handle on 40 00:01:59,210 --> 00:02:01,620 Gareth Aird: what's going on is that we've been in a very 41 00:02:01,620 --> 00:02:05,920 Gareth Aird: low interest rate environment for very long time. That's supportive 42 00:02:05,950 --> 00:02:09,440 Gareth Aird: of asset prices in particular of the stock market. There 43 00:02:10,169 --> 00:02:12,299 Gareth Aird: is a concern that if rates end up going up 44 00:02:12,300 --> 00:02:16,530 Gareth Aird: too quickly, that causes some issues for equities. I still 45 00:02:16,530 --> 00:02:19,660 Gareth Aird: think that U. S. Federal Reserve will be relatively patient 46 00:02:19,660 --> 00:02:21,970 Gareth Aird: in what they're doing as much as they probably don't 47 00:02:21,970 --> 00:02:25,050 Gareth Aird: talk about it. They would be concerned around their actions 48 00:02:25,050 --> 00:02:29,760 Gareth Aird: causing too much negative impact on asset prices. When they 49 00:02:29,760 --> 00:02:31,810 Gareth Aird: get around to raising rates, I think they'll try and 50 00:02:32,400 --> 00:02:35,139 Gareth Aird: manage it so that they're not causing too much disruption 51 00:02:35,139 --> 00:02:36,760 Gareth Aird: to financial markets in particular. 52 00:02:37,090 --> 00:02:40,110 Sean Aylmer: Okay. Let's bring it home. The big question for most 53 00:02:40,110 --> 00:02:42,079 Sean Aylmer: of us people with a home loan or a car 54 00:02:42,080 --> 00:02:45,710 Sean Aylmer: loan or a personal loan, pensioners who need income, when 55 00:02:45,710 --> 00:02:47,940 Sean Aylmer: will the reserve bank increase the official cash rate? 56 00:02:48,700 --> 00:02:50,989 Gareth Aird: Well, it's a very good question. It's one that every 57 00:02:50,990 --> 00:02:54,609 Gareth Aird: cell site economist right now is trying to answer. Everyone 58 00:02:54,610 --> 00:02:57,150 Gareth Aird: was aware that all through last year the reserve bank 59 00:02:57,150 --> 00:03:00,100 Gareth Aird: was flagging the idea of an increase in the cash 60 00:03:00,100 --> 00:03:03,050 Gareth Aird: rate as being a long time away. They were either 61 00:03:03,050 --> 00:03:08,360 Gareth Aird: talking about early 2024 or potentially late 2023 as the 62 00:03:08,360 --> 00:03:10,579 Gareth Aird: time they thought most likely that they would raise the 63 00:03:10,580 --> 00:03:14,609 Gareth Aird: cash rate. We were never convinced on that basically because 64 00:03:14,650 --> 00:03:17,790 Gareth Aird: our view is that they have been underestimating that the 65 00:03:17,790 --> 00:03:21,000 Gareth Aird: potential for our inflation in Australia to come through an 66 00:03:21,000 --> 00:03:24,130 Gareth Aird: in turn higher wages growth and a tighter labor market. 67 00:03:24,980 --> 00:03:28,590 Gareth Aird: Therefore, guidance on the cash rate was always predicated on their 68 00:03:28,630 --> 00:03:31,750 Gareth Aird: view on inflation and employment as it turns out the 69 00:03:31,750 --> 00:03:34,100 Gareth Aird: data has been coming in a lot stronger, particularly around 70 00:03:34,100 --> 00:03:39,000 Gareth Aird: inflation than they've been expecting. It's our view at CBA at 71 00:03:39,650 --> 00:03:42,880 Gareth Aird: August this year is the most likely time now for an increase 72 00:03:42,880 --> 00:03:46,340 Gareth Aird: in the cash rate. That obviously it sounds like a time 73 00:03:46,340 --> 00:03:48,270 Gareth Aird: which is very different to what the Reserve Bank has 74 00:03:48,270 --> 00:03:51,780 Gareth Aird: been talking about. In the inflation data that we got 75 00:03:51,780 --> 00:03:54,770 Gareth Aird: out this week, what we saw is that inflation pressures here 76 00:03:54,770 --> 00:03:57,330 Gareth Aird: in Australia are running a lot hotter than the Reserve 77 00:03:57,330 --> 00:04:00,590 Gareth Aird: Bank had been expecting. Next week we hear quite a 78 00:04:00,590 --> 00:04:03,060 Gareth Aird: bit from the Reserve Bank. There's a board meeting, there's 79 00:04:03,060 --> 00:04:05,420 Gareth Aird: a speech by the governor and then the Statement Monetary 80 00:04:05,420 --> 00:04:08,700 Gareth Aird: Policy. I think after that communication, we'll have a lot 81 00:04:08,700 --> 00:04:11,490 Gareth Aird: better sense of what the Reserve Bank is now thinking 82 00:04:11,690 --> 00:04:14,240 Gareth Aird: around the cash rate. They're going to need to acknowledge, 83 00:04:14,240 --> 00:04:18,029 Gareth Aird: I think, that they haven't actually read the inflation outlook correctly. 84 00:04:20,420 --> 00:04:23,820 Sean Aylmer: Okay. Now with saying that we have that next week, the figures this week headline inflation was 3. 5% 85 00:04:24,200 --> 00:04:28,060 Sean Aylmer: underlying 2. 6%, which the Reserve Bank tends to focus 86 00:04:28,060 --> 00:04:31,640 Sean Aylmer: on. In three months time if we get similar numbers, 87 00:04:31,790 --> 00:04:35,330 Sean Aylmer: let's say we get 2. 5%, 2. 6% for underlying inflation, 88 00:04:35,740 --> 00:04:38,169 Sean Aylmer: that means that underlying inflation is well and truly in 89 00:04:38,170 --> 00:04:41,969 Sean Aylmer: the Reserve Bank's target band. Is that enough to push 90 00:04:41,970 --> 00:04:44,110 Sean Aylmer: them or does it need to be outside the band? 91 00:04:44,630 --> 00:04:46,930 Gareth Aird: Well, they're looking for a few things at the moment. 92 00:04:46,930 --> 00:04:49,589 Gareth Aird: They're looking for inflation to be, and this is the 93 00:04:49,589 --> 00:04:53,000 Gareth Aird: words that they're using sustainably within the target, around that 94 00:04:53,050 --> 00:04:55,540 Gareth Aird: midpoint of the band. They've said I don't want to 95 00:04:55,540 --> 00:04:57,570 Gareth Aird: see it just get there, they want to be comfortable 96 00:04:57,570 --> 00:04:59,790 Gareth Aird: that it's going to stay there. For them to be 97 00:04:59,790 --> 00:05:01,860 Gareth Aird: comfortable that it'll stay there, they want to see higher 98 00:05:01,860 --> 00:05:04,660 Gareth Aird: wages growth as well. I think they're going to see 99 00:05:04,660 --> 00:05:07,150 Gareth Aird: that we get a wages print in the middle of 100 00:05:07,160 --> 00:05:10,000 Gareth Aird: February, which I think will show that wages pressures in 101 00:05:10,000 --> 00:05:14,099 Gareth Aird: Australia are accelerating because the labor market is so tight. The unemployment 102 00:05:14,100 --> 00:05:17,510 Gareth Aird: rate in December was down at 4.2%, which was its 103 00:05:17,510 --> 00:05:21,210 Gareth Aird: lowest level since 2008. That bodes very well for wages 104 00:05:21,210 --> 00:05:24,089 Gareth Aird: growth. I think they're going to see that. It's probably worth just 105 00:05:24,089 --> 00:05:27,170 Gareth Aird: flagging too, in terms of where underlying inflation is right 106 00:05:27,170 --> 00:05:31,440 Gareth Aird: now in Australia. The annual rate is 2. 6%. If 107 00:05:31,440 --> 00:05:33,960 Gareth Aird: you look at the last two quarterly rates, in other 108 00:05:33,960 --> 00:05:37,380 Gareth Aird: words, Q3 and Q4 of last year, and then you take 109 00:05:37,380 --> 00:05:40,400 Gareth Aird: those two rates as a six month annualized rate, what 110 00:05:40,400 --> 00:05:44,760 Gareth Aird: you find is that inflation Australia's more like 3.5%. There's 111 00:05:44,760 --> 00:05:48,330 Gareth Aird: been a clear acceleration in the rate of inflation over the 112 00:05:48,330 --> 00:05:51,900 Gareth Aird: second half of last year. Within that annual calculation, the 113 00:05:51,900 --> 00:05:53,880 Gareth Aird: annual rate at the moment, you've got some pretty low 114 00:05:53,880 --> 00:05:57,870 Gareth Aird: numbers from the first half of 2021. They will drop 115 00:05:57,870 --> 00:06:01,070 Gareth Aird: out in coming quarters and then it's going to be 116 00:06:01,670 --> 00:06:04,650 Gareth Aird: very easy then for an underlying inflation to actually be sitting 117 00:06:04,710 --> 00:06:06,530 Gareth Aird: at the top of the Reserve Bank's 2% to 3% 118 00:06:06,890 --> 00:06:07,469 Gareth Aird: target band. 119 00:06:07,810 --> 00:06:09,490 Sean Aylmer: Stay with me, Gareth. We'll be back in a minute. 120 00:06:09,490 --> 00:06:17,669 Sean Aylmer: I'm speaking to Gareth Aird, Head of Australian Economics at the Commonwealth Bank. 121 00:06:18,470 --> 00:06:22,700 Sean Aylmer: Let's talk about wages. Over summer, everywhere I went, holidays 122 00:06:22,850 --> 00:06:27,029 Sean Aylmer: around where I live, people didn't have staff. Often, you 123 00:06:27,029 --> 00:06:28,710 Sean Aylmer: couldn't sit down in a restaurant. You could only get 124 00:06:28,710 --> 00:06:31,420 Sean Aylmer: take away. There were limited menus. I've got to say 125 00:06:31,420 --> 00:06:33,070 Sean Aylmer: I actually went to one of the major banks, we'll 126 00:06:33,070 --> 00:06:35,900 Sean Aylmer: call it the Commonwealth Bank. They were having staff shortages 127 00:06:35,950 --> 00:06:38,089 Sean Aylmer: in the branch. We were sitting down to look at 128 00:06:38,089 --> 00:06:40,080 Sean Aylmer: a personal loan for one of my kids. They said, 129 00:06:40,080 --> 00:06:42,219 Sean Aylmer: look, we'll help you, but it's just difficult at the 130 00:06:42,220 --> 00:06:45,320 Sean Aylmer: moment with staffing. It's affecting everyone it seems. 131 00:06:45,930 --> 00:06:48,500 Gareth Aird: Look, it is. There's a couple of things going on. 132 00:06:48,580 --> 00:06:51,359 Gareth Aird: The one is the direct impact of COVID on the 133 00:06:51,360 --> 00:06:54,349 Gareth Aird: labor market where people have either got the virus and 134 00:06:54,350 --> 00:06:57,460 Gareth Aird: so they're isolating, or their close contact and they're in 135 00:06:57,460 --> 00:07:01,510 Gareth Aird: isolation. That's causing significant short term disruption on the labor 136 00:07:01,510 --> 00:07:04,460 Gareth Aird: market. If we take a step back from that, particularly 137 00:07:04,460 --> 00:07:06,650 Gareth Aird: if we look at where things were in December, before, 138 00:07:06,910 --> 00:07:09,339 Gareth Aird: we really had a lot of COVID disruption on the 139 00:07:09,339 --> 00:07:12,370 Gareth Aird: labor market. The unemployment rate, as I said, was very 140 00:07:12,630 --> 00:07:16,870 Gareth Aird: low and the underemployment rate, which flies under the radar a little bit, 141 00:07:16,870 --> 00:07:18,760 Gareth Aird: but it's measuring the people out there that have a 142 00:07:18,760 --> 00:07:21,680 Gareth Aird: job, but are looking for more work, that's also at 143 00:07:21,680 --> 00:07:26,150 Gareth Aird: its lowest level since around 2008. Even before the COVID 144 00:07:26,150 --> 00:07:29,960 Gareth Aird: disruption that's come about through isolation and illness, the labor 145 00:07:29,960 --> 00:07:33,560 Gareth Aird: market was looking very tight. That bodes really well for 146 00:07:33,560 --> 00:07:37,130 Gareth Aird: wages growth. We haven't to date seen too much of 147 00:07:37,130 --> 00:07:40,160 Gareth Aird: an acceleration in the official wages data, but I would 148 00:07:40,160 --> 00:07:43,410 Gareth Aird: add that the official data, the most recent print is 149 00:07:43,410 --> 00:07:46,330 Gareth Aird: for Q3 of last year and half of the country 150 00:07:46,330 --> 00:07:50,450 Gareth Aird: was in lockdown through that September quarter. I think what 151 00:07:50,450 --> 00:07:52,940 Gareth Aird: we're going to see is quite a lift in wages 152 00:07:52,940 --> 00:07:55,490 Gareth Aird: growth from here given the tightness in the labor market. 153 00:07:55,870 --> 00:07:58,370 Gareth Aird: Our internal data at Commonwealth Bank, which is capturing money 154 00:07:58,370 --> 00:08:01,870 Gareth Aird: that's been into CBA bank accounts, when we make a 155 00:08:01,870 --> 00:08:04,670 Gareth Aird: few tweaks to account for changes in hours work and 156 00:08:04,720 --> 00:08:08,840 Gareth Aird: people moving jobs, it's suggesting that wages inflation did actually 157 00:08:08,840 --> 00:08:12,050 Gareth Aird: accelerate quite materially over the back end of last year. 158 00:08:12,590 --> 00:08:15,179 Gareth Aird: It should only continue to pick up this year, given 159 00:08:15,180 --> 00:08:17,920 Gareth Aird: that tightness in the labor market. I think a lot 160 00:08:17,920 --> 00:08:20,610 Gareth Aird: of the anecdotes and reports you see and floating around 161 00:08:20,610 --> 00:08:24,739 Gareth Aird: the media around significantly higher pay for people washing dishes 162 00:08:24,740 --> 00:08:28,080 Gareth Aird: and construction workers and the like. I think we'll start 163 00:08:28,080 --> 00:08:30,110 Gareth Aird: to see some of that bear out in the official 164 00:08:30,110 --> 00:08:34,150 Gareth Aird: data. Again, that's all going to be supportive of the 165 00:08:34,150 --> 00:08:37,110 Gareth Aird: idea that the Reserve Bank will end up normalizing rates 166 00:08:37,620 --> 00:08:39,540 Gareth Aird: much earlier than they've been telegraphing. 167 00:08:39,550 --> 00:08:43,840 Sean Aylmer: Okay. If that happens and we get an interest rate increase 168 00:08:43,910 --> 00:08:47,569 Sean Aylmer: in August and potentially one later in the year, what's 169 00:08:47,570 --> 00:08:50,870 Sean Aylmer: mean for other parts of the economy? I would like 170 00:08:50,870 --> 00:08:52,880 Sean Aylmer: to ask you about the housing sector. I'd also like 171 00:08:52,960 --> 00:08:56,179 Sean Aylmer: to ask you about businesses. Do businesses not want an 172 00:08:56,179 --> 00:08:58,670 Sean Aylmer: interest rate hike or is it just the fact that 173 00:08:58,670 --> 00:09:00,870 Sean Aylmer: it actually shows that the economy is doing better? 174 00:09:01,460 --> 00:09:05,390 Gareth Aird: Look, they're good questions. There are winners and losers to 175 00:09:05,390 --> 00:09:08,170 Gareth Aird: interest rates either going up or down. What we do know 176 00:09:08,610 --> 00:09:12,410 Gareth Aird: is from a business perspective, business borrowing is not particularly 177 00:09:12,410 --> 00:09:16,069 Gareth Aird: sensitive to interest rates. Businesses will borrow if they think 178 00:09:16,070 --> 00:09:18,100 Gareth Aird: that demand is going to be strong in the economy 179 00:09:18,280 --> 00:09:22,870 Gareth Aird: and businesses are generally borrowing to invest. Small movements in 180 00:09:22,870 --> 00:09:26,960 Gareth Aird: interest rates don't generally change a business decision around investment. 181 00:09:27,490 --> 00:09:30,130 Gareth Aird: The interest rate sensitive part of the economy is really 182 00:09:30,130 --> 00:09:33,020 Gareth Aird: the household sector and that flows through obviously to the 183 00:09:33,020 --> 00:09:36,929 Gareth Aird: property market. For people that are on floating mortgages, when 184 00:09:36,929 --> 00:09:40,130 Gareth Aird: interest rates go up, they'll experience an increase in their 185 00:09:40,130 --> 00:09:44,760 Gareth Aird: mortgage repayments assuming that they're repaying the minimum. As interest 186 00:09:44,760 --> 00:09:47,660 Gareth Aird: rates were coming down, if a borrower was on a 187 00:09:47,660 --> 00:09:50,449 Gareth Aird: floating rate but they left their dollar repayment the same, 188 00:09:50,809 --> 00:09:53,440 Gareth Aird: then what actually would be happening is they would be paying 189 00:09:53,780 --> 00:09:57,640 Gareth Aird: more in principle, each repayment and less in interest. Therefore, 190 00:09:57,640 --> 00:10:00,760 Gareth Aird: as rates go back up, their repayments may not actually 191 00:10:00,760 --> 00:10:03,020 Gareth Aird: change. It would just be the composition of the payment 192 00:10:03,270 --> 00:10:05,960 Gareth Aird: that would be changing in terms of interest versus principle. 193 00:10:06,490 --> 00:10:09,530 Gareth Aird: For anyone who's paying the minimum on their home loan 194 00:10:09,530 --> 00:10:12,280 Gareth Aird: at the moment and is on a floating rate, as 195 00:10:12,280 --> 00:10:14,670 Gareth Aird: soon as the standard variable rate goes up in response 196 00:10:14,670 --> 00:10:16,890 Gareth Aird: to an increase in the cash rate, well, they will 197 00:10:16,890 --> 00:10:20,030 Gareth Aird: find that they're paying a little bit more each fortnight 198 00:10:20,030 --> 00:10:22,230 Gareth Aird: or quarter to pay off their home loan because the interest 199 00:10:22,230 --> 00:10:26,370 Gareth Aird: cost has gone up. That then in turns acts to 200 00:10:26,460 --> 00:10:29,640 Gareth Aird: slow the economy a little bit. That ultimately is what 201 00:10:29,640 --> 00:10:32,090 Gareth Aird: you're trying to do when you are raising interest rates. 202 00:10:32,090 --> 00:10:34,700 Gareth Aird: It's a recognition that the level of interest rates that 203 00:10:34,700 --> 00:10:37,199 Gareth Aird: you're currently got is not the right savings based on 204 00:10:37,200 --> 00:10:40,589 Gareth Aird: where the economy is and therefore you tweak rates accordingly 205 00:10:40,590 --> 00:10:44,530 Gareth Aird: to generate the economic outcomes you're looking for. When we 206 00:10:44,530 --> 00:10:46,520 Gareth Aird: think about what the Reserve Bank will be trying to 207 00:10:46,520 --> 00:10:49,270 Gareth Aird: do when they get around to raising interest rates, they 208 00:10:49,280 --> 00:10:51,990 Gareth Aird: won't be trying to take the cash rate from a 209 00:10:51,990 --> 00:10:55,829 Gareth Aird: stimulatory setting to a contractionary setting. What they'll be trying 210 00:10:55,830 --> 00:10:58,290 Gareth Aird: to do is taking it from a very stimulatory setting 211 00:10:58,610 --> 00:11:02,410 Gareth Aird: to a normal setting. We think that means that's still 212 00:11:02,410 --> 00:11:04,569 Gareth Aird: a very low interest rate just based on how much 213 00:11:04,570 --> 00:11:08,270 Gareth Aird: debt the household sector in Australia carries. But it will 214 00:11:08,270 --> 00:11:10,990 Gareth Aird: be a rate which is obviously higher than where it is today. We 215 00:11:10,990 --> 00:11:12,790 Gareth Aird: think it's probably around a cash rate of 1. 25% 216 00:11:14,020 --> 00:11:16,040 Gareth Aird: which means you're probably looking at a little bit over 217 00:11:16,040 --> 00:11:19,920 Gareth Aird: 100 basis points of increases to the cash rate to 218 00:11:19,920 --> 00:11:22,390 Gareth Aird: get policy to what we would say is a normal 219 00:11:22,390 --> 00:11:25,080 Gareth Aird: setting could turn out to be the case of Reserve 220 00:11:25,080 --> 00:11:27,540 Gareth Aird: Bank has to go beyond that. That would only be if 221 00:11:27,540 --> 00:11:30,750 Gareth Aird: the economy's running so hot that they're actually trying to 222 00:11:30,750 --> 00:11:33,100 Gareth Aird: run contractionary policy to really pull it back. 223 00:11:33,580 --> 00:11:36,179 Sean Aylmer: Okay. In a sense, we hope that's not the case. 224 00:11:36,179 --> 00:11:38,439 Sean Aylmer: We are at very low interest rates at the moment, 225 00:11:38,440 --> 00:11:41,840 Sean Aylmer: actually going up 100 basis points. For most of us 226 00:11:41,900 --> 00:11:44,290 Sean Aylmer: outside the last two years, that's still a relatively low 227 00:11:44,290 --> 00:11:44,640 Sean Aylmer: interest rate. 228 00:11:45,179 --> 00:11:48,220 Gareth Aird: Yeah. Look, that's exactly right. A lot of this where 229 00:11:48,220 --> 00:11:50,209 Gareth Aird: we end up in some sense will come down to 230 00:11:50,210 --> 00:11:53,620 Gareth Aird: the timing of when the Reserve Bank starts. Ideally, if 231 00:11:53,620 --> 00:11:56,520 Gareth Aird: they get their policy settings right and they move at the 232 00:11:56,520 --> 00:11:59,420 Gareth Aird: right pace, then they won't actually need to go beyond 233 00:11:59,420 --> 00:12:02,140 Gareth Aird: that point where they're running contractionary policy because they will 234 00:12:02,140 --> 00:12:05,010 Gareth Aird: be normalizing the cash rate at a rate which is 235 00:12:05,320 --> 00:12:07,990 Gareth Aird: appropriate for where the economy is at the moment. That's 236 00:12:07,990 --> 00:12:10,809 Gareth Aird: our expectation that they'll just end up at that place. 237 00:12:11,130 --> 00:12:14,429 Gareth Aird: We shouldn't forget that we have a federal election coming 238 00:12:14,429 --> 00:12:17,420 Gareth Aird: up and it's possible that the Commonwealth government, whoever that 239 00:12:17,420 --> 00:12:19,940 Gareth Aird: turns out to be after the election wants to spend a lot 240 00:12:19,940 --> 00:12:22,160 Gareth Aird: more money than is currently baked in. That could mean 241 00:12:22,670 --> 00:12:25,090 Gareth Aird: interest rates end up higher than neutral. But at the 242 00:12:25,090 --> 00:12:27,540 Gareth Aird: moment, it's probably just worth thinking about that as a 243 00:12:27,540 --> 00:12:29,750 Gareth Aird: risk to the outlook as opposed to what would be 244 00:12:29,750 --> 00:12:31,530 Gareth Aird: to your central scenario. 245 00:12:32,480 --> 00:12:36,630 Sean Aylmer: We've almost made the whole interview without mentioning COVID, which is quite incredible, but 246 00:12:36,630 --> 00:12:39,120 Sean Aylmer: of course, I am a Connor in COVID. Is that still 247 00:12:39,120 --> 00:12:40,380 Sean Aylmer: the big risk to the economy? 248 00:12:41,100 --> 00:12:43,970 Gareth Aird: Look, it's still the big risk in terms of disruption. 249 00:12:44,320 --> 00:12:46,980 Gareth Aird: I think by and large the news has actually been 250 00:12:46,980 --> 00:12:49,689 Gareth Aird: pretty good on it so far this year. I know 251 00:12:49,690 --> 00:12:51,670 Gareth Aird: that might sound a little bit odd given we've had 252 00:12:51,670 --> 00:12:55,820 Gareth Aird: the explosion in cases. By all accounts, cases have peaked, 253 00:12:56,120 --> 00:12:59,309 Gareth Aird: the hospital system around the country has coped relatively well. 254 00:12:59,309 --> 00:13:02,970 Gareth Aird: It's caused obviously a lot of disruption but I think 255 00:13:02,970 --> 00:13:06,690 Gareth Aird: we're already moving through to the other side. One of 256 00:13:06,690 --> 00:13:08,750 Gareth Aird: the things that is an encouraging sign for me on 257 00:13:08,750 --> 00:13:11,900 Gareth Aird: that front is our internal data at CBA relating to 258 00:13:11,900 --> 00:13:15,349 Gareth Aird: spending on credit and debit cards that slowed quite a 259 00:13:15,350 --> 00:13:17,980 Gareth Aird: bit at the end of last year and the first 260 00:13:18,030 --> 00:13:20,990 Gareth Aird: week or two of this year. In the last couple 261 00:13:20,990 --> 00:13:23,199 Gareth Aird: of weeks in January, it's actually picked up quite a 262 00:13:23,200 --> 00:13:26,319 Gareth Aird: bit. I think really what it was capturing is just the 263 00:13:26,320 --> 00:13:29,329 Gareth Aird: impact of people being in isolation, on spending. But as soon 264 00:13:29,330 --> 00:13:31,679 Gareth Aird: as they've been able to get out of isolation, they're 265 00:13:31,679 --> 00:13:36,500 Gareth Aird: back out spending. I think we're going to find that the COVID disruptions will dissipate 266 00:13:36,500 --> 00:13:37,510 Gareth Aird: as we go through this year. 267 00:13:37,890 --> 00:13:40,070 Sean Aylmer: Let's hope so. Gareth, thank you for talking to Fear 268 00:13:40,070 --> 00:13:40,540 Sean Aylmer: and Greed. 269 00:13:40,860 --> 00:13:41,640 Gareth Aird: It's lovely to have a chat. 270 00:13:42,190 --> 00:13:44,880 Sean Aylmer: That was Gareth Aird, Head of Australian Economics at the 271 00:13:44,880 --> 00:13:47,760 Sean Aylmer: Commonwealth Bank. This is the Fear and Greed Daily Interview. 272 00:13:47,760 --> 00:13:49,890 Sean Aylmer: Join me every morning for the full Fear and Greed 273 00:13:49,890 --> 00:13:52,510 Sean Aylmer: podcast with all the business news you need to know. 274 00:13:52,800 --> 00:13:54,479 Sean Aylmer: I'm Sean Aylmer. Enjoy your day.