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Speaker 1: Welcome to Fear and Greed Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: Are Michael Thompson and every Monday morning we're joined by

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Speaker 1: economist Stephen kok Cooles to look at the week ahead.

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Speaker 1: You'll find him at the Kirk dot com, t g

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Speaker 1: ko uk dot com and on excusing the handle of

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Speaker 1: the Kirk. Stephen, Good morning, Good morning Michael, and a

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Speaker 1: happy new month to you. It's a big month, right

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Speaker 1: and we are kicking it off with a big couple

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Speaker 1: of days because the Reserve Bank Board meets today Tomorrow

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Speaker 1: afternoon we will find out what they're going to do

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Speaker 1: on interest rates. Are we going to see a hike?

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Speaker 2: The rate hike will be on the board table. So

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Speaker 2: the Monetary Policy Board of the RBA, as you said,

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Speaker 2: there's meeting today and tomorrow and the announcer will be

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Speaker 2: at two thirty Eastern daylight saving time as it always is,

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Speaker 2: and the debate will be we move with a twenty

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Speaker 2: five basis point rate hike now or should we wait?

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Speaker 2: Should we sort of look at some of the things

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Speaker 2: that have spooked the market and spooked us as the RBA,

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Speaker 2: Because the RBA didn't anticipate this sort of inflation result,

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Speaker 2: the unemployment rate being as low as it is, and

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Speaker 2: even to some extent, the recovery, the strength in household spending.

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Speaker 2: So they're probably going to be just sort of looking

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Speaker 2: at the updated state of play. Of course, they're updating

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Speaker 2: their forecast that they'll also release tomorrow afternoon with the

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Speaker 2: state non monetary policy revised forecasts for inflation, unemployment, GDP growth,

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Speaker 2: all of those sorts of things, and they'll be saying,

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Speaker 2: is what we're seeing a little bit of noise And

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Speaker 2: by that I mean, oh, some administered prices went up,

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Speaker 2: boosting the CPI. We're uncertain whether that December jobs number

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Speaker 2: was more young fifteen to twenty four year old males

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Speaker 2: getting pucked on jobs and your unseasonally large number, and

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Speaker 2: we're out unwined in January, and they'll have a look

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Speaker 2: international at what is happening there and saying, look, what

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Speaker 2: if we hike and we find that in the coming

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Speaker 2: months there's a bit of a turmoil and disruption global economy.

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Speaker 2: So my short well that's my long answer answers. I

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Speaker 2: think they'll hold, but with no degree of confidence in

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Speaker 2: that forecast. But Michelle Bullock, who gives a press conference

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Speaker 2: after was the RBA governor. She'll be sort of as

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Speaker 2: hawkish as hawkish as can be whether they hold or

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Speaker 2: whether they hike.

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Speaker 1: So it's not going to be a quick decision, because

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Speaker 1: imagine there would be some meetings where they would have

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Speaker 1: the decision made by about eleven o'clock on Monday morning.

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Speaker 2: It'd be really easy. Yeah, straight, you're on hold, or

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Speaker 2: yet we've got a hiker. We've got to cut. Its

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Speaker 2: obvious this one, this one, the hike is is certainly

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Speaker 2: in play, no question, no question at all. But there

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Speaker 2: are some nuances. And indeed, even just looking at the

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Speaker 2: inflation data from last week, yeah, the focus was on

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Speaker 2: the quarterly trimmed mean, and yes it was elevated, and

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Speaker 2: that's the sort of catalyst I suppose for the rave

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Speaker 2: HiPE being on the agenda. But there's a few savvy

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Speaker 2: economists to point out that I speak to and read

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Speaker 2: about and listen to and the like, they've noticed that

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Speaker 2: this is exactly the benefit of monthly numbers, the monthly

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Speaker 2: trimmed mean, and even though we're still coming to terms

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Speaker 2: with how reliable it is and these sort of things,

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Speaker 2: it actually just showed a consolidation, if you like, of

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Speaker 2: the inflation rate, and it's pretty clear that even without

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Speaker 2: a high and this is a critical thing, that the

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Speaker 2: next couple of months that three point three on the

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Speaker 2: monthly trimmed mean will drop to three point one, probably

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Speaker 2: dropped a three two point nine just through the evolution

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Speaker 2: of the of the monthly data, and you get some

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Speaker 2: of these high results from January February March twenty twenty

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Speaker 2: five dropping out of your year on year run rate.

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Speaker 2: Don't to complicate it too much, but that's the sort

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Speaker 2: of thing that the on hold brigade would be focusing on.

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Speaker 1: Okay, you mentioned something just before that. I mean, obviously

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Speaker 1: a big focus here would be the RBA looking obviously

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Speaker 1: first at the inflation data that did come through higher

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Speaker 1: than expected, and then obviously the very tight jobs market

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Speaker 1: that we talked about the previous week, but then the

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Speaker 1: international factors. How much does international volatility play on a

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Speaker 1: decision like this, And we've just even looking at last week,

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Speaker 1: for instance, we had the Aussie dollar climbing, a weaker

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Speaker 1: US dollar, gold soaring, dropping, soaring, fluctuating in a way

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Speaker 1: that you would not expect a safe have an asset

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Speaker 1: to do how much? And then we had the Fed

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Speaker 1: reserve leaving rates on hold as well. How much do

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Speaker 1: all of these factors weigh on the decision making process

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Speaker 1: of the Reserve Bank.

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Speaker 2: They do look at the international economy, not just from

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Speaker 2: the volatility of markets. That is important to them, of course,

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Speaker 2: but they of course they taken more considered you they're

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Speaker 2: the reserve bank. They can sort of sit back and

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Speaker 2: have a little look at the trends and all of

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Speaker 2: the things you mentioned are highly relevant to what the

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Speaker 2: assessment of global risks and monetary policy setting. It's often

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Speaker 2: forgotten or underst stated, I should say, is about risk management.

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Speaker 2: The RBA and me and you don't know exactly where

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Speaker 2: the economy will be in twelve months time. It's managing

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Speaker 2: the risk. They say, the current cash rate three point

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Speaker 2: six zer eight percent, given what we know has happened,

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Speaker 2: and given what we expect some of this global volatility

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Speaker 2: to impact on our major trading partner's commodity prices. China

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Speaker 2: is an important part that hasn't got much of a

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Speaker 2: looking in recent times, even though it's still our dominant

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Speaker 2: export market buys, you know, millions of tons of iron

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Speaker 2: ore each year from US, and the i ore price

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Speaker 2: is very buoyant. At the moment, it's still one hundred

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Speaker 2: and five odd US dollars a ton, which is still

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Speaker 2: pretty good. So they look at all these things, put

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Speaker 2: them into the melting pot, and it's what they do.

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Speaker 2: This is why the Statement on Monetary Policy, the seventy

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Speaker 2: odd page document that comes out simultaneously to the decision,

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Speaker 2: is such a good read each quarter, because that's effectively

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Speaker 2: what the Board will deliberate over. They go through international

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Speaker 2: commodity prices, the Aussie dollar, household consumption, housing inflation, they

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Speaker 2: go through the economy almost line by line. Where's the strength,

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Speaker 2: where's the weakness, And if the balance is tilting, oh,

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Speaker 2: we've got too many inflation risks coming, they'll hike. And

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Speaker 2: if they sort of say, well, look there's some quirks

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Speaker 2: in the numbers, we'll send a hawkis message. We'll sort

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Speaker 2: of say that we're about to hike it in the

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Speaker 2: next Between now and the next meeting, we get another

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Speaker 2: high monthly inflation number and the unemported rates really very low,

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Speaker 2: we'll go that's the That's sort of how they do

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Speaker 2: it anyway.

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Speaker 1: Okay, And so this is then you're kind of saying

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Speaker 1: that that at this point they may hold. But there's

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Speaker 1: a lot of a lot of economists, a lot of

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Speaker 1: the big banks are saying that it's actually pretty likely

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Speaker 1: we will see a rate hike tomorrow.

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Speaker 2: Yes, I think the vast majority now is on the

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Speaker 2: rate hiking core.

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Speaker 1: Okay, So if we then unpack that a little bit more,

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Speaker 1: if there is a rate hike tomorrow, if you break

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Speaker 1: it right down for me, who who does it hit first?

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Speaker 1: What's the effect that the Reserve Bank is looking for here,

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Speaker 1: and who does it hit first? And how does that

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Speaker 1: play out?

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Speaker 2: Two aspects. There's the impact of the twenty five basis

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Speaker 2: points extra on your borrowing costs, because I'm assuming the

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Speaker 2: banks will pass it through the mortgage holders and businesses

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Speaker 2: and the like. They'll also pass it through, I think,

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Speaker 2: on deposits. So there are some people who are going

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Speaker 2: to be cheering if we get that rate hike tomorrow afternoon.

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Speaker 2: People who have got money in the bank, they're looking

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Speaker 2: to save some money. Term deposit rates might go back

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Speaker 2: up a little bit because of the rate hike, so

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Speaker 2: they willn't be earning more interesting come from their savings.

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Speaker 2: But the other thing of course, is that people with

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Speaker 2: a mortgage will have to pay a quarter of a

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Speaker 2: percentage point more on their mortgage repayments. And that has

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Speaker 2: and both of those is sort of how interest rates work.

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Speaker 2: If your savings rate goes up, you're incentive to spend

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Speaker 2: is reduced because oh, I can get a higher registrate

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Speaker 2: by leaving my money in the bank. I'll put it

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Speaker 2: in there for twelve months and use the interest in

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Speaker 2: twelve months time to do some spending. So higher interest

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Speaker 2: rates attrack higher savings. But of course the biggest transmission

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Speaker 2: mechanism is on our level of household debt, and even

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Speaker 2: small business and medium sized business debt. A quarter of

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Speaker 2: a point on a couple of trillion dollars of household

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Speaker 2: debt starts adding up pretty quickly, and that means that

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Speaker 2: you're paying an extra twenty forty sixty dollars a month,

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Speaker 2: depending how big your mortgage is, that you don't have

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Speaker 2: twenty forty sixty dollars a month to spend on on

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Speaker 2: other parts of the economy, you'll be households.

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Speaker 1: Then that put the brakes onreating.

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Speaker 2: It's the household sector that will be the main driver

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Speaker 2: of slower growth, and as a business operator. Oh no,

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Speaker 2: it's coming into my shop as much as they were.

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Speaker 2: I can't put up my prices this this half year

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Speaker 2: because if I do, my competitor will eat my lunch.

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Speaker 2: They'll they'll discount and they'll make money. And that's not

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Speaker 2: how inflation comes back down. That's the theory it generally works.

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Speaker 1: And how long does it take before you see those effects?

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Speaker 1: Because I imagine the impact itself would be almost immediate. People

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Speaker 1: would change their behavior quite quickly, but in terms of

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Speaker 1: actually seeing it flow through to the economy and through

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Speaker 1: the data would be a little bit longer.

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Speaker 2: There's lots of research that's being done on that. It's

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Speaker 2: somewhere between three and twelve months. It used to be

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Speaker 2: slightly longer. But I think with this world where we

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Speaker 2: get information overload instantly, and here we are talking about

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Speaker 2: the prospective rad hike Tomorrow. I'm sure tomorrow nights news

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Speaker 2: bulletins and online areas and Fear and Green itself will

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Speaker 2: be talking about the ray hike, so people will get

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Speaker 2: that information really quickly. So there is the cash flow effect,

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Speaker 2: which is the one that is your hip pocket, But

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Speaker 2: there's also this one that good old John Maynard Kynes

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Speaker 2: the economists from the nineteen thirties was talking about animal

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Speaker 2: spirits because the way people sort of react to the

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Speaker 2: news is almost as important as the cash flo effect. Oh,

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Speaker 2: rates have gone up. I thought they were going down.

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Speaker 2: I'm going to even be more cautious. Will there be

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Speaker 2: another one? Yeah, So they'll actually react to it through

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Speaker 2: their sentiment and through their behavior, even though the cash

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Speaker 2: flow effect might be relatively small. If you've got a

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Speaker 2: modest mortgine're paying thirty forty dollars a month, it's not

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Speaker 2: going to kill your household finances, but you might be scared.

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Speaker 2: Oh there's another one coming or another too. We're going

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Speaker 2: to see more of these things, So that impacts your

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Speaker 2: behavior today because you're fearful where rates might be in

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Speaker 2: six and twelve months time.

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Speaker 1: All right, it's going to be a very big couple

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Speaker 1: of days. Be a fascinating thing to be a fly

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Speaker 1: on the wall for one of these meetings.

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Speaker 2: And I think this is the one where as we

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Speaker 2: were saying, the discussion will be fantastic that Yeah, while

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Speaker 2: the balance of probabilities favor a hike, I think you know,

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Speaker 2: and the raid hiking thing will be on the table.

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Speaker 2: The discussion from Smart Monetary Policy Alert, economically alert members

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Speaker 2: of the RBA Board, and they're all bloody good at

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Speaker 2: their job. Will be fascinating that it'd be great to

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Speaker 2: see this debate and now hopefully, hopefully Michelle Bullock will

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Speaker 2: enlighten us when she gives her press conference tomorrow afternoon. Yeah.

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Speaker 1: Indeed, big week, busy week.

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Speaker 2: Enjoy it.

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Speaker 1: Thank you, Steven, Thank you, Michael. That was economist Stephen

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Speaker 1: co Coolest, better known as the Kok. You can find

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Speaker 1: him at the kook dot com t r g k

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Speaker 1: o uk dot com and follow him on excusing the

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Speaker 1: handle of the Kok. I'm Michael Thompson and this Fear

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Speaker 1: and Greed Q and a