1 00:00:05,680 --> 00:00:08,600 Speaker 1: Welcome to the Fear and Greed Business Interview. I'm Sean Almam. 2 00:00:08,720 --> 00:00:11,800 Speaker 1: Yesterday afternoon the Reserve Bank Board left interest rates on 3 00:00:11,920 --> 00:00:14,760 Speaker 1: whole at four point three five percent and we may 4 00:00:14,800 --> 00:00:17,799 Speaker 1: not see a cut anytime soon. With inflation remaining a 5 00:00:17,880 --> 00:00:21,400 Speaker 1: persistent challenge for the bank. I'm joined today to talk 6 00:00:21,440 --> 00:00:24,880 Speaker 1: about it by Westpac's chief economist, Lucy Ellis. As I've 7 00:00:24,880 --> 00:00:27,600 Speaker 1: mentioned before, Lucy has a unique insight into the way 8 00:00:27,640 --> 00:00:30,880 Speaker 1: the Reserve Bank processes this information and makes decisions, having 9 00:00:30,920 --> 00:00:33,559 Speaker 1: been the Assistant Governor at the Reserve Bank until late 10 00:00:33,600 --> 00:00:36,199 Speaker 1: last year, effectively the chief economist, Lucy. Welcome back to 11 00:00:36,240 --> 00:00:36,840 Speaker 1: Fear and Greed. 12 00:00:37,360 --> 00:00:39,160 Speaker 2: Thanks very much, Sean. Great to be here. 13 00:00:40,120 --> 00:00:44,360 Speaker 1: What do you make of yesterday's decision and statement with 14 00:00:44,400 --> 00:00:48,360 Speaker 1: it and commentary by Michelle Bullock at the press conference afterwards. 15 00:00:48,440 --> 00:00:53,159 Speaker 2: Broadly, we weren't surprised by their decision to hold. We 16 00:00:53,159 --> 00:00:56,720 Speaker 2: weren't surprised by the inflation numbers that came out the 17 00:00:56,760 --> 00:00:59,600 Speaker 2: previous week. We were only a little bit surprised about 18 00:00:59,600 --> 00:01:03,160 Speaker 2: the trim me, whereas the market was more surprised, and 19 00:01:03,320 --> 00:01:06,760 Speaker 2: indeed our inflation outlook for trim mean is almost identical 20 00:01:07,200 --> 00:01:09,880 Speaker 2: to what the Reserve Bank published in its statement on 21 00:01:09,920 --> 00:01:15,040 Speaker 2: monetary policy yesterday. What is a little puzzling is their 22 00:01:15,160 --> 00:01:18,840 Speaker 2: view about how long they think they need to keep 23 00:01:19,240 --> 00:01:23,319 Speaker 2: interest rates steady from here. They are still worried about 24 00:01:23,400 --> 00:01:27,080 Speaker 2: upside risk to inflation. They have a very particular view 25 00:01:27,200 --> 00:01:32,400 Speaker 2: about goods inflation. And while we always expected the RBA 26 00:01:32,520 --> 00:01:35,200 Speaker 2: to be among the laster to cut, if not the last, 27 00:01:35,280 --> 00:01:37,280 Speaker 2: because they didn't go up as far, they don't have 28 00:01:37,360 --> 00:01:40,479 Speaker 2: as far to go. The RBA does seem to now 29 00:01:40,560 --> 00:01:44,840 Speaker 2: be constructing a view of their reaction function, which says 30 00:01:44,880 --> 00:01:49,720 Speaker 2: that you don't start reducing the restrictiveness of policy until 31 00:01:49,720 --> 00:01:51,840 Speaker 2: we are very very close to target. Now we know 32 00:01:51,960 --> 00:01:55,320 Speaker 2: policy operates with a lag. We know that you actually 33 00:01:55,400 --> 00:01:59,040 Speaker 2: have to start reducing the restrictiveness of policy before getting 34 00:01:59,080 --> 00:02:04,160 Speaker 2: back to target. And that consideration didn't really feature in 35 00:02:04,200 --> 00:02:06,040 Speaker 2: any of their communication yesterday. 36 00:02:06,760 --> 00:02:08,960 Speaker 1: Michelle Bullock, the governor, came out and said there were 37 00:02:09,000 --> 00:02:12,320 Speaker 1: two options on the table. One was to lift rates, 38 00:02:12,639 --> 00:02:15,320 Speaker 1: the other one was to hold rates, knowing that they 39 00:02:15,320 --> 00:02:18,520 Speaker 1: would be on hold for a while. Is that in 40 00:02:18,560 --> 00:02:22,880 Speaker 1: your experience and you've worked inside the bank. Obviously surprising 41 00:02:23,160 --> 00:02:26,799 Speaker 1: that they didn't at least consider when a cut might 42 00:02:26,880 --> 00:02:27,639 Speaker 1: be necessary. 43 00:02:28,400 --> 00:02:31,120 Speaker 2: The board are really conscious that things are uncertain, and 44 00:02:31,160 --> 00:02:36,800 Speaker 2: they always have been, so they don't generally prejudge where 45 00:02:36,800 --> 00:02:39,040 Speaker 2: they're going to be in three or six months time. 46 00:02:39,560 --> 00:02:42,280 Speaker 2: And in the periods where they have wanted to give 47 00:02:42,360 --> 00:02:45,840 Speaker 2: more forward guidance, that hasn't worked out so well, and 48 00:02:45,880 --> 00:02:48,239 Speaker 2: so you know, the governor has been very reluctant to 49 00:02:48,280 --> 00:02:53,600 Speaker 2: provide any kind of forward guidance. Recently, we expected that 50 00:02:53,680 --> 00:02:57,520 Speaker 2: the choice would be between a rate hike and keeping 51 00:02:57,600 --> 00:03:01,640 Speaker 2: rates on hold. But our view was that with inflation 52 00:03:01,760 --> 00:03:03,799 Speaker 2: coming down on the track that the RBA has been 53 00:03:03,840 --> 00:03:07,880 Speaker 2: forecasting for quite some time, I mean, the inflation forecasts 54 00:03:07,919 --> 00:03:10,600 Speaker 2: are almost the same as where they were in November, 55 00:03:11,480 --> 00:03:14,240 Speaker 2: so your view of the policy shouldn't be that different. 56 00:03:15,120 --> 00:03:18,400 Speaker 2: What seems to have changed, though, is that but since May, 57 00:03:19,000 --> 00:03:24,200 Speaker 2: they've changed their view about the level of demand and 58 00:03:24,360 --> 00:03:28,280 Speaker 2: the level of supply. They've revised their view about aggregate 59 00:03:28,320 --> 00:03:33,839 Speaker 2: demand up, and they've revised their view about supply capacity 60 00:03:34,720 --> 00:03:39,720 Speaker 2: and in particular productivity down. We're still assessing why they've 61 00:03:39,720 --> 00:03:43,760 Speaker 2: come to that conclusion. It's not one that we necessarily share, 62 00:03:44,240 --> 00:03:46,760 Speaker 2: but that does seem to be entering into their thinking. 63 00:03:46,800 --> 00:03:50,320 Speaker 2: But it is very common for a Reserve bank board 64 00:03:50,400 --> 00:03:54,880 Speaker 2: to consider two different cases, even if they're not seriously 65 00:03:54,880 --> 00:03:58,200 Speaker 2: considering one of them. In this instance, they given how 66 00:03:58,240 --> 00:04:02,240 Speaker 2: recently the inflation numbers have turned around. Of course they 67 00:04:02,320 --> 00:04:05,520 Speaker 2: were considering whether to hype rates, but it just isn't 68 00:04:05,720 --> 00:04:09,200 Speaker 2: something that we think you will actually transpire because they're 69 00:04:09,240 --> 00:04:12,200 Speaker 2: also conscious that, you know, the level of rates where 70 00:04:12,200 --> 00:04:14,760 Speaker 2: they are is causing a lot of pain in the community. 71 00:04:15,120 --> 00:04:18,080 Speaker 2: So as long as inflation remains on track, you know, 72 00:04:18,120 --> 00:04:20,800 Speaker 2: they'll have to remain vigilant, they'll have to keep the 73 00:04:20,880 --> 00:04:24,919 Speaker 2: retrick very robust, but ultimately they're going to be in 74 00:04:24,920 --> 00:04:27,719 Speaker 2: a position down the track that they can say, Okay, 75 00:04:27,720 --> 00:04:30,640 Speaker 2: we're close enough to target that we can start removing 76 00:04:30,880 --> 00:04:33,280 Speaker 2: the restrictiveness of policy. They we won't be in a 77 00:04:33,360 --> 00:04:35,120 Speaker 2: hurry to do that, and they're clearly in less of 78 00:04:35,160 --> 00:04:38,479 Speaker 2: a hurry than we would have expected, but you know 79 00:04:38,560 --> 00:04:40,720 Speaker 2: that's the profile that they're looking at. 80 00:04:41,440 --> 00:04:43,279 Speaker 1: Stay with me, Lucy, we'll be back in a minute. 81 00:04:50,320 --> 00:04:54,280 Speaker 1: I'm speaking to Lucy Ellis, Group chief economist at Westpac. 82 00:04:55,920 --> 00:04:59,080 Speaker 1: Just help me understand the aggregate demand comment you just made. 83 00:04:59,120 --> 00:05:04,320 Speaker 1: Ben the Reserve Bank in their statement yesterday certainly sounded 84 00:05:04,839 --> 00:05:08,919 Speaker 1: more optimistic about agricate demand. If that's a way of 85 00:05:08,960 --> 00:05:11,599 Speaker 1: putting it, then, I thought, particularly given the cost of 86 00:05:11,640 --> 00:05:15,039 Speaker 1: living crisis, the pressure people are under agricate demand is 87 00:05:15,080 --> 00:05:17,640 Speaker 1: all of demand, as the name suggests. Is that because 88 00:05:17,640 --> 00:05:20,520 Speaker 1: there's too much government spending? Is that because actually households 89 00:05:20,520 --> 00:05:23,680 Speaker 1: are as poorly off as we thought? Just unpack that 90 00:05:23,760 --> 00:05:25,360 Speaker 1: aggregric demand comment for me. 91 00:05:25,720 --> 00:05:28,960 Speaker 2: Well, it does take quite some unpacking, as just as 92 00:05:29,000 --> 00:05:32,960 Speaker 2: we can tell, there are two main changes driving their assessment. 93 00:05:33,839 --> 00:05:38,440 Speaker 2: One is that there is more government spending than they 94 00:05:38,440 --> 00:05:42,760 Speaker 2: had in their forecast previously. The other is that they 95 00:05:42,839 --> 00:05:48,000 Speaker 2: have pushed out their population growth profile. So Westpac Economics 96 00:05:48,040 --> 00:05:50,160 Speaker 2: is one of the few outfits that actually puts out 97 00:05:50,200 --> 00:05:54,160 Speaker 2: a projection for population growth over the near term independently 98 00:05:54,200 --> 00:05:58,120 Speaker 2: of government. We've been expecting that population growth would be 99 00:05:58,200 --> 00:06:02,800 Speaker 2: around that one point nine to two point zero rate four 100 00:06:02,839 --> 00:06:06,360 Speaker 2: twenty twenty four for a while. In its May forecast, 101 00:06:06,440 --> 00:06:09,960 Speaker 2: the RBA had a slower rate of population growth this year. 102 00:06:10,279 --> 00:06:14,880 Speaker 2: They expected that rollover after the surge in population when 103 00:06:14,880 --> 00:06:18,600 Speaker 2: the border is opened to happen faster than it's actually happening. 104 00:06:18,720 --> 00:06:22,520 Speaker 2: So they've moved their population growth forecast to be more 105 00:06:22,520 --> 00:06:25,320 Speaker 2: in line with what we already had, and so that's 106 00:06:25,400 --> 00:06:29,239 Speaker 2: increased their view of overall growth in the near term. 107 00:06:29,520 --> 00:06:32,480 Speaker 2: The overall level. Now, if you're adding more people, you're 108 00:06:32,520 --> 00:06:36,080 Speaker 2: adding more demand, but you're also adding more supply. So 109 00:06:36,160 --> 00:06:38,680 Speaker 2: the other piece of the puzzle, in addition to the 110 00:06:38,720 --> 00:06:42,880 Speaker 2: public demand that they're seeing, is also that they have 111 00:06:43,120 --> 00:06:48,040 Speaker 2: downgraded their forecast for productivity growth. This is a long 112 00:06:48,120 --> 00:06:52,039 Speaker 2: standing uncertainty after the pandemic. Our own view at Westpac 113 00:06:52,080 --> 00:06:55,839 Speaker 2: Economics is that productivity growth is rolling over because the 114 00:06:55,880 --> 00:06:59,680 Speaker 2: slump in productivity was, in our view, a ripple effect 115 00:06:59,680 --> 00:07:02,240 Speaker 2: from OD and it just will take some time to 116 00:07:02,440 --> 00:07:06,560 Speaker 2: wash out. But the Reserve Bank's taken a more bearish 117 00:07:06,600 --> 00:07:09,479 Speaker 2: and more pessimistic view of how quickly that can turn 118 00:07:09,520 --> 00:07:10,640 Speaker 2: around than we have. 119 00:07:12,200 --> 00:07:16,400 Speaker 1: So what's your best estimate about when the Reserve Bank 120 00:07:16,480 --> 00:07:18,160 Speaker 1: will move on interest rates? 121 00:07:19,240 --> 00:07:23,880 Speaker 2: Well, up until yesterday afternoon, we were expecting rates to 122 00:07:23,880 --> 00:07:25,720 Speaker 2: be you know that the Reserve Bankboard would be in 123 00:07:25,760 --> 00:07:29,560 Speaker 2: a position to start cutting rates in November. Our forecast 124 00:07:29,600 --> 00:07:33,360 Speaker 2: for inflation hasn't changed and theirs is in line with ours. 125 00:07:33,400 --> 00:07:36,160 Speaker 2: So you know, if they had the reaction function we 126 00:07:36,200 --> 00:07:38,800 Speaker 2: thought they had they would be cutting rates in November, 127 00:07:38,880 --> 00:07:42,520 Speaker 2: but given the language in the statement on monetary policy, 128 00:07:42,560 --> 00:07:46,720 Speaker 2: given what the governor said in the media conference, even 129 00:07:46,760 --> 00:07:49,080 Speaker 2: if things play out as we expect, we just don't 130 00:07:49,120 --> 00:07:52,280 Speaker 2: see they will see their way through to pivot that quickly. 131 00:07:52,440 --> 00:07:55,400 Speaker 2: So our forecasts are under review at the moment while 132 00:07:55,440 --> 00:07:59,280 Speaker 2: we assess the basis for the Reserve Bank's economic outlook. 133 00:08:00,240 --> 00:08:02,680 Speaker 1: Lucy, I've got to ask you the question about what 134 00:08:02,720 --> 00:08:05,280 Speaker 1: it's like inside the Reserve Bank because you have been 135 00:08:05,360 --> 00:08:09,720 Speaker 1: chief economists, You've been involved in all these discussions, albeit 136 00:08:10,000 --> 00:08:13,160 Speaker 1: not this year because you're obviously at Westpac chief economs 137 00:08:13,240 --> 00:08:15,560 Speaker 1: at Westpac. But I mean, is there a lot of 138 00:08:15,600 --> 00:08:18,080 Speaker 1: two toing and froing going Do you turn up with 139 00:08:18,120 --> 00:08:20,760 Speaker 1: your forecast? The economics team turned up with their forecasts 140 00:08:21,200 --> 00:08:23,560 Speaker 1: and there's a lot of debate about it. I'm just 141 00:08:23,640 --> 00:08:25,800 Speaker 1: kind of interested in the process in those meetings. 142 00:08:26,440 --> 00:08:28,920 Speaker 2: Well, without giving inn a thing a way that's not 143 00:08:29,000 --> 00:08:31,560 Speaker 2: already in the public domain, there's a couple of speeches 144 00:08:31,600 --> 00:08:36,480 Speaker 2: that go through the process. Glenn Stevens gave one some 145 00:08:36,640 --> 00:08:39,040 Speaker 2: years ago. Michelle Bullok I think it was gave one 146 00:08:39,400 --> 00:08:42,480 Speaker 2: as Deputy Governor, where she talks through the process and 147 00:08:42,520 --> 00:08:46,640 Speaker 2: the timing. Now some of those things have changed since 148 00:08:46,679 --> 00:08:50,240 Speaker 2: I left because of the recommendations of the Reserve Bank Review. 149 00:08:50,679 --> 00:08:53,280 Speaker 2: The Board now meets over two days, So instead of 150 00:08:53,280 --> 00:08:56,600 Speaker 2: squishing all the discussion into three hours on a Tuesday morning, 151 00:08:56,960 --> 00:09:00,000 Speaker 2: they have both the Monday afternoon and the Tuesday Mollie. 152 00:09:00,920 --> 00:09:03,240 Speaker 2: They have a lot more inter meeting interaction with the 153 00:09:03,280 --> 00:09:06,680 Speaker 2: Board than used to be the case, and so there 154 00:09:06,760 --> 00:09:09,800 Speaker 2: is an opportunity to kind of test and shape the 155 00:09:09,880 --> 00:09:13,439 Speaker 2: view about what their artlook looks like. But what essentially 156 00:09:13,480 --> 00:09:15,480 Speaker 2: I think is going on here is it's not so 157 00:09:15,559 --> 00:09:19,240 Speaker 2: much about how they've tested the forecasts. As I said, 158 00:09:19,559 --> 00:09:22,400 Speaker 2: their forecast of trim mean or almost identical to ours. 159 00:09:23,200 --> 00:09:26,400 Speaker 2: Now that they've revised their forecasts in the most recent 160 00:09:26,600 --> 00:09:31,320 Speaker 2: statement on monetary policy, what has changed is they've become 161 00:09:31,400 --> 00:09:34,120 Speaker 2: less forward looking. And so what has changed with the 162 00:09:34,160 --> 00:09:38,560 Speaker 2: Reserve Bank Review recommendations is they are now much more 163 00:09:38,600 --> 00:09:42,120 Speaker 2: focused on this idea of the level of aggurate demand 164 00:09:42,200 --> 00:09:45,240 Speaker 2: versus the level of aggregate supply, and that's sort of 165 00:09:45,280 --> 00:09:49,120 Speaker 2: a framework that they didn't rely on as heavily in 166 00:09:49,160 --> 00:09:49,640 Speaker 2: the past. 167 00:09:50,800 --> 00:09:53,120 Speaker 1: Fascinating LISSI, thank you very much for talking to Fear 168 00:09:53,160 --> 00:09:53,480 Speaker 1: and Greed. 169 00:09:54,000 --> 00:09:56,640 Speaker 2: Thanks very much, Sean's great great as always. 170 00:09:56,679 --> 00:09:59,760 Speaker 1: That was Lucy Ellis, Group chief Economist at Westpac. This 171 00:09:59,840 --> 00:10:02,559 Speaker 1: is Fear and Greed Business Interview. Join us every morning 172 00:10:02,600 --> 00:10:05,000 Speaker 1: for the full episode of Fear and Greed Daily business 173 00:10:05,120 --> 00:10:07,360 Speaker 1: years for people who make their own decisions. I'm Sean 174 00:10:07,400 --> 00:10:09,960 Speaker 1: Eelma Enjoy your day.