1 00:00:05,820 --> 00:00:08,640 Sean Aylmer: Welcome to the Fear & Greed Business Interview. I'm Sean Aylmer. 2 00:00:08,700 --> 00:00:12,179 Sean Aylmer: Will we see an interest rate cut this year? There's 3 00:00:12,179 --> 00:00:14,969 Sean Aylmer: a growing number of economists suggesting that it won't happen 4 00:00:14,969 --> 00:00:19,320 Sean Aylmer: at all in 2024 and instead it will be 2025. 5 00:00:19,560 --> 00:00:22,919 Sean Aylmer: One of those is Warren Hogan, managing director of EQ 6 00:00:23,340 --> 00:00:27,119 Sean Aylmer: Economics and economic advisor at Judo Bank. He, of course, 7 00:00:27,120 --> 00:00:30,539 Sean Aylmer: was previously chief economist at ANZ. He was also the 8 00:00:30,540 --> 00:00:33,630 Sean Aylmer: only economist to correctly predict almost a year out, that 9 00:00:33,630 --> 00:00:37,440 Sean Aylmer: the official cash rate would hit 4. 35%. Warren, welcome 10 00:00:37,440 --> 00:00:38,340 Sean Aylmer: back to Fear & Greed. 11 00:00:38,670 --> 00:00:40,168 Warren Hogan: Thanks for having me on the show again, Sean. 12 00:00:40,830 --> 00:00:44,040 Sean Aylmer: You've had a pretty good track record over the past 13 00:00:44,040 --> 00:00:46,979 Sean Aylmer: 12 months or so, particularly around interest rates, Warren. We 14 00:00:46,979 --> 00:00:49,409 Sean Aylmer: had the Reserve Bank Board release its minutes from the 15 00:00:49,409 --> 00:00:52,169 Sean Aylmer: last meeting yesterday. What did they tell us? 16 00:00:52,920 --> 00:00:54,690 Warren Hogan: They told us pretty much what we knew and that 17 00:00:54,690 --> 00:00:57,840 Warren Hogan: is that they know about as much of the future 18 00:00:57,840 --> 00:00:59,790 Warren Hogan: as anyone else and that's not much. It looks like 19 00:00:59,790 --> 00:01:04,260 Warren Hogan: it's playing out as planned. The economy's gradually removing that 20 00:01:04,260 --> 00:01:07,770 Warren Hogan: excess demand. The supply and demand balance is coming back. 21 00:01:08,580 --> 00:01:11,969 Warren Hogan: Inflation is gradually coming down and yes, at some stage 22 00:01:11,969 --> 00:01:14,400 Warren Hogan: they might be able to cut rates, but they're not 23 00:01:14,400 --> 00:01:17,700 Warren Hogan: ruling anything in or anything out. And that terminology is 24 00:01:17,700 --> 00:01:20,610 Warren Hogan: very clear and, to me, that tells me that they 25 00:01:20,610 --> 00:01:23,190 Warren Hogan: really don't know what's next. And I think the next 26 00:01:23,190 --> 00:01:26,038 Warren Hogan: three or four months are critical for the Australian economy, 27 00:01:26,039 --> 00:01:30,059 Warren Hogan: for the trends around inflation and then ultimately, interest rates. 28 00:01:30,059 --> 00:01:31,380 Warren Hogan: And I think it's all up for grabs. 29 00:01:32,220 --> 00:01:35,250 Sean Aylmer: Okay. So, what are the things that the Reserve Bank is 30 00:01:35,250 --> 00:01:38,520 Sean Aylmer: looking at? And I mean obviously it's inflation, but it's 31 00:01:38,520 --> 00:01:40,020 Sean Aylmer: more than inflation, isn't it? 32 00:01:40,620 --> 00:01:44,038 Warren Hogan: It is. It's essentially this excess demand in the economy 33 00:01:44,429 --> 00:01:47,009 Warren Hogan: and that's measured in a range of different ways. The 34 00:01:47,010 --> 00:01:50,730 Warren Hogan: obvious one and the most important element is the excess 35 00:01:50,730 --> 00:01:54,870 Warren Hogan: demand for labor. And they're talking about it coming gradually back 36 00:01:54,870 --> 00:01:58,800 Warren Hogan: down into balance, but the economy is still running above 37 00:01:58,800 --> 00:02:02,639 Warren Hogan: its potential and that's why we're still seeing inflation above 38 00:02:02,790 --> 00:02:06,330 Warren Hogan: target. That's the way they frame it. And they're hopeful 39 00:02:06,330 --> 00:02:09,540 Warren Hogan: that it's going to continue to ... That gap close, that 40 00:02:09,540 --> 00:02:12,510 Warren Hogan: excess demand is going to come out of the economy, 41 00:02:12,930 --> 00:02:17,280 Warren Hogan: but they're relying on the past tightening of policy to do 42 00:02:17,280 --> 00:02:21,120 Warren Hogan: the work. We've seen only one rate hike since 1 43 00:02:21,120 --> 00:02:25,049 Warren Hogan: July last year. And of course, that nominal tightening, that 44 00:02:25,049 --> 00:02:29,940 Warren Hogan: massive 425 basis points of rate hikes is working its 45 00:02:29,940 --> 00:02:32,609 Warren Hogan: way through the system. And the big question is what's 46 00:02:32,610 --> 00:02:35,400 Warren Hogan: left when that's worked its way all through the system 47 00:02:35,400 --> 00:02:37,440 Warren Hogan: probably by the end of this year? And the answer 48 00:02:37,440 --> 00:02:41,340 Warren Hogan: is a real interest rate. That is the interest rate minus inflation. 49 00:02:41,609 --> 00:02:45,030 Warren Hogan: That's still very low by historical standards. So, I think 50 00:02:45,030 --> 00:02:48,480 Warren Hogan: they're being very cautious for a good reason. They don't 51 00:02:48,960 --> 00:02:52,110 Warren Hogan: have any reason not to believe their current outlook is 52 00:02:52,110 --> 00:02:54,689 Warren Hogan: the right one, but they know it can go any 53 00:02:54,690 --> 00:02:55,320 Warren Hogan: way from here. 54 00:02:56,160 --> 00:02:59,578 Sean Aylmer: So, from where you see it, when do you think the next ... 55 00:02:59,788 --> 00:03:03,030 Sean Aylmer: Well, firstly, is the next move a reduction? Which I'm 56 00:03:03,030 --> 00:03:05,310 Sean Aylmer: presuming, but maybe you have some other view on that. 57 00:03:05,610 --> 00:03:06,600 Sean Aylmer: And when will it happen? 58 00:03:07,740 --> 00:03:10,710 Warren Hogan: So, at the moment I have is the central case that 59 00:03:11,099 --> 00:03:13,620 Warren Hogan: they will get the job done with a 4. 35% 60 00:03:13,620 --> 00:03:16,619 Warren Hogan: cash rate and that they can start to look to 61 00:03:16,619 --> 00:03:20,579 Warren Hogan: take some of that tightening out of the system next 62 00:03:20,580 --> 00:03:24,990 Warren Hogan: year. And I've moved from November to February '25, so 63 00:03:24,990 --> 00:03:28,290 Warren Hogan: November '24 to February '25, and the last couple of weeks 64 00:03:28,290 --> 00:03:33,508 Warren Hogan: we've seen some stronger data for 2024, particularly in terms 65 00:03:33,508 --> 00:03:35,879 Warren Hogan: of the business sector. So, it just is taking a 66 00:03:35,879 --> 00:03:39,450 Warren Hogan: long time for this economy to rebalance and of course, 67 00:03:39,450 --> 00:03:41,850 Warren Hogan: it not just has to rebalance, it has to be 68 00:03:41,850 --> 00:03:44,040 Warren Hogan: showing signs of producing some slack for them to be 69 00:03:44,040 --> 00:03:47,100 Warren Hogan: comfortable with cutting rates. So, I'm very much of the view 70 00:03:47,429 --> 00:03:49,739 Warren Hogan: that it is going to take a while before they'll 71 00:03:49,740 --> 00:03:53,430 Warren Hogan: be comfortable easing. But I also, at the same time, 72 00:03:53,940 --> 00:03:56,160 Warren Hogan: am putting a lot of emphasis on the fact that 73 00:03:56,160 --> 00:03:59,430 Warren Hogan: we can't rule out rate hikes sometime in probably late 74 00:03:59,430 --> 00:04:02,700 Warren Hogan: winter or early spring if the economy actually starts to 75 00:04:02,700 --> 00:04:05,939 Warren Hogan: come back. And the reason I highlight that risk is 76 00:04:05,969 --> 00:04:09,150 Warren Hogan: we're seeing it happen in many economies overseas. And as 77 00:04:09,150 --> 00:04:12,299 Warren Hogan: I said, the tightening impulse that's been put into this 78 00:04:12,330 --> 00:04:15,810 Warren Hogan: economy by the 425 basis points of rate hikes over 79 00:04:15,810 --> 00:04:18,780 Warren Hogan: the last couple of years, it will soon wear off 80 00:04:19,050 --> 00:04:22,050 Warren Hogan: and will be readjusted to this new level of rates. 81 00:04:22,050 --> 00:04:25,259 Warren Hogan: And the question is, is it the right level? And all of 82 00:04:25,259 --> 00:04:27,210 Warren Hogan: my models tell me we're still a little bit short 83 00:04:27,210 --> 00:04:29,460 Warren Hogan: of the right level, but my models could be wrong. 84 00:04:30,180 --> 00:04:32,010 Warren Hogan: And we also know that they're only going to tighten further if they absolutely have to. 85 00:04:33,210 --> 00:04:37,440 Warren Hogan: So, I think the right call is still a cut 86 00:04:37,440 --> 00:04:39,540 Warren Hogan: as the next move, but it's certainly not going to 87 00:04:39,540 --> 00:04:40,200 Warren Hogan: happen quickly. 88 00:04:40,740 --> 00:04:42,480 Sean Aylmer: Stay with me, Warren, we'll be back in a minute. 89 00:04:49,830 --> 00:04:53,370 Sean Aylmer: I'm speaking to Warren Hogan, managing director at EQ Economics 90 00:04:53,370 --> 00:04:58,139 Sean Aylmer: and economic advisor at Judo Bank. On the ground, be 91 00:04:58,139 --> 00:05:01,469 Sean Aylmer: that through EQ Economics or your role at Judo Bank, 92 00:05:02,009 --> 00:05:04,740 Sean Aylmer: I'm sure you talk to businesses, small and medium- sized 93 00:05:04,740 --> 00:05:09,089 Sean Aylmer: businesses. Have you been surprised by how resilient they've been? 94 00:05:09,990 --> 00:05:13,140 Warren Hogan: I certainly have. I've been surprised how resilient they've been 95 00:05:13,140 --> 00:05:16,170 Warren Hogan: through the whole last four years, through COVID, through the 96 00:05:16,170 --> 00:05:21,150 Warren Hogan: recovery. It's been an incredible period of challenges. And what 97 00:05:21,150 --> 00:05:25,469 Warren Hogan: we're seeing early in '24 after the summer holidays is 98 00:05:25,560 --> 00:05:28,440 Warren Hogan: an improvement in sentiment. So, we know that the slowdown 99 00:05:28,440 --> 00:05:31,560 Warren Hogan: was driven by consumer belt tightening and slower consumption spending, 100 00:05:31,800 --> 00:05:34,169 Warren Hogan: but business was really starting to get worried and feel 101 00:05:34,170 --> 00:05:36,389 Warren Hogan: it towards the end of last year, but there's been 102 00:05:36,389 --> 00:05:40,169 Warren Hogan: a noticeable turnaround in sentiment this year. We're certainly seeing a 103 00:05:40,170 --> 00:05:45,180 Warren Hogan: lot more inquiry for expanding businesses and investment. And I 104 00:05:45,180 --> 00:05:48,089 Warren Hogan: think that reflects that maybe the last rate hike is 105 00:05:48,089 --> 00:05:52,380 Warren Hogan: behind us. We're seeing equity markets on record highs. Dwelling 106 00:05:52,380 --> 00:05:56,670 Warren Hogan: housing markets are rising. So, I actually see in the 107 00:05:56,670 --> 00:06:00,299 Warren Hogan: last few months, improved sentiment and the business surveys are 108 00:06:00,299 --> 00:06:03,180 Warren Hogan: showing that up as well. But we've only really got 109 00:06:03,180 --> 00:06:05,279 Warren Hogan: one data point on the consumer and that was last 110 00:06:05,279 --> 00:06:10,139 Warren Hogan: week's retail sales and they were okay, but they certainly weren't spectacular. So, there 111 00:06:10,139 --> 00:06:12,689 Warren Hogan: still is question marks over this economy, but I think 112 00:06:12,690 --> 00:06:15,089 Warren Hogan: we're starting to see a bit of an improvement in 2024. 113 00:06:16,049 --> 00:06:18,510 Sean Aylmer: Bringing all this together then, what you have said in 114 00:06:18,510 --> 00:06:20,820 Sean Aylmer: the last few minutes is that we may not actually 115 00:06:20,820 --> 00:06:24,360 Sean Aylmer: get a lot of interest rate relief in the short 116 00:06:24,360 --> 00:06:25,410 Sean Aylmer: to medium term then? 117 00:06:26,250 --> 00:06:29,339 Warren Hogan: Well, I think that's another important point that isn't being 118 00:06:29,339 --> 00:06:31,888 Warren Hogan: talked about a lot is, so if the RBA does 119 00:06:31,889 --> 00:06:33,720 Warren Hogan: start cutting rates, how much are they going to cut? 120 00:06:34,260 --> 00:06:36,599 Warren Hogan: And my very strong view is that it's not going 121 00:06:36,600 --> 00:06:38,430 Warren Hogan: to be by much. They might take the cash rate 122 00:06:38,430 --> 00:06:40,800 Warren Hogan: down to three and a half, and then the next 123 00:06:40,800 --> 00:06:43,380 Warren Hogan: move after that is probably to be up again two 124 00:06:43,380 --> 00:06:45,330 Warren Hogan: or three years down the track. I mean, I think we still 125 00:06:45,330 --> 00:06:48,178 Warren Hogan: live in a world of cycles. But we're living in 126 00:06:48,178 --> 00:06:51,419 Warren Hogan: a world of chronic labor shortages. There's going to be 127 00:06:51,420 --> 00:06:54,959 Warren Hogan: constant upward pressure on real wages now for many years 128 00:06:54,960 --> 00:06:56,820 Warren Hogan: to come. And that's just going to keep the cost 129 00:06:56,820 --> 00:06:59,760 Warren Hogan: structure for business constantly under pressure, and of course, therefore, 130 00:06:59,760 --> 00:07:02,909 Warren Hogan: inflation under pressure. So, the new normal for interest rates 131 00:07:02,910 --> 00:07:04,290 Warren Hogan: is a lot different to what we've known in the 132 00:07:04,290 --> 00:07:07,830 Warren Hogan: last probably 15 years. So, I think a neutral RBA 133 00:07:07,830 --> 00:07:09,660 Warren Hogan: cash rate is somewhere between three and a half and 134 00:07:09,660 --> 00:07:14,130 Warren Hogan: four. And therefore when they do cut, assuming it's in the 135 00:07:14,130 --> 00:07:17,100 Warren Hogan: absence of a recession or something more severe to the 136 00:07:17,100 --> 00:07:19,739 Warren Hogan: economy, but when they do cut, they'll only do a 137 00:07:19,740 --> 00:07:22,050 Warren Hogan: little bit and then of course, the question will turn 138 00:07:22,050 --> 00:07:24,930 Warren Hogan: to whether or not they're going to tighten again at some stage 139 00:07:25,110 --> 00:07:27,359 Warren Hogan: in a year or two's time. So, I think that's 140 00:07:27,360 --> 00:07:28,320 Warren Hogan: the right way to think about it. 141 00:07:28,799 --> 00:07:30,840 Sean Aylmer: Okay. So, if I'm a business and I've been running 142 00:07:30,840 --> 00:07:32,970 Sean Aylmer: for 15 years, I'm about to hit a period which 143 00:07:32,970 --> 00:07:36,300 Sean Aylmer: I've probably never experienced before, simply because rates have been 144 00:07:36,300 --> 00:07:40,590 Sean Aylmer: so low post- GFC, but this is probably the old 145 00:07:40,590 --> 00:07:42,870 Sean Aylmer: normal, I don't know, the new normal, whatever it is, Warren. 146 00:07:43,500 --> 00:07:46,109 Warren Hogan: Well, it's back to the normal from, I see it 147 00:07:46,109 --> 00:07:48,660 Warren Hogan: as the golden era of the Australian economy in the '90s 148 00:07:48,660 --> 00:07:52,200 Warren Hogan: and noughties when we really lifted the living standards of 149 00:07:52,200 --> 00:07:55,890 Warren Hogan: everyone and performed very well, high productivity. And I think 150 00:07:55,890 --> 00:07:58,170 Warren Hogan: we're going back to that world. I'm very positive on 151 00:07:58,170 --> 00:08:01,649 Warren Hogan: productivity and I'm positive on business investment, but it does 152 00:08:01,650 --> 00:08:04,740 Warren Hogan: mean the cost of capital is going to be elevated 153 00:08:04,740 --> 00:08:07,290 Warren Hogan: and the cost of funding is going to be elevated 154 00:08:07,290 --> 00:08:09,030 Warren Hogan: compared to what we've known in the last 10 years. 155 00:08:09,030 --> 00:08:11,430 Warren Hogan: But when I speak to people in business, that's not 156 00:08:11,430 --> 00:08:14,700 Warren Hogan: what they're worried about. Households worry about interest rates or 157 00:08:14,730 --> 00:08:18,539 Warren Hogan: heavily leveraged households worry about interest rates. Businesses aren't too 158 00:08:18,540 --> 00:08:21,599 Warren Hogan: concerned because it's a cost that they can write off 159 00:08:21,599 --> 00:08:25,380 Warren Hogan: their tax. They're concerned about is their business running well, 160 00:08:25,380 --> 00:08:28,050 Warren Hogan: how's their market going? Can they find the right labor? 161 00:08:28,050 --> 00:08:31,740 Warren Hogan: This sort of thing. So, I think businesses are very 162 00:08:31,950 --> 00:08:34,380 Warren Hogan: ready to adapt to this new world of interest rates 163 00:08:34,380 --> 00:08:35,610 Warren Hogan: that have been higher than what we've seen. 164 00:08:36,420 --> 00:08:38,848 Sean Aylmer: And you just mentioned productivity. It seems to be something 165 00:08:38,849 --> 00:08:42,540 Sean Aylmer: we've spoken about forever, improving productivity, particularly in the last 166 00:08:42,540 --> 00:08:45,390 Sean Aylmer: couple of months. You are reasonably confident that will happen? 167 00:08:46,110 --> 00:08:48,870 Warren Hogan: I am, over the medium to longer term, i. e., 168 00:08:48,960 --> 00:08:52,889 Warren Hogan: 2, 3, 4 years plus. We have chronic labor shortages, 169 00:08:52,889 --> 00:08:55,949 Warren Hogan: the result of the retirement of the baby boomers, and 170 00:08:55,950 --> 00:08:58,319 Warren Hogan: that's not going away quickly even with our high immigration 171 00:08:58,320 --> 00:09:01,710 Warren Hogan: rates. And that's essentially going to be sending a signal 172 00:09:01,710 --> 00:09:04,560 Warren Hogan: to business to invest in labor- saving technology, which is 173 00:09:04,950 --> 00:09:08,880 Warren Hogan: the definition of productivity. So, I see business is in good 174 00:09:08,880 --> 00:09:11,610 Warren Hogan: shape to make these investments, whether it's as simple as 175 00:09:11,610 --> 00:09:14,610 Warren Hogan: better plant and equipment, better software, all the way through 176 00:09:14,610 --> 00:09:17,910 Warren Hogan: to the AI story. I am positive productivity over the 177 00:09:17,910 --> 00:09:22,050 Warren Hogan: decade ahead. In the short term though, because labor is 178 00:09:22,050 --> 00:09:24,990 Warren Hogan: relatively cheap, that is real wages haven't been ... Well, they've 179 00:09:24,990 --> 00:09:27,090 Warren Hogan: been going backwards, it only just started to even out. 180 00:09:27,719 --> 00:09:29,910 Warren Hogan: Businesses are able to apply more and more labor to 181 00:09:29,910 --> 00:09:31,860 Warren Hogan: the capital stock at the moment and make money out of it. 182 00:09:32,040 --> 00:09:34,260 Warren Hogan: And that's what's killing us in the short term around 183 00:09:34,260 --> 00:09:39,300 Warren Hogan: productivity. So, until we start to see the economy really 184 00:09:39,300 --> 00:09:42,120 Warren Hogan: slow and squeeze business and they have to therefore make some 185 00:09:42,120 --> 00:09:44,970 Warren Hogan: tough decisions, i. e., is cost- cutting the new black? 186 00:09:45,929 --> 00:09:48,719 Warren Hogan: I don't see the productivity story turning around quickly. And 187 00:09:49,139 --> 00:09:51,570 Warren Hogan: that employment number we got for February just shows you 188 00:09:51,570 --> 00:09:54,569 Warren Hogan: that that process still seems to be in play. That 189 00:09:54,660 --> 00:09:59,220 Warren Hogan: is, continued application of labor to the capital stock and 190 00:09:59,220 --> 00:10:02,670 Warren Hogan: the high immigration just seems to be feeding that beast 191 00:10:02,670 --> 00:10:05,730 Warren Hogan: of labor demand. So, it doesn't seem to have changed 192 00:10:05,730 --> 00:10:08,309 Warren Hogan: a lot, but we're waiting to see. I think the 193 00:10:08,309 --> 00:10:11,789 Warren Hogan: next three or four months are absolutely critical. And I 194 00:10:11,789 --> 00:10:15,630 Warren Hogan: do worry, and I worry about a strong economy because 195 00:10:15,630 --> 00:10:17,488 Warren Hogan: I do think that then therefore means we're going to 196 00:10:17,490 --> 00:10:20,130 Warren Hogan: need higher rates. And that's going to put massive pressure 197 00:10:20,130 --> 00:10:23,610 Warren Hogan: on the RBA, the politics of it's horrendous, as we 198 00:10:23,610 --> 00:10:26,249 Warren Hogan: can see. And yeah, if they're having to tighten again, 199 00:10:26,250 --> 00:10:27,929 Warren Hogan: it's going to be very, very tough period for them. 200 00:10:28,708 --> 00:10:30,510 Sean Aylmer: Warren, thank you for talking to Fear & Greed. 201 00:10:31,049 --> 00:10:31,439 Warren Hogan: Thanks, Sean. 202 00:10:32,309 --> 00:10:35,730 Sean Aylmer: That was Warren Hogan, managing director of EQ Economics and 203 00:10:35,730 --> 00:10:38,909 Sean Aylmer: economic advisor at Judo Bank. This is the Fear & Greed 204 00:10:38,910 --> 00:10:41,429 Sean Aylmer: Business Interview. Join us every morning for the full episode 205 00:10:41,429 --> 00:10:44,490 Sean Aylmer: of Fear & Greed, daily business news for people who make 206 00:10:44,490 --> 00:10:47,370 Sean Aylmer: their own decisions. I'm Sean Aylmer. Enjoy your day.