1 00:00:05,720 --> 00:00:08,360 Speaker 1: Welcome to the Fear and Greed Business Interview. I'm Sean Alma. 2 00:00:08,560 --> 00:00:12,080 Speaker 1: Yesterday afternoon, the Reserve Bank Board left interest rates on hold. 3 00:00:12,440 --> 00:00:15,280 Speaker 1: The benchmark great stays at four point three five percent. 4 00:00:15,720 --> 00:00:19,119 Speaker 1: Surprises there. With financial markets tipping a reduction in rates 5 00:00:19,160 --> 00:00:22,200 Speaker 1: some point next year. The Reserve Bank Governor Michelle Bullock 6 00:00:22,360 --> 00:00:24,320 Speaker 1: is very much sticking to the line that they're not 7 00:00:24,400 --> 00:00:27,040 Speaker 1: ruling anything in or not ruling anything out for that matter, 8 00:00:27,400 --> 00:00:31,000 Speaker 1: reiterating that inflation continues to be too high. I'm joined 9 00:00:31,040 --> 00:00:34,520 Speaker 1: today by Westpax Chief Economist Lucy Ellis. As I've mentioned before, 10 00:00:34,600 --> 00:00:36,760 Speaker 1: Lucy has a unique insight into the way the Reserve 11 00:00:36,800 --> 00:00:39,760 Speaker 1: Bank makes decisions, having been the Assistant Governor at the 12 00:00:39,800 --> 00:00:42,280 Speaker 1: Reserve Bank and the chief economist until late last year. 13 00:00:42,479 --> 00:00:44,200 Speaker 1: Lucy Ellis, welcome back to Fear and Greed. 14 00:00:44,800 --> 00:00:46,600 Speaker 2: Thanks very much, se and lovely to be here. 15 00:00:47,720 --> 00:00:51,400 Speaker 1: What do you make out of yesterday's statement on monetary 16 00:00:51,400 --> 00:00:54,800 Speaker 1: policy which came out as well as Michelle Bullock's press 17 00:00:54,840 --> 00:00:56,960 Speaker 1: conference and the statement after the board meeting. 18 00:00:57,440 --> 00:01:01,440 Speaker 2: Well, the decision to keep rates on whole was widely expected, 19 00:01:02,560 --> 00:01:07,280 Speaker 2: and it was recognized in that package of communication that 20 00:01:08,000 --> 00:01:13,480 Speaker 2: inflation has come down as we expected, they highlighted the 21 00:01:13,480 --> 00:01:16,440 Speaker 2: fact that underlying inflation is still too high, and they're 22 00:01:16,480 --> 00:01:21,959 Speaker 2: looking through the much larger decline in headline inflation because 23 00:01:22,000 --> 00:01:26,319 Speaker 2: of course that's been largely driven by the electricity rebates, 24 00:01:26,360 --> 00:01:29,679 Speaker 2: so they're looking through that. They're expecting a pickup in 25 00:01:29,720 --> 00:01:34,319 Speaker 2: headline inflation next year once the rebates expire, and they're 26 00:01:34,400 --> 00:01:37,600 Speaker 2: focusing on measures like trimmed mean inflation to get the 27 00:01:37,680 --> 00:01:41,720 Speaker 2: underlying trend. Now, while trimmed mean inflation is coming down, 28 00:01:41,920 --> 00:01:44,840 Speaker 2: is still a good half of a point above the 29 00:01:44,880 --> 00:01:48,280 Speaker 2: top of the RBA's two to three percent target range, 30 00:01:48,400 --> 00:01:51,400 Speaker 2: and it hasn't been coming down that quickly on a 31 00:01:51,480 --> 00:01:53,920 Speaker 2: quarterly basis, and they're the sort of things that the 32 00:01:54,080 --> 00:01:59,720 Speaker 2: RBA has been very mindful of. Now they did slightly 33 00:01:59,720 --> 00:02:04,480 Speaker 2: show they're inflation forecast, they're trimmed mean inflation forecast by 34 00:02:04,520 --> 00:02:08,840 Speaker 2: a little right through the horizon, because trimmed mean inflation 35 00:02:09,200 --> 00:02:12,000 Speaker 2: already got to the level at the getting a year 36 00:02:12,120 --> 00:02:15,840 Speaker 2: ended September quarter that they are expecting year in December quarters. 37 00:02:15,840 --> 00:02:18,079 Speaker 2: So if anything, they're a little bit ahead of schedule 38 00:02:18,680 --> 00:02:23,280 Speaker 2: relative to what they previously expected. But broadly speaking, the 39 00:02:23,320 --> 00:02:26,880 Speaker 2: outlook is not that different from what they were previously expecting, 40 00:02:27,160 --> 00:02:30,600 Speaker 2: a bit softer growth, a bit lower wages growth, a 41 00:02:30,840 --> 00:02:34,919 Speaker 2: very margin or decline in inflation. But they're mindful of 42 00:02:34,960 --> 00:02:38,959 Speaker 2: the upside risks because inflation is still above the band. 43 00:02:39,000 --> 00:02:41,520 Speaker 2: You've got to be more vigilant to the upside risk, 44 00:02:41,639 --> 00:02:45,200 Speaker 2: even if the risks around your forecast are balanced as 45 00:02:45,240 --> 00:02:48,880 Speaker 2: they are. And so they're still keeping on with the 46 00:02:49,320 --> 00:02:52,400 Speaker 2: not ruling anything on or out language, still keeping on 47 00:02:52,600 --> 00:02:56,480 Speaker 2: with the vigilant language vigila to upside risks. So in 48 00:02:56,560 --> 00:03:01,200 Speaker 2: many respects it was a relatively straight but change of 49 00:03:01,240 --> 00:03:04,400 Speaker 2: outlook compared with what they had in August or in 50 00:03:04,440 --> 00:03:05,200 Speaker 2: deed September. 51 00:03:06,240 --> 00:03:09,959 Speaker 1: Okay, So for we outside pundits as opposed to those 52 00:03:10,000 --> 00:03:13,240 Speaker 1: inside and people like yourself who have been inside, do 53 00:03:13,320 --> 00:03:15,480 Speaker 1: you think there would ever have been some sort of 54 00:03:16,200 --> 00:03:20,760 Speaker 1: inclination to soften the language just a bit. I mean 55 00:03:20,800 --> 00:03:24,600 Speaker 1: that they're firmly in neutral, it seems. But given the 56 00:03:24,720 --> 00:03:28,960 Speaker 1: trajectory of inflation, giving those forecasts that they have shaved 57 00:03:29,080 --> 00:03:32,799 Speaker 1: marginally that you went through, and I suppose we're all 58 00:03:32,880 --> 00:03:35,080 Speaker 1: hoping that lean into the idea that rates the next 59 00:03:35,160 --> 00:03:36,920 Speaker 1: movement rates TOD be down but they're not even doing 60 00:03:37,000 --> 00:03:40,640 Speaker 1: that really, whilst everyone expects that, they're not even saying that, really, 61 00:03:40,680 --> 00:03:41,000 Speaker 1: are they. 62 00:03:41,760 --> 00:03:44,680 Speaker 2: You're right, Sean. The Governor refused to be drawn on 63 00:03:44,720 --> 00:03:48,080 Speaker 2: the outlook for the cash rat in the first half 64 00:03:48,120 --> 00:03:51,360 Speaker 2: of next year. You could argue that's a little bit 65 00:03:51,440 --> 00:03:53,880 Speaker 2: less wawkish than they were it of August, where she 66 00:03:54,040 --> 00:03:57,480 Speaker 2: was quite explicit about not considering a near term rate 67 00:03:57,560 --> 00:04:01,520 Speaker 2: cut as being consistent with their strategy. She didn't actually 68 00:04:01,600 --> 00:04:05,400 Speaker 2: say that a nearter rate cut was inconsistent, but on 69 00:04:05,440 --> 00:04:08,600 Speaker 2: the other hand, you did get the sense that they 70 00:04:08,680 --> 00:04:13,320 Speaker 2: were more comfortable with market pricing, which has pushed the 71 00:04:13,360 --> 00:04:17,080 Speaker 2: timing of that rate cut out a little bit. I 72 00:04:17,120 --> 00:04:19,320 Speaker 2: do think that part of what's going on is that 73 00:04:19,400 --> 00:04:22,920 Speaker 2: even though the disinflation is on track, inflation is declining, 74 00:04:23,360 --> 00:04:27,120 Speaker 2: you know, as well, perhaps even a little faster as 75 00:04:27,160 --> 00:04:31,240 Speaker 2: they expected. They've also become a little bit more nervous 76 00:04:31,400 --> 00:04:35,200 Speaker 2: about tightness in the labor market, and over a sequence 77 00:04:35,240 --> 00:04:41,839 Speaker 2: of meetings they've become progressively more pessimistic about supply capacity 78 00:04:42,279 --> 00:04:44,680 Speaker 2: in the Australian economy. And this is something we've been 79 00:04:44,720 --> 00:04:47,240 Speaker 2: talking about a bit in recent times. 80 00:04:47,839 --> 00:04:49,760 Speaker 1: Stay with me, Lucie we'll be back in a minute. 81 00:04:57,080 --> 00:05:00,400 Speaker 1: I'm speaking to Lucy Ellis, Group chief economist at PACK. 82 00:05:01,760 --> 00:05:04,000 Speaker 1: What about household spending if they talked a bit about that, 83 00:05:04,040 --> 00:05:09,560 Speaker 1: and they also talked about exogenous factors overseas in Ukraine, 84 00:05:09,560 --> 00:05:12,839 Speaker 1: Middle East, US election. Again Michelle Bullock wasn't drawn on that, 85 00:05:12,960 --> 00:05:15,880 Speaker 1: but you know, these are all factors that they're talking about. 86 00:05:16,000 --> 00:05:17,920 Speaker 1: It seemed to me that household spending they are a 87 00:05:17,960 --> 00:05:20,039 Speaker 1: little bit concerned about that falling too much. 88 00:05:20,680 --> 00:05:24,799 Speaker 2: That's absolutely right. The risks that they assessed on consumption 89 00:05:24,920 --> 00:05:28,159 Speaker 2: were on the downside, and they outright said that they 90 00:05:28,240 --> 00:05:33,000 Speaker 2: expect that real consumption will be flat in the September quarter, so, 91 00:05:33,400 --> 00:05:37,240 Speaker 2: you know, further weakness in consumption. But in the end, 92 00:05:37,400 --> 00:05:40,480 Speaker 2: what they're focused on is the balance of aggregate demand 93 00:05:40,520 --> 00:05:44,680 Speaker 2: and aggregate supply. And this is really an evolution of 94 00:05:44,720 --> 00:05:48,320 Speaker 2: the way they're conducting policy and analyzing the economy that's 95 00:05:48,320 --> 00:05:51,440 Speaker 2: happened in the wake of the RBA review. And so 96 00:05:51,560 --> 00:05:54,080 Speaker 2: even though consumption's weak, they're looking at the whole economy 97 00:05:54,080 --> 00:05:58,960 Speaker 2: and they're saying in their assessment the level of demand 98 00:05:59,000 --> 00:06:02,720 Speaker 2: is still outst their assessment of the level of supply, 99 00:06:03,640 --> 00:06:06,279 Speaker 2: and that's why some of the communication they had around 100 00:06:06,279 --> 00:06:11,120 Speaker 2: the labor market was so impactful. They're really seeing the 101 00:06:11,240 --> 00:06:14,479 Speaker 2: labor market are still being too tight, and they pointed 102 00:06:14,520 --> 00:06:17,320 Speaker 2: to a number of indicators where they're saying, well, this 103 00:06:17,360 --> 00:06:21,480 Speaker 2: isn't easing anymore. So average hours worked isn't easing anymore. 104 00:06:22,320 --> 00:06:26,440 Speaker 2: Some of the business survey measures aren't suggesting loosening labor 105 00:06:26,440 --> 00:06:30,120 Speaker 2: market conditions in the recent times compared with you know, 106 00:06:30,120 --> 00:06:32,280 Speaker 2: although they has loosened a lot since a year or 107 00:06:32,320 --> 00:06:35,200 Speaker 2: so ago. And as a consequence of all that, they're 108 00:06:35,200 --> 00:06:37,440 Speaker 2: sort of saying, well, we still think the level of 109 00:06:37,560 --> 00:06:42,560 Speaker 2: supply is low, and so therefore the level of demand 110 00:06:42,600 --> 00:06:46,279 Speaker 2: that's sustainable while still keeping the just inflation on track 111 00:06:46,800 --> 00:06:50,200 Speaker 2: is pretty weak. That's the way they're thinking about the 112 00:06:50,240 --> 00:06:51,279 Speaker 2: economy at the moment. 113 00:06:52,080 --> 00:06:56,240 Speaker 1: Government spending always comes up as a reason, depending on 114 00:06:56,680 --> 00:07:01,400 Speaker 1: which media outlet you're talking to, its inflationary or Michelle 115 00:07:01,440 --> 00:07:03,680 Speaker 1: Bullock yesterday really didn't want to be drawn in to 116 00:07:04,080 --> 00:07:06,839 Speaker 1: government spending, particularly around federal elections that type of thing. 117 00:07:07,680 --> 00:07:10,840 Speaker 1: So Park, what the Reserve Bank thinks? Do you think, Lucy, 118 00:07:11,240 --> 00:07:15,800 Speaker 1: that government spending is providing an extra challenge for the 119 00:07:15,800 --> 00:07:19,240 Speaker 1: Reserve Bank? Simply because fiscal policy isn't doing much of 120 00:07:19,280 --> 00:07:21,200 Speaker 1: a job in retarding the economy. 121 00:07:21,840 --> 00:07:24,720 Speaker 2: Well, I think there are aspects of fiscal policy that 122 00:07:24,840 --> 00:07:30,480 Speaker 2: have done enormous lifting in keeping a demand damp. And 123 00:07:30,560 --> 00:07:33,360 Speaker 2: you've got to remember that the tax take from this 124 00:07:33,440 --> 00:07:36,720 Speaker 2: Stradian household sector reached an all time high as a 125 00:07:36,720 --> 00:07:40,000 Speaker 2: share of income in recent times just ahead of the 126 00:07:40,040 --> 00:07:43,040 Speaker 2: Stage three tax cuts, and in fact, the tax take 127 00:07:43,160 --> 00:07:46,040 Speaker 2: was surprisingly strong in the June quarter just ahead of 128 00:07:46,040 --> 00:07:53,040 Speaker 2: those tax cuts. The level of the federal government's deficit, indeed, 129 00:07:53,040 --> 00:07:56,440 Speaker 2: they ran two surpluses and the deficits quite small. So 130 00:07:57,440 --> 00:07:59,440 Speaker 2: you know, all of these things need to be taken 131 00:07:59,520 --> 00:08:03,679 Speaker 2: in con text, and I think where the RBA is heading. 132 00:08:03,720 --> 00:08:07,160 Speaker 2: And you know, an important way to frame this is 133 00:08:08,360 --> 00:08:12,440 Speaker 2: if you truly believe that the aggriate supply in the 134 00:08:12,520 --> 00:08:16,240 Speaker 2: economy is this week, then any extra dollar of demand 135 00:08:16,320 --> 00:08:18,440 Speaker 2: is a problem, and it doesn't matter who's spending it. 136 00:08:19,120 --> 00:08:22,520 Speaker 2: You know, it so happens that with consumption this week. 137 00:08:23,280 --> 00:08:26,680 Speaker 2: You know, there's been sort of a call for more 138 00:08:26,760 --> 00:08:29,120 Speaker 2: government spending, and of course, as the governor pointed out 139 00:08:29,160 --> 00:08:32,000 Speaker 2: in the press conference, there is a certain amount of 140 00:08:32,080 --> 00:08:36,920 Speaker 2: reallocation of spending between the private sector and the public sector. 141 00:08:37,000 --> 00:08:40,080 Speaker 2: So you know those electricity rebates. What they're doing is 142 00:08:40,440 --> 00:08:44,160 Speaker 2: removing a certain amount of spending on electricity from private 143 00:08:44,160 --> 00:08:48,200 Speaker 2: consumption household consumption, and moving it to be recorded as 144 00:08:48,240 --> 00:08:51,720 Speaker 2: public consumption. So some of this is just pure reallocation. 145 00:08:52,960 --> 00:08:55,440 Speaker 2: But in the end, it's the aggriate level of demand 146 00:08:55,520 --> 00:08:58,760 Speaker 2: that matters relative to the level. So the aggregate level 147 00:08:58,760 --> 00:09:02,920 Speaker 2: of demand has has been growing very slowly, as the 148 00:09:02,960 --> 00:09:06,720 Speaker 2: governor acknowledged in the press conference, But it's all about 149 00:09:06,760 --> 00:09:09,600 Speaker 2: their assessment of aggregate supply and how weak that is. 150 00:09:09,640 --> 00:09:12,400 Speaker 2: And you know, it doesn't matter who's spending the extra dollar, 151 00:09:12,440 --> 00:09:13,439 Speaker 2: that would be a problem. 152 00:09:14,040 --> 00:09:16,920 Speaker 1: Lissi L's chief of condoms that Wespack. Then when will 153 00:09:16,960 --> 00:09:19,559 Speaker 1: we see the next move in interest rates? And I'm 154 00:09:19,559 --> 00:09:21,680 Speaker 1: assuming you're going to say you expect that the next 155 00:09:21,679 --> 00:09:22,439 Speaker 1: move will be down? 156 00:09:23,120 --> 00:09:26,040 Speaker 2: You're right, sure, I do expect that the next rate 157 00:09:26,120 --> 00:09:29,200 Speaker 2: move will be down. Our current view is that it's 158 00:09:29,240 --> 00:09:32,280 Speaker 2: going to be in February, but a lot can happen 159 00:09:32,320 --> 00:09:36,560 Speaker 2: between now and then. We certainly don't think that they're 160 00:09:36,559 --> 00:09:39,000 Speaker 2: going to be cutting rates in December. And you know, 161 00:09:39,040 --> 00:09:43,400 Speaker 2: I think, yeah, any vestiges of people's idea that you 162 00:09:43,440 --> 00:09:46,240 Speaker 2: could have a rate cut that after the December meeting 163 00:09:46,280 --> 00:09:50,960 Speaker 2: has pretty much been eliminated by the slightly more hawkish 164 00:09:51,000 --> 00:09:54,640 Speaker 2: tone than expected in the bank's communication yesterday. 165 00:09:55,360 --> 00:09:57,079 Speaker 1: Lucy, thank you for talking to Fear and Greed. 166 00:09:57,520 --> 00:09:59,200 Speaker 2: Thanks very much, sure and always pleasure. 167 00:09:59,480 --> 00:10:02,800 Speaker 1: As Lucy yellis Group Chief Economist at Westpac. This is 168 00:10:02,840 --> 00:10:05,480 Speaker 1: the Fear and Greed Business Interview. Join us every morning 169 00:10:05,520 --> 00:10:08,200 Speaker 1: for the full episode of Fear and Greed, daily business 170 00:10:08,240 --> 00:10:10,760 Speaker 1: news for people who make their own decisions. I'm Sean Elma. 171 00:10:11,280 --> 00:10:11,880 Speaker 1: Enjoy your day.