1 00:00:03,990 --> 00:00:06,360 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean 2 00:00:06,420 --> 00:00:09,750 Sean Aylmer: Aylmer. The Reserve Bank board has delivered another jumbo rate 3 00:00:09,750 --> 00:00:13,230 Sean Aylmer: hike, increasing the official cash rate by 50 basis points 4 00:00:13,230 --> 00:00:16,169 Sean Aylmer: at its July meeting yesterday. For a homeowner with a $ 5 00:00:16,170 --> 00:00:21,180 Sean Aylmer: 500,000 mortgage, that's about $ 130 extra a month in repayments. 6 00:00:21,480 --> 00:00:23,940 Sean Aylmer: It comes after a 50 basis point jump last month and 7 00:00:24,090 --> 00:00:26,970 Sean Aylmer: 25 basis points in May. So is this going to 8 00:00:26,970 --> 00:00:30,720 Sean Aylmer: be enough to bring inflation under control? Diana Mousina is 9 00:00:30,720 --> 00:00:33,630 Sean Aylmer: the senior economist at AMP. Diana, welcome back to Fear 10 00:00:33,630 --> 00:00:34,050 Sean Aylmer: and Greed. 11 00:00:34,290 --> 00:00:35,730 Diana Mousina: Thank you so much for having me on. 12 00:00:36,030 --> 00:00:40,110 Sean Aylmer: So, 50 basis points was widely expected. Clearly the Reserve 13 00:00:40,110 --> 00:00:44,280 Sean Aylmer: Bank's pretty serious about getting a handle on inflation. 14 00:00:44,790 --> 00:00:48,030 Diana Mousina: The RBA is trying to be aggressive in front- loading 15 00:00:48,090 --> 00:00:52,560 Diana Mousina: these rate hikes because they are concerned that inflation expectations 16 00:00:52,560 --> 00:00:55,740 Diana Mousina: could get out of control, they'll get entrenched at a 17 00:00:55,740 --> 00:00:59,100 Diana Mousina: high level, and that will be harder for the Reserve 18 00:00:59,100 --> 00:01:02,280 Diana Mousina: Bank to bring them down if they get too high, 19 00:01:02,280 --> 00:01:06,090 Diana Mousina: ultimately. And I suppose also the RBA's watching the inflation 20 00:01:06,090 --> 00:01:09,600 Diana Mousina: story play out in the US, and I guess arguably 21 00:01:09,600 --> 00:01:12,330 Diana Mousina: in Europe as well, and they're thinking, we don't want 22 00:01:12,330 --> 00:01:15,540 Diana Mousina: to get to the same situation that these countries are 23 00:01:15,540 --> 00:01:18,419 Diana Mousina: in, in terms of inflation printing at eight or 9% 24 00:01:18,870 --> 00:01:22,289 Diana Mousina: on a headline annual basis. We think that inflation will 25 00:01:22,560 --> 00:01:25,350 Diana Mousina: peak at about 7%, so we're not really too far 26 00:01:25,350 --> 00:01:26,790 Diana Mousina: away from what's happening globally. 27 00:01:27,450 --> 00:01:29,250 Sean Aylmer: Okay. So what the banks said yesterday, they talked about 28 00:01:29,250 --> 00:01:33,089 Sean Aylmer: anchoring inflation expectations. And we've spoken about this on Fear 29 00:01:33,090 --> 00:01:37,470 Sean Aylmer: and Greed previously, just how important expectations of inflation are. 30 00:01:37,470 --> 00:01:38,640 Sean Aylmer: Why is that the case? 31 00:01:39,209 --> 00:01:44,970 Diana Mousina: Because it determines the trajectory for price rises and for 32 00:01:44,970 --> 00:01:50,280 Diana Mousina: wages growth. When consumers and businesses expect and price into 33 00:01:50,790 --> 00:01:55,529 Diana Mousina: expectations and forecasts for wages, for how much they're going 34 00:01:55,530 --> 00:01:58,500 Diana Mousina: to increase prices by, if you continue to get on 35 00:01:58,500 --> 00:02:03,810 Diana Mousina: this spiral, I guess, of continuing rises in prices, you 36 00:02:03,810 --> 00:02:07,590 Diana Mousina: can get to a situation where you get inflation printing 37 00:02:07,620 --> 00:02:11,400 Diana Mousina: at extremely high levels, well over 5% on an annual 38 00:02:11,400 --> 00:02:14,910 Diana Mousina: basis for a prolonged period of time. And that destroys 39 00:02:15,120 --> 00:02:19,109 Diana Mousina: purchasing power for everyone in the economy, because it becomes 40 00:02:19,110 --> 00:02:21,780 Diana Mousina: unsustainable. And that's what we don't want to see. I 41 00:02:21,780 --> 00:02:24,510 Diana Mousina: don't think that we're likely to get there, though. I 42 00:02:24,510 --> 00:02:26,790 Diana Mousina: do think that we are getting a little bit carried away 43 00:02:26,790 --> 00:02:30,690 Diana Mousina: about how high inflation can get. I mean, yes, it 44 00:02:30,690 --> 00:02:34,440 Diana Mousina: is high at the moment, but we have very strange 45 00:02:34,440 --> 00:02:39,360 Diana Mousina: things going on that are unlikely to persist forever, so I don't think that 46 00:02:40,110 --> 00:02:42,540 Diana Mousina: we should be worried that we are going to get 47 00:02:42,540 --> 00:02:45,210 Diana Mousina: a wage price spiral. And the central bank's clearly being 48 00:02:45,210 --> 00:02:47,820 Diana Mousina: so aggressive with rate rises that they're going to get 49 00:02:47,820 --> 00:02:48,570 Diana Mousina: this under control. 50 00:02:49,530 --> 00:02:51,150 Sean Aylmer: Some of those strange things you were talking about, things 51 00:02:51,150 --> 00:02:55,470 Sean Aylmer: like Ukraine war and energy prices, supply chain problems because 52 00:02:55,470 --> 00:02:56,580 Sean Aylmer: of COVID, that type of thing? 53 00:02:57,090 --> 00:03:00,120 Diana Mousina: That's right. And also in Australia, we've had the flooding 54 00:03:00,240 --> 00:03:02,400 Diana Mousina: across the east coast of Australia. And now in the 55 00:03:02,400 --> 00:03:05,639 Diana Mousina: last week, we've had more bad weather, which will put 56 00:03:05,639 --> 00:03:09,810 Diana Mousina: even more upwards pressure on fresh food, fruit and vegetable, 57 00:03:09,810 --> 00:03:13,860 Diana Mousina: meat, seafood prices. But that's unlikely to continue forever. It 58 00:03:13,860 --> 00:03:16,889 Diana Mousina: may be another few painful months for consumers in terms 59 00:03:16,889 --> 00:03:20,520 Diana Mousina: of high prices for fresh food, but it's unlikely that will 60 00:03:21,210 --> 00:03:24,570 Diana Mousina: be the same situation in 2023. We've seen these periods 61 00:03:24,570 --> 00:03:28,230 Diana Mousina: before where we see big price rises for some fresh 62 00:03:28,230 --> 00:03:31,680 Diana Mousina: food in Australia because of weather events and the like. 63 00:03:31,919 --> 00:03:34,410 Diana Mousina: The problem at the moment is that we have high 64 00:03:34,440 --> 00:03:37,380 Diana Mousina: prices for food, but also at the same time, high prices 65 00:03:37,380 --> 00:03:39,450 Diana Mousina: for petrol because of what's going on to the oil 66 00:03:39,450 --> 00:03:42,030 Diana Mousina: price. Ukraine is a key input into that, but also 67 00:03:42,030 --> 00:03:44,490 Diana Mousina: other factors, and also just the general rise in commodity 68 00:03:44,490 --> 00:03:47,520 Diana Mousina: prices. So we're seeing an across the board increase in 69 00:03:47,520 --> 00:03:50,190 Diana Mousina: a lot of different prices that consumers pay for every 70 00:03:50,190 --> 00:03:50,730 Diana Mousina: single day. 71 00:03:51,240 --> 00:03:53,130 Sean Aylmer: Stay with me, Diana, we'll be back in a minute. 72 00:03:59,580 --> 00:04:04,410 Sean Aylmer: I'm speaking to AMP Senior Economist Diana Mousina. How do you think the fact that 73 00:04:04,410 --> 00:04:07,320 Sean Aylmer: we've had sort of 30 basis points, 50 basis points, 74 00:04:07,320 --> 00:04:11,040 Sean Aylmer: another 50 basis points, as you said, front- loading in 75 00:04:11,070 --> 00:04:14,580 Sean Aylmer: consumers' psyche. I mean, I know how much more I'm 76 00:04:14,580 --> 00:04:18,179 Sean Aylmer: paying on my mortgage. When my bank puts up the 77 00:04:18,180 --> 00:04:21,300 Sean Aylmer: mortgage rate that I pay, it's actually a lot of money. 78 00:04:21,960 --> 00:04:24,900 Diana Mousina: It's a huge increase. You were talking about the figures 79 00:04:24,960 --> 00:04:28,050 Diana Mousina: earlier, Sean, about how much an average household would be 80 00:04:28,050 --> 00:04:33,240 Diana Mousina: down on a mortgage of $ 500,000. And we're talking about a 81 00:04:33,240 --> 00:04:37,500 Diana Mousina: significant increase in monthly costs that consumers have to take 82 00:04:37,500 --> 00:04:40,920 Diana Mousina: from somewhere. Yes, they could take it from accumulated savings 83 00:04:40,920 --> 00:04:43,440 Diana Mousina: that we've spoken about before that they've built up, or 84 00:04:43,440 --> 00:04:46,739 Diana Mousina: prepayments that they've done. If you're taking money out of 85 00:04:46,740 --> 00:04:49,950 Diana Mousina: savings, then later down the track are you not going 86 00:04:49,950 --> 00:04:52,589 Diana Mousina: to be going on that holiday because you've already taken 87 00:04:52,589 --> 00:04:54,599 Diana Mousina: the money out of savings to pay for your mortgage? 88 00:04:54,900 --> 00:04:56,700 Diana Mousina: There's a lot of flow- on effects and it will 89 00:04:56,700 --> 00:04:59,220 Diana Mousina: take some time for that to show up in the 90 00:04:59,220 --> 00:05:02,400 Diana Mousina: data, but it will start to show up and consumer 91 00:05:02,400 --> 00:05:05,220 Diana Mousina: spending will slow. I guess that's also the purpose of 92 00:05:05,250 --> 00:05:07,770 Diana Mousina: why the RBA's raising rates. They want to see consumer 93 00:05:07,770 --> 00:05:10,169 Diana Mousina: spending slow down, because part of the reason for why 94 00:05:10,170 --> 00:05:12,779 Diana Mousina: we have high inflation is because the economy is too 95 00:05:12,779 --> 00:05:15,540 Diana Mousina: hot and has been running at a very heated level 96 00:05:15,540 --> 00:05:17,190 Diana Mousina: for the last year and they want to slow down 97 00:05:17,190 --> 00:05:19,650 Diana Mousina: the pace of economic growth. But it will start to 98 00:05:19,770 --> 00:05:22,320 Diana Mousina: show up in the data, and I think it already is starting. 99 00:05:23,220 --> 00:05:27,060 Sean Aylmer: The bank's statement yesterday did actually focus a bit on 100 00:05:27,060 --> 00:05:30,120 Sean Aylmer: household spending and what would happen, whether they draw down 101 00:05:30,420 --> 00:05:34,830 Sean Aylmer: all the savings they've had in the bank. But clearly 102 00:05:34,830 --> 00:05:37,680 Sean Aylmer: the bank wants to keep an eye on what households 103 00:05:37,680 --> 00:05:38,100 Sean Aylmer: are doing. 104 00:05:38,580 --> 00:05:42,330 Diana Mousina: Well, this will be the health check of the economy. 105 00:05:42,330 --> 00:05:46,469 Diana Mousina: Consumer spending is 60% of our GDP, so if you 106 00:05:46,470 --> 00:05:50,250 Diana Mousina: see a significant deceleration in consumer spending that will have 107 00:05:50,250 --> 00:05:53,850 Diana Mousina: huge ramifications for economic growth. And then also, obviously, the flow- 108 00:05:53,850 --> 00:05:58,290 Diana Mousina: on effect to business investment and business spending. There's also 109 00:05:58,320 --> 00:06:01,320 Diana Mousina: this effect called the wealth effect, which happens when home 110 00:06:01,320 --> 00:06:04,289 Diana Mousina: prices decline, or when consumers feel less wealthy, they tend 111 00:06:04,290 --> 00:06:08,520 Diana Mousina: to reduce their spending and increase savings. And interest rate 112 00:06:08,520 --> 00:06:12,359 Diana Mousina: rises impact the housing market quite significantly. So when we 113 00:06:12,360 --> 00:06:15,210 Diana Mousina: see these interest rate rises go through into the housing 114 00:06:15,210 --> 00:06:17,880 Diana Mousina: market, we think home prices will be down 15 to 115 00:06:18,000 --> 00:06:22,350 Diana Mousina: 20% (inaudible) into 2023, and that will have further 116 00:06:22,350 --> 00:06:24,810 Diana Mousina: negative downward effects for consumers. 117 00:06:25,230 --> 00:06:28,380 Sean Aylmer: Yeah, the other thing that the Reserve Bank said yesterday 118 00:06:28,589 --> 00:06:31,800 Sean Aylmer: was it's not just about inflation, it's also about getting 119 00:06:31,860 --> 00:06:37,529 Sean Aylmer: monetary policy settings back to more normal levels. How much 120 00:06:37,529 --> 00:06:39,690 Sean Aylmer: further do they need to go to get to more 121 00:06:39,690 --> 00:06:40,740 Sean Aylmer: normal levels? 122 00:06:41,339 --> 00:06:43,740 Diana Mousina: Well, our guess is that a more normal level of 123 00:06:43,740 --> 00:06:45,660 Diana Mousina: the cash rate would be somewhere at around 2.5%, At 124 00:06:46,710 --> 00:06:49,020 Diana Mousina: that kind of level we think that there'll be enough 125 00:06:49,080 --> 00:06:52,529 Diana Mousina: downwards pressure on inflation to get it back to a more 126 00:06:52,529 --> 00:06:55,740 Diana Mousina: comfortable two to 3% target band, probably at the top 127 00:06:55,740 --> 00:06:58,799 Diana Mousina: end of that target band, but then an expectation that 128 00:06:58,800 --> 00:07:02,099 Diana Mousina: it would get into the RBA's range. I think a 129 00:07:02,100 --> 00:07:07,529 Diana Mousina: cash rate any further above 2. 5% would put significant 130 00:07:07,529 --> 00:07:12,210 Diana Mousina: downward pressure on consumers that would result in a economic 131 00:07:12,210 --> 00:07:15,600 Diana Mousina: downturn and potentially the risk of recession. Market is still 132 00:07:15,600 --> 00:07:17,970 Diana Mousina: pricing at a very high cash rate, close to 4% in 133 00:07:18,780 --> 00:07:22,020 Diana Mousina: the year's time. I don't think that is sustainable in 134 00:07:22,020 --> 00:07:27,090 Diana Mousina: Australia, based on household leverage. Our housing sector, our leverage 135 00:07:27,090 --> 00:07:30,360 Diana Mousina: that consumers have to housing, is very different compared to 136 00:07:30,780 --> 00:07:32,790 Diana Mousina: countries that we compare ourselves with at the moment; the 137 00:07:32,790 --> 00:07:36,810 Diana Mousina: US or Europe. US consumers are not as leveraged, they're 138 00:07:36,810 --> 00:07:39,720 Diana Mousina: not as impacted by changes in interest rates because of 139 00:07:39,720 --> 00:07:42,630 Diana Mousina: the way that their housing structures are done in terms 140 00:07:42,630 --> 00:07:45,360 Diana Mousina: of the fixed and variable rates. So I don't think 141 00:07:45,360 --> 00:07:48,030 Diana Mousina: consumers would be able to handle a cash rate above 2. 142 00:07:48,480 --> 00:07:51,870 Diana Mousina: 5% unless the RBA wants to engineer a recession to 143 00:07:51,870 --> 00:07:54,240 Diana Mousina: get inflation down. But I don't think that they will 144 00:07:54,240 --> 00:07:58,260 Diana Mousina: need to go that far. I think inflation will naturally 145 00:07:58,260 --> 00:08:00,330 Diana Mousina: fall over the next six or 12 months. 146 00:08:00,600 --> 00:08:05,010 Sean Aylmer: So is the forecast that the cash rate, which is now 1. 147 00:08:05,010 --> 00:08:09,870 Sean Aylmer: 35%, will get to 2. 5%? Is that likely this year, do 148 00:08:09,870 --> 00:08:10,230 Sean Aylmer: you think? 149 00:08:10,440 --> 00:08:13,050 Diana Mousina: We see the cash rate ending this year at about 2. 150 00:08:13,500 --> 00:08:16,830 Diana Mousina: 1% and then in the middle of next year to 151 00:08:16,830 --> 00:08:20,220 Diana Mousina: peak at about 2. 5%. So some further rate rises next 152 00:08:20,220 --> 00:08:23,550 Diana Mousina: year, but a much slower rate rise cycle. The risk 153 00:08:23,550 --> 00:08:25,320 Diana Mousina: is that the RBA wants to do all the rate rises 154 00:08:25,740 --> 00:08:28,770 Diana Mousina: this year, so maybe we'll see a cash rate close to 2. 155 00:08:28,770 --> 00:08:31,380 Diana Mousina: 5% by the end of this year. And of course, 156 00:08:31,380 --> 00:08:33,780 Diana Mousina: I think the overall risk is that we're still too 157 00:08:33,780 --> 00:08:36,720 Diana Mousina: dovish of our own expectations for the RBA, and that 158 00:08:36,720 --> 00:08:40,410 Diana Mousina: they'll want to increase rates further to get that downward 159 00:08:40,410 --> 00:08:43,349 Diana Mousina: impact on inflation. So the risk is that the cash 160 00:08:43,350 --> 00:08:44,850 Diana Mousina: rate peaks at a higher rate than 2.5%. 161 00:08:46,110 --> 00:08:48,360 Sean Aylmer: The meetings inside the Reserve Bank seem to have changed 162 00:08:48,360 --> 00:08:49,739 Sean Aylmer: a lot in the last six months, like it's a 163 00:08:49,740 --> 00:08:52,020 Sean Aylmer: very different outlook from the bank than it was six 164 00:08:52,020 --> 00:08:52,530 Sean Aylmer: months ago. 165 00:08:53,370 --> 00:08:58,410 Diana Mousina: Well, the RBA didn't forecast the rise in inflation very 166 00:08:58,410 --> 00:09:02,040 Diana Mousina: well, and they've said that themselves. So I guess that 167 00:09:02,040 --> 00:09:05,370 Diana Mousina: they've had to change the way that they're going about 168 00:09:05,700 --> 00:09:09,120 Diana Mousina: looking at the economy and the process. So they've changed 169 00:09:09,120 --> 00:09:13,530 Diana Mousina: their minds, based on the current situation in Australia and 170 00:09:13,530 --> 00:09:16,740 Diana Mousina: also globally. And I think that was the right thing 171 00:09:16,740 --> 00:09:17,520 Diana Mousina: to do, obviously. 172 00:09:18,030 --> 00:09:21,390 Sean Aylmer: Yeah. Okay. And then just finally, the Reserve Bank said that 173 00:09:21,570 --> 00:09:24,870 Sean Aylmer: any future moves in monetary policy would depend on data, 174 00:09:25,080 --> 00:09:27,209 Sean Aylmer: though obviously it's made it clear that interest rates are 175 00:09:27,210 --> 00:09:30,000 Sean Aylmer: still rising. What are the key data points coming up in 176 00:09:30,000 --> 00:09:32,309 Sean Aylmer: the next month, two, three months or so that we 177 00:09:32,309 --> 00:09:34,979 Sean Aylmer: should all keep an eye on, which will influence what 178 00:09:34,980 --> 00:09:36,000 Sean Aylmer: the Reserve Bank does? 179 00:09:36,390 --> 00:09:39,179 Diana Mousina: In Australia, we get the consumer price data quarterly, so 180 00:09:39,179 --> 00:09:41,520 Diana Mousina: we get our next print in late July. That will 181 00:09:41,520 --> 00:09:44,819 Diana Mousina: be a key factor that will determine what the size 182 00:09:44,820 --> 00:09:47,880 Diana Mousina: of the rate rise is in August. We favor a 50 basis 183 00:09:47,880 --> 00:09:49,920 Diana Mousina: point move, but it could be higher, it could be 184 00:09:49,920 --> 00:09:52,470 Diana Mousina: 75 basis points, because I think that the risk is 185 00:09:52,470 --> 00:09:55,350 Diana Mousina: that CPI comes out stronger than what the RBA's been 186 00:09:55,350 --> 00:09:58,920 Diana Mousina: forecasting, given what's going on with inflation around the world. 187 00:09:59,580 --> 00:10:01,650 Diana Mousina: And then of course, we need to watch the labor 188 00:10:01,650 --> 00:10:06,450 Diana Mousina: market data closely to see how businesses are responding to 189 00:10:06,510 --> 00:10:09,000 Diana Mousina: a rising interest rate environment. And then on a more 190 00:10:09,000 --> 00:10:12,510 Diana Mousina: monthly basis, I like watching the consumer sentiment numbers, which 191 00:10:12,510 --> 00:10:15,510 Diana Mousina: also come out weekly, to see how consumers are feeling 192 00:10:15,780 --> 00:10:20,250 Diana Mousina: about higher interest rates. And also our own AMP trackers 193 00:10:20,250 --> 00:10:23,309 Diana Mousina: that we've put together, which is a timely indicator based 194 00:10:23,309 --> 00:10:28,590 Diana Mousina: on weekly bank credit card data, retail spending, foot traffic, 195 00:10:28,800 --> 00:10:31,140 Diana Mousina: these types of high frequency indicators that we were watching 196 00:10:31,140 --> 00:10:34,830 Diana Mousina: during COVID to track how consumers were changing their behavior, 197 00:10:35,100 --> 00:10:38,429 Diana Mousina: before, during and after lockdowns. But I think that's quite 198 00:10:38,429 --> 00:10:42,300 Diana Mousina: becoming relevant again, because we can see how consumers are 199 00:10:42,300 --> 00:10:46,140 Diana Mousina: changing their behavior based on the current interest rate environment 200 00:10:46,140 --> 00:10:48,360 Diana Mousina: and also the high inflation environment. 201 00:10:48,840 --> 00:10:50,910 Sean Aylmer: And you can see through that data that people are 202 00:10:50,910 --> 00:10:52,710 Sean Aylmer: already changing their behavior? 203 00:10:53,309 --> 00:10:55,950 Diana Mousina: There's been some early signs of it. Some of the 204 00:10:55,950 --> 00:10:59,610 Diana Mousina: bank data is starting to soften a little bit over 205 00:10:59,610 --> 00:11:02,730 Diana Mousina: June, but it's been a very slow start for consumers 206 00:11:02,730 --> 00:11:05,610 Diana Mousina: to show any signs of weakening. I think that it 207 00:11:05,610 --> 00:11:07,800 Diana Mousina: will still take some months for it to show up in the data. 208 00:11:07,800 --> 00:11:12,690 Diana Mousina: And consumers, they don't necessarily respond straight away to rises in 209 00:11:12,809 --> 00:11:15,780 Diana Mousina: interest rates. But there's a lot of different things hitting 210 00:11:15,780 --> 00:11:18,870 Diana Mousina: consumers at the same time: higher interest rates, higher petrol 211 00:11:18,870 --> 00:11:22,800 Diana Mousina: prices, higher prices for fresh food. And that should eventually 212 00:11:22,800 --> 00:11:24,870 Diana Mousina: show up in softer retail data. 213 00:11:25,080 --> 00:11:27,000 Sean Aylmer: Diana, thank you for talking to Fear and Greed. 214 00:11:27,240 --> 00:11:27,960 Diana Mousina: Thank you so much. 215 00:11:28,500 --> 00:11:31,650 Sean Aylmer: That was AMP senior economist Diana Mousina. This is the 216 00:11:31,650 --> 00:11:34,320 Sean Aylmer: Fear and Greed daily interview. Remember, you should get professional 217 00:11:34,320 --> 00:11:37,980 Sean Aylmer: advice before making any investment decisions. Join us every morning 218 00:11:37,980 --> 00:11:40,260 Sean Aylmer: for the full episode of Fear and Greed, Australia's most 219 00:11:40,260 --> 00:11:43,890 Sean Aylmer: popular business podcast. I'm Sean Aylmer. Enjoy your day.