1 00:00:05,880 --> 00:00:08,670 Sean Aylmer: Welcome to the Fear & Greed Business Interview. I'm Sean Aylmer. 2 00:00:08,760 --> 00:00:11,700 Sean Aylmer: As expected yesterday, the Reserve Bank Board left interest rates 3 00:00:11,700 --> 00:00:15,809 Sean Aylmer: on hold at 4. 35%. The big question now is 4 00:00:15,809 --> 00:00:19,290 Sean Aylmer: when will first cut be? Gareth Aird is Commonwealth Bank's 5 00:00:19,290 --> 00:00:22,500 Sean Aylmer: head of Australian economics. Gareth, welcome back to Fear & Greed. 6 00:00:22,920 --> 00:00:24,390 Gareth Aird: Good day, Sean. It's nice to be with you. 7 00:00:25,050 --> 00:00:28,259 Sean Aylmer: What do you make of yesterday's Reserve Bank statement and 8 00:00:28,260 --> 00:00:31,440 Sean Aylmer: the press conference and everything. But Michele Bullock was pretty 9 00:00:31,440 --> 00:00:34,349 Sean Aylmer: clear, the board doesn't know which way they're going to 10 00:00:34,350 --> 00:00:36,509 Sean Aylmer: jump next, or is she hiding something? 11 00:00:37,229 --> 00:00:39,778 Gareth Aird: No. Look, I think they just want to keep full 12 00:00:39,780 --> 00:00:43,350 Gareth Aird: optionality out there at the moment. And in a lot of ways, I think they've 13 00:00:43,350 --> 00:00:47,010 Gareth Aird: been scarred by the forward guidance of 2021, where they 14 00:00:47,010 --> 00:00:50,040 Gareth Aird: thought they wouldn't be raising rates until 2024 at the earliest. 15 00:00:50,040 --> 00:00:53,369 Gareth Aird: And they continued to basically make that case, and obviously 16 00:00:53,369 --> 00:00:56,370 Gareth Aird: that turned out to be anything but given we've had 17 00:00:56,640 --> 00:01:00,390 Gareth Aird: 425 basis points of rate hikes before we got to 18 00:01:00,390 --> 00:01:04,349 Gareth Aird: 2024. So I think right now the RBA doesn't want 19 00:01:04,349 --> 00:01:07,319 Gareth Aird: to commit to doing anything in the future to the 20 00:01:07,319 --> 00:01:10,949 Gareth Aird: extent they'll be guided by the data. And I thought 21 00:01:10,949 --> 00:01:13,559 Gareth Aird: in the governor's press conference, it was basically a long- 22 00:01:13,560 --> 00:01:16,860 Gareth Aird: winded way of saying, " We haven't ruled anything in or 23 00:01:16,860 --> 00:01:20,580 Gareth Aird: out." In other words, our next policy decision, or our 24 00:01:20,580 --> 00:01:23,520 Gareth Aird: next policy move rather, will simply be guided by the data. 25 00:01:23,940 --> 00:01:27,179 Sean Aylmer: Some are suggesting that the wording in the statement yesterday 26 00:01:27,179 --> 00:01:31,140 Sean Aylmer: suggested that they've lost their bias towards tightening. Do you 27 00:01:31,140 --> 00:01:31,890 Sean Aylmer: agree with that? 28 00:01:32,850 --> 00:01:35,340 Gareth Aird: Yeah. Look, I do. And that's what I put in 29 00:01:35,340 --> 00:01:39,030 Gareth Aird: our note actually yesterday that the statement actually moved officially 30 00:01:39,030 --> 00:01:42,509 Gareth Aird: away from a hiking bias to a neutral one. And 31 00:01:42,509 --> 00:01:45,569 Gareth Aird: the change they made there is from last month they said, " 32 00:01:45,599 --> 00:01:48,240 Gareth Aird: A further increase in interest rates cannot be ruled out." 33 00:01:48,780 --> 00:01:51,360 Gareth Aird: Whereas this month they just said, " The board is not 34 00:01:51,360 --> 00:01:55,050 Gareth Aird: ruling anything in or out." I mean, in some sense 35 00:01:55,350 --> 00:01:58,349 Gareth Aird: you could argue it's semantics, but really what I think 36 00:01:58,349 --> 00:02:00,719 Gareth Aird: has happened is over the last month, the run of 37 00:02:00,719 --> 00:02:05,339 Gareth Aird: data has left the board increasingly confident that they won't 38 00:02:05,340 --> 00:02:08,280 Gareth Aird: need to raise rates again. They still haven't of course 39 00:02:08,280 --> 00:02:11,250 Gareth Aird: ruled that out, but they're now not making an explicit 40 00:02:11,310 --> 00:02:14,639 Gareth Aird: reference in the statement to a further increase in rates 41 00:02:14,639 --> 00:02:15,450 Gareth Aird: not being ruled out. 42 00:02:16,139 --> 00:02:18,930 Sean Aylmer: How do you think Michele Bullock went in her second 43 00:02:18,990 --> 00:02:21,900 Sean Aylmer: press conference yesterday? It can't be easy for a Reserve 44 00:02:21,900 --> 00:02:25,110 Sean Aylmer: Bank governor to stand in front of the media and 45 00:02:25,110 --> 00:02:28,108 Sean Aylmer: answer those questions. And many of the questions were exactly 46 00:02:28,110 --> 00:02:30,750 Sean Aylmer: the same one, as in, " Do you have a bias 47 00:02:30,750 --> 00:02:33,059 Sean Aylmer: towards one way or another?" But she seemed to handle 48 00:02:33,059 --> 00:02:34,350 Sean Aylmer: it fairly well. How do you think she went? 49 00:02:34,860 --> 00:02:37,708 Gareth Aird: Yeah. Look, I think she went well, to the extent that 50 00:02:38,008 --> 00:02:40,559 Gareth Aird: the board just do not want to provide any forward 51 00:02:40,559 --> 00:02:43,950 Gareth Aird: guidance at the moment. And most of the questions were 52 00:02:43,950 --> 00:02:46,800 Gareth Aird: really around what do we need to see to get 53 00:02:46,800 --> 00:02:48,840 Gareth Aird: some rate cuts and when are we likely to get 54 00:02:48,840 --> 00:02:51,689 Gareth Aird: some rate cuts? And it makes a lot of sense, 55 00:02:51,960 --> 00:02:54,420 Gareth Aird: to some extent the press is asking that, because there 56 00:02:54,540 --> 00:02:57,599 Gareth Aird: are many, many home borrowers out there wondering the same 57 00:02:57,599 --> 00:03:00,630 Gareth Aird: thing. But the central bank does not want to commit 58 00:03:01,650 --> 00:03:04,139 Gareth Aird: to giving a timeline on when they think they might 59 00:03:04,139 --> 00:03:07,470 Gareth Aird: be cutting interest rates. And that's something that we're a 60 00:03:07,470 --> 00:03:09,750 Gareth Aird: little bit different here in Australia compared to other central 61 00:03:09,750 --> 00:03:13,410 Gareth Aird: banks where, for example, with the US Fed, Fed members 62 00:03:13,410 --> 00:03:17,369 Gareth Aird: provide what's called a dot plot, where they outlay where 63 00:03:17,369 --> 00:03:20,578 Gareth Aird: they think rates will be over a multi- year horizon. 64 00:03:20,910 --> 00:03:24,750 Gareth Aird: We take a different approach here, and the RBA is basically 65 00:03:24,750 --> 00:03:28,169 Gareth Aird: not wanting to commit to where interest rates may land 66 00:03:28,169 --> 00:03:30,750 Gareth Aird: in the future. And I think it just goes back 67 00:03:30,750 --> 00:03:33,599 Gareth Aird: to that point of forward guidance in the past not 68 00:03:33,599 --> 00:03:37,020 Gareth Aird: actually being particularly beneficial for households, and they probably just 69 00:03:37,020 --> 00:03:40,170 Gareth Aird: don't want to get home borrower hopes up at this 70 00:03:40,170 --> 00:03:42,270 Gareth Aird: stage. And I think they're going to wait until just 71 00:03:42,270 --> 00:03:44,699 Gareth Aird: before they're ready to cut rates before sending the message 72 00:03:44,700 --> 00:03:45,840 Gareth Aird: that the next move is down. 73 00:03:46,410 --> 00:03:48,149 Sean Aylmer: Stay with me, Gareth. We'll be back in a minute. 74 00:03:54,809 --> 00:03:57,990 Sean Aylmer: I'm speaking to Gareth Aird, Commonwealth Bank's head of Australian 75 00:03:57,990 --> 00:04:01,560 Sean Aylmer: economics. She said that the war on inflation hasn't been 76 00:04:01,560 --> 00:04:04,380 Sean Aylmer: won yet. How do we win the war on inflation? 77 00:04:05,639 --> 00:04:08,850 Gareth Aird: Well, we basically just continue on the same path that 78 00:04:08,850 --> 00:04:12,300 Gareth Aird: we are, and that is you have below trend economic 79 00:04:12,330 --> 00:04:15,210 Gareth Aird: growth. And GDP growth has been particularly weak and I 80 00:04:15,210 --> 00:04:17,880 Gareth Aird: think that fed into the shift from a hiking bias 81 00:04:17,880 --> 00:04:21,690 Gareth Aird: to a neutral one yesterday. The national accounts that were 82 00:04:21,690 --> 00:04:24,238 Gareth Aird: out a couple of weeks ago told us that over 83 00:04:24,240 --> 00:04:28,409 Gareth Aird: the course of 2023, the quarterly growth prints were sequentially 0.6%, 0.5%, 0.3%, and 0. 84 00:04:28,409 --> 00:04:36,990 Gareth Aird: 2%. So as economic growth has slowed, particularly around household 85 00:04:36,990 --> 00:04:40,529 Gareth Aird: consumption, that is making it harder for businesses to put 86 00:04:40,529 --> 00:04:44,609 Gareth Aird: up prices because consumer demand has softened. And you've also 87 00:04:44,610 --> 00:04:48,209 Gareth Aird: got as well the labor market loosening, which puts downward 88 00:04:48,209 --> 00:04:52,140 Gareth Aird: pressure on wages. So all of that ultimately helps to 89 00:04:52,140 --> 00:04:57,118 Gareth Aird: lower inflation. But the RBA cannot declare the war inflation 90 00:04:57,240 --> 00:05:00,839 Gareth Aird: won until they're actually ready to cut rates. Because if 91 00:05:00,839 --> 00:05:03,719 Gareth Aird: the war on inflation had been won, then we shouldn't 92 00:05:03,719 --> 00:05:07,950 Gareth Aird: have policy at a restrictive setting. So I think we're 93 00:05:07,950 --> 00:05:10,919 Gareth Aird: still another quarter or two away from getting to that 94 00:05:10,920 --> 00:05:13,470 Gareth Aird: point. But if we can continue down the path that 95 00:05:13,470 --> 00:05:16,920 Gareth Aird: we're on at the moment, hopefully the RBA is declaring 96 00:05:16,920 --> 00:05:18,419 Gareth Aird: victory in the second half of this year. 97 00:05:18,988 --> 00:05:23,039 Sean Aylmer: Okay. So that suggests, Gareth, that you think interest rates 98 00:05:23,039 --> 00:05:25,830 Sean Aylmer: will fall in the second half of this year. If 99 00:05:25,830 --> 00:05:28,169 Sean Aylmer: so, how far do they go down? We're not going 100 00:05:28,170 --> 00:05:30,390 Sean Aylmer: to go back to what we've seen obviously. They were 101 00:05:30,600 --> 00:05:35,160 Sean Aylmer: emergency measures post pandemic or during the pandemic. What is 102 00:05:35,160 --> 00:05:36,510 Sean Aylmer: a more normal interest rate? 103 00:05:37,380 --> 00:05:39,509 Gareth Aird: Yeah, Sean, look, it's interesting the way you put that 104 00:05:39,509 --> 00:05:43,350 Gareth Aird: question, because I think it's easily forgotten that pre- pandemic 105 00:05:43,410 --> 00:05:46,620 Gareth Aird: the cash rate was just 0. 75%. And at the 106 00:05:46,620 --> 00:05:50,580 Gareth Aird: time, nobody thought that we were at an emergency setting. So 107 00:05:50,580 --> 00:05:53,159 Gareth Aird: it only took a couple of rate hikes at the 108 00:05:53,160 --> 00:05:55,320 Gareth Aird: start of the tightening cycle for the cash rate to 109 00:05:55,320 --> 00:05:58,889 Gareth Aird: end up above where it was pre- pandemic. And now 110 00:05:58,889 --> 00:06:02,190 Gareth Aird: we're at 4. 35%, which is well above where we 111 00:06:02,190 --> 00:06:06,510 Gareth Aird: were pre- pandemic. We think the neutral rate, which is 112 00:06:06,510 --> 00:06:10,349 Gareth Aird: this kind of concept around what is a steady state 113 00:06:10,349 --> 00:06:12,899 Gareth Aird: interest rate if you had inflation roughly in target and 114 00:06:12,900 --> 00:06:17,219 Gareth Aird: the economy growing about trend pace, we think that interest 115 00:06:17,219 --> 00:06:20,910 Gareth Aird: rate is somewhere around 2. 5 to 3%. Which means 116 00:06:20,910 --> 00:06:24,300 Gareth Aird: at 4. 35%, we're quite above that at the moment. 117 00:06:24,900 --> 00:06:28,170 Gareth Aird: And we're increasingly feeling confident that that is about the 118 00:06:28,170 --> 00:06:31,380 Gareth Aird: right guesstimate for a neutral rate because of how much 119 00:06:31,380 --> 00:06:33,928 Gareth Aird: the economy has slowed under where rates are at the 120 00:06:33,928 --> 00:06:36,780 Gareth Aird: moment. So if you then think about what would the 121 00:06:36,809 --> 00:06:40,260 Gareth Aird: central bank be doing in terms of an easing cycle 122 00:06:40,620 --> 00:06:44,040 Gareth Aird: if it's time to take policy out of a restrictive setting, 123 00:06:44,070 --> 00:06:46,500 Gareth Aird: well, it would be to actually take the cash rate 124 00:06:46,500 --> 00:06:49,320 Gareth Aird: back to a neutral sort of level. So on our 125 00:06:49,320 --> 00:06:51,870 Gareth Aird: profile then for the RBA, we've got them starting an 126 00:06:51,870 --> 00:06:56,310 Gareth Aird: easing cycle in September, and delivering 150 basis points of 127 00:06:56,310 --> 00:06:58,919 Gareth Aird: cuts over a 12- month period, which would get the 128 00:06:58,920 --> 00:07:03,178 Gareth Aird: cash rate to 2. 85%. I think that the risk to our 129 00:07:03,178 --> 00:07:05,700 Gareth Aird: view here is that the RBA themselves think that the 130 00:07:05,700 --> 00:07:08,609 Gareth Aird: neutral rate is higher, and therefore they don't take rates 131 00:07:08,610 --> 00:07:12,630 Gareth Aird: down as quickly, they pause at something like 3.5% or 132 00:07:12,630 --> 00:07:14,670 Gareth Aird: maybe a little bit under and watch the economy for 133 00:07:14,670 --> 00:07:17,820 Gareth Aird: a while before determining if they need to take rates 134 00:07:17,820 --> 00:07:18,630 Gareth Aird: any lower than that. 135 00:07:19,650 --> 00:07:22,019 Sean Aylmer: One thing that Michele Bullock was asked yesterday was the 136 00:07:22,020 --> 00:07:25,259 Sean Aylmer: impact on house prices if rates do start falling. And 137 00:07:25,259 --> 00:07:27,720 Sean Aylmer: she basically said it's too hard to predict house prices, 138 00:07:27,900 --> 00:07:31,320 Sean Aylmer: however demand is higher than supply. And a very basic 139 00:07:31,500 --> 00:07:34,980 Sean Aylmer: macro one forecast that. But just going on with what 140 00:07:34,980 --> 00:07:38,370 Sean Aylmer: you are saying, if we do start seeing cuts in 141 00:07:38,370 --> 00:07:41,969 Sean Aylmer: mortgage rates eventually, what does that mean for house prices? 142 00:07:41,969 --> 00:07:44,549 Sean Aylmer: Because it's an incredibly resilient market out there. 143 00:07:45,029 --> 00:07:50,220 Gareth Aird: Look, it is. And we saw house prices lift through 144 00:07:50,250 --> 00:07:54,780 Gareth Aird: 2023 and the RBA was hiking, and house prices have 145 00:07:54,780 --> 00:07:57,270 Gareth Aird: continued to rise in the early part of this year 146 00:07:57,270 --> 00:07:59,940 Gareth Aird: with the central bank on hold. So if the RBA 147 00:07:59,940 --> 00:08:02,190 Gareth Aird: is going to then take the policy rate lower, which 148 00:08:02,190 --> 00:08:04,980 Gareth Aird: means that mortgage rates will come down, you can only 149 00:08:04,980 --> 00:08:09,330 Gareth Aird: see house prices picking up further. Now, the central bank, 150 00:08:09,600 --> 00:08:11,940 Gareth Aird: if that's to occur, the central bank is still going 151 00:08:11,940 --> 00:08:14,580 Gareth Aird: to put weight on their inflation target and full employment, 152 00:08:14,910 --> 00:08:17,520 Gareth Aird: and they don't actually have in their mandate anything to 153 00:08:17,520 --> 00:08:20,549 Gareth Aird: do with house prices. And it's really up to other 154 00:08:20,549 --> 00:08:24,690 Gareth Aird: arms of policy, particularly on the government side to pull 155 00:08:24,690 --> 00:08:26,730 Gareth Aird: a couple of levers if they want to stem the 156 00:08:27,030 --> 00:08:30,000 Gareth Aird: speed at which house prices are rising. It's not really 157 00:08:30,000 --> 00:08:32,850 Gareth Aird: one for the central bank. And I think if we 158 00:08:32,940 --> 00:08:37,080 Gareth Aird: think about the issue from a societal perspective, what's gone 159 00:08:37,080 --> 00:08:40,230 Gareth Aird: on in the housing market has not being good. We've 160 00:08:40,230 --> 00:08:44,100 Gareth Aird: had incredibly strong population growth. We're not building enough homes. 161 00:08:44,700 --> 00:08:48,120 Gareth Aird: Vacancy rates are very, very low across the country and 162 00:08:48,120 --> 00:08:50,789 Gareth Aird: rents are rising very quickly. And all of that in 163 00:08:50,790 --> 00:08:53,939 Gareth Aird: turn is putting upward pressure on home prices. So if 164 00:08:53,940 --> 00:08:57,089 Gareth Aird: the RBA is taking rates lower, home prices could end 165 00:08:57,089 --> 00:09:00,660 Gareth Aird: up rising quite swiftly, but that's simply something the central 166 00:09:00,660 --> 00:09:03,390 Gareth Aird: bank would need to look through given they'd be more 167 00:09:03,390 --> 00:09:05,250 Gareth Aird: concerned we think with rising unemployment. 168 00:09:05,850 --> 00:09:09,780 Sean Aylmer: We've got labor force figures out tomorrow. What's your thoughts 169 00:09:09,780 --> 00:09:10,230 Sean Aylmer: on that? 170 00:09:11,160 --> 00:09:13,230 Gareth Aird: Yeah. Look, at the risk of giving a prediction now, 171 00:09:13,230 --> 00:09:15,179 Gareth Aird: giving a lot of listeners might be listening to it 172 00:09:15,179 --> 00:09:18,780 Gareth Aird: after the labor force numbers have printed, our call is 173 00:09:18,780 --> 00:09:21,509 Gareth Aird: for the unemployment rate to tick down from 4.1% to 174 00:09:21,509 --> 00:09:26,218 Gareth Aird: 4%, and for a decent lift in employment. Now, that 175 00:09:26,340 --> 00:09:29,160 Gareth Aird: sort of numbers might sound like it goes against the 176 00:09:29,160 --> 00:09:30,929 Gareth Aird: trend of what I was saying in terms of rising 177 00:09:30,929 --> 00:09:34,170 Gareth Aird: unemployment. But the ABS did tell us that in January 178 00:09:34,170 --> 00:09:36,510 Gareth Aird: there are a lot more people than usual who were 179 00:09:36,510 --> 00:09:40,290 Gareth Aird: considered unemployed, but they actually had a job to start 180 00:09:40,350 --> 00:09:42,690 Gareth Aird: in February. So if that turned out to be the 181 00:09:42,690 --> 00:09:45,150 Gareth Aird: case, we should see a tick back down in the 182 00:09:45,150 --> 00:09:49,769 Gareth Aird: unemployment rate. And I'd suggest to anyone who's trying to 183 00:09:49,770 --> 00:09:51,809 Gareth Aird: work out what's going on in the labor market to 184 00:09:51,809 --> 00:09:54,690 Gareth Aird: actually look at the trend data as opposed to these 185 00:09:54,690 --> 00:09:58,380 Gareth Aird: monthly seasonally adjusted numbers, which have been really choppy over 186 00:09:58,380 --> 00:10:00,660 Gareth Aird: the last six months. And if we look at it 187 00:10:00,660 --> 00:10:02,578 Gareth Aird: on a trend basis, what we can see is that the 188 00:10:02,580 --> 00:10:06,270 Gareth Aird: unemployment rate is rising. It hit a cyclical low of 189 00:10:06,270 --> 00:10:09,660 Gareth Aird: 3.5%. It's now up to about 4% on a trend 190 00:10:09,660 --> 00:10:12,780 Gareth Aird: basis. That's exactly what you'd expect to see given the 191 00:10:12,990 --> 00:10:16,860 Gareth Aird: economic growth is below trend. And even if we get 192 00:10:16,860 --> 00:10:18,958 Gareth Aird: a little tick down this month in the unemployment rate, 193 00:10:19,620 --> 00:10:22,170 Gareth Aird: we've still got pretty high conviction at the economics team 194 00:10:22,230 --> 00:10:25,679 Gareth Aird: at the bank that unemployment's going to continue to rise through 195 00:10:25,679 --> 00:10:26,130 Gareth Aird: this year. 196 00:10:26,580 --> 00:10:28,380 Sean Aylmer: Gareth, thank you for talking to Fear & Greed. 197 00:10:28,740 --> 00:10:29,490 Gareth Aird: It's nice to chat. 198 00:10:30,000 --> 00:10:33,240 Sean Aylmer: That was Gareth Aird, Commonwealth Bank's head of Australian economics. 199 00:10:33,660 --> 00:10:35,970 Sean Aylmer: This is the Fear & Greed Business Interview. Join us every 200 00:10:35,970 --> 00:10:38,969 Sean Aylmer: morning for the full episode of Fear & Greed, daily business 201 00:10:38,970 --> 00:10:41,400 Sean Aylmer: news for people who make their own decisions. I'm Sean 202 00:10:41,429 --> 00:10:42,749 Sean Aylmer: Aylmer. Enjoy your day.