August 7, 2025 • 20 mins
The Reserve Bank of Australia surprised the market in July by holding interest rates steady - and only a few people saw it coming. One of those who did was Bloomberg Economics’ James McIntyre. Now, he thinks that Governor Michele Bullock and her board will finally deliver a cut at the August 12 meeting.
This week on the Bloomberg Australia Podcast, Chris Bourke talks to James about what’s changed since the July decision, how far borrowing costs could fall this year - and why US President Donald Trump may play a role in what the RBA does next.
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Speaker 1 (00:03):
The last RBA meeting was a shock. The next one looks.
Speaker 2 (00:06):
Like a lock.
Speaker 3 (00:07):
So very welcome development that we saw inflation come down
really right across the board in those numbers which were
released yesterday. It was a powerful demonstration of the progress
that Australians had made.
Speaker 1 (00:19):
There's not really a good argument for a continued hold.
Speaker 3 (00:23):
If they do decide.
Speaker 1 (00:24):
To hold, I'd like to see what that argument is.
The Reserve Bank of Australia stunned nearly everyone last month
by holding rates steady, but Bloomberg economist James McIntyre saw
it coming with another rate decision just around the corner.
He's back to share what he thinks is on the cards. Hello,
I'm Chris Burkhan. This is the Bloomberg Australia Podcast. Almost
(00:46):
exactly a month ago, the RBA made one of its
most surprising decisions in recent memory by doing absolutely nothing.
Instead of delivering the rate cut that most of us
thought was a sure thing, it held steady q much confusion, frustration,
and maybe a little humility for some of us. James
McIntire from Bloomberg Economics was among the few who correctly
(01:09):
predicted that rates would stay on hold Today James has
brought along his crystal ball to tell us what he
expects what happened next Tuesday when the RBA meets again. James,
Welcome back to the podcast.
Speaker 2 (01:22):
Thanks very much for having me, Chris.
Speaker 1 (01:24):
So, James, what did you see in the data last
month or indeed in the RBA's mindset that nearly everyone
else missed.
Speaker 2 (01:34):
Yeah, so, Las, when we were thinking about the July
RBA meeting, we had a central bank that was like
any central bank, but in Australia's case, balancing a range
of competing factors. None of them were screaming that they
had to move straight away. So the RBA has indicated
that the rates are on the way down, but it's
(01:54):
going to be a gradual process and it's going to
depend on the data. And so with the data that
the RBA had at the time, especially that labor market data,
we saw that look, there's no real compelling reason they
could afford to wait, and they did. And we've seen
that the data since has backed up one that decision
to wait on the inflation front, but it's changed the
(02:17):
story on another front, or the labor market, and it's
really i think line up in a way that's pretty
much a guarantee as much as you get one in
these sorts of things that the RBA will cut at
the August meeting on Tuesday.
Speaker 1 (02:28):
So what exactly is different this time? I mean, what's
changed in the past four weeks or so that makes
you think this is a sure fire bet.
Speaker 2 (02:36):
Well, let's take the two big parts of the puzzle
for any central bank, but for the RBA, the labor
market and inflation. In July, we only had the partial
inflation indicator, and that was suggesting that inflation was actually
very very weak. It was weaker than expected, and that
got markets and a lot of people really jumping onto
(02:57):
the idea that well, that's enough to pull the RBA
over the line. But on the other hand, the labor
market data that we had, the unemployment rate was actually
when they were standing there in July, the data that
we had at that time suggested that the unemployment rate
was below what the RBA was expecting, below the projections
from the main statement of monetary policy. So really, in
(03:18):
my mind it was like, well, there's not enough here
to really push the RBA off the edge and get
them to cut. But as we fast forward and focus
on what we've got Now we've got the full CPI
data and that's back to the RBA up. The RBA
thought it was going to be a little bit warmer
than what the monthly was saying, and that's been the case.
But that CPI is in line with what the RBA
(03:39):
was expecting, so no need to hold them up there.
But the labor market that's telling us a different story now.
So we've had revisions come through to Australia's unemployment rate
and the latest monthly data has indicated that it's now
at the highest in a couple of years and we've
got the unemployment rate trending higher, So that's a bit
of a different story, and that's one that's with that
(04:00):
inflation being where the RBA hoped for, but the labor
market now looking a little softer and a higher unemployment
rate than what they're expecting. That we think is going
to be enough when they recut their forecasts, especially when
they add another six months onto their forecast horizon, which
is something they're going to do at the August meeting.
All of that combined should be enough to flip the
(04:21):
script from that hold in July to getting that cut
in August.
Speaker 1 (04:27):
So just to clarify, you are predicting a cut from
three point eighty five percent to three point six percent
on Tuesday. Yeah, that's right.
Speaker 2 (04:38):
Still sticking with that gradual pace of monetary policy using
twenty five basis points at a time, fifty will be
considered as a matter of routine, I think. But I
don't think that that's where they're going to be to
looking at this time around. There's not enough in the
economy to get that round of cut, I think.
Speaker 1 (04:56):
And what do you reckon? Is it one and done
or is this kind of a renewed easing cycle.
Speaker 2 (05:03):
It's going to be well, we might think it's renewed,
but we're going to I think see these pauses at
the mid quarter meetings with the RBA emphasizing and really
deliberately dragging out these cuts. If the economy holds together
like we've been seeing so far, the cuts dribbling out
once a quarter. So I think there's actually quite a
(05:26):
bit further to go for the RBA. I think that
they need to. They'll be cutting not only in August,
another follow up in November, and a few more next
year as well. A little bit below where the consensus
is and below where the markets are currently tropping out.
I think there's a bit more easing, but there's no
rush to it. I think that's the main.
Speaker 1 (05:45):
Story, isn't it. I mean, Michelle Bullok did emphasize that
at her press conference at the last decision decision that
this was very much about direction and not timing, and
she's since phasizes that again that this is a very
cautious and gradual approach. So what is the RBA trying
(06:06):
to achieve here? What are they balancing?
Speaker 2 (06:09):
Yeah, it's balancing that, making sure a couple of things,
but making sure that that inflation victory is actually one
that's achieved. And we could, you know, we could realistically
see a situation where the labor market is is quite tight,
it stays tight, and as a result, a little bit
(06:30):
of an inflation shock from the rest of the world,
perhaps if something happens on all prices through a geopolitical
spat or if you know, it's not what I think
is going to be the way it turns out, but
if tariffs do inject a new wave of inflation that
manages to spill over into the rest of the world,
I think it's going to be the other way for
(06:50):
the non U S side of the global economy. But
those are things that could actually, you know, see inflation
still be a problem for the RBA. So they're balancing
that they want the labor and they're also trying to
balance this delicate transition in the economy public demand to
private demand. The public side of the economy is driven
demand for most of twenty twenty four. We need the
private side to pick up this year, and that's also
(07:13):
the case in the labor market as well. So if
there's any delay in that, let's say a confidence shock hits,
consumers and businesses decide that they're not going to deliver
the investment wave that their capex expectations suggest is on
the way. If that doesn't happen, the RBA might have
to speed things up a bit and move a little
bit faster with easing to broad that private sector side
(07:35):
of the economy along.
Speaker 1 (07:36):
Yeah, let's just go a bit deeper into that consumer
aspect that you referred to there, because obviously we know
the RBA it repeatedly without fail, it seems, highlights household
spending as a key uncertainty for the outlook, and we
of course know that Australian households are among the most
(07:57):
indebted in the world. So we've just had the latest
household spending data out Tuesday, which is the new data
set that effectively replaces retail sales as they go to
read on consumers. What did Tuesday's report show and are
those numbers likely to influence next week's decision at all?
Speaker 2 (08:19):
Yeah, So I think the key story is that whilst
the headlines for the global economic headlines are very much
focused and zeroed in on tariffs, and that's the main
game for the world economy, but when it comes to
what is that, how will it translate or what would
the RBA be worrying about. In the Australian economy, it's
very much the consumer side of things and getting that upswing.
(08:42):
And so we've seen this retail trade survey that we've
run for seventy five or nearly seventy five years in
Australia come to an end. It was only a very
very smaller and smaller portion of what people were spending.
And now we've got this much wider, bigger data set
on household spending and what that's telling us is that
there has been a little bit of an improvement in
(09:03):
spending in the second quarter, but a bit of that's
been driven by discounting, So consumers have opened their wallets,
but the price had to be right to get them
to step into the store. And there were some other
things as well, like the release of the Nintendo Switch
to which seemed to be something that boosted electronic sales
as well. So we've seen what looks like the consumers
(09:25):
becoming a little bit warmer, but actually when we dig in,
it's really still a very very something to be a
bit circumspect about and not yet assured that the consumers
are stepping up, and we need them to. And the
reason why we need consumers to step up is that
through the course of the last year or so, consumer
spending has been very much Over the last two to
(09:45):
three years, it's very much been driven by population growth
and migration boom. Her capital spending has been the weakest
since the nineteen nineties recession, especially in volume terms. So
we do need consumers in divisi dually to start opening
their wallets, and that's because the projections are that the
migration boom that we have been experiencing is going to
(10:07):
normalize back to regular levels, and so without consumers on
their each consumer spending more. The fact that there's not
as much growth in the number of consumers would leave
especially the retail sector, a very employment heavy sector of
the economy uses a lot of labor. If that sector
is not seeing the type of growth that they need,
(10:28):
then we could see that spill over into the labor
market and leading to a bit of a sharp rise
in the unemployment rates. So the RBA needs consumers to
open their wallets.
Speaker 1 (10:38):
Yeah, really good points, But look, how are we comparing
globally in that regard. Look how is the US consumer
looking well?
Speaker 2 (10:47):
In the latest quarterly data that we've got for GDP,
it didn't look to flash for US consumers. Actually, private
demand being quite a bit of a weak story. And
it's not just the US. If we were to look
look across the ditch at New Zealand as well, a
bit of you know, consumers struggling there collectively. And this
is sort of a little bit of a global focus.
(11:09):
Over the June quarter since Trump made his tariff announcements
and you know, brought an abrupt upending to the to
the global economic order. It's injected such a wave of uncertainty,
not only across financial markets, but it's hitting down to
main street, it's hitting consumer confidence and consumers are sitting
on their hands. You know. We've we've got the estimates
(11:31):
from the RBNZ that it's likely to have a pretty
decent hit to GDP. There similar deal here for Australia,
though you don't see it as badly because of some
of the discounting that went on, But if that wasn't there,
and if the migration wasn't holding up, we would be
looking at a pretty a bit of a hit as well.
(11:52):
So there's this real kind of consumer angst that has
happened post tariffs that central banks are going to probably
have to begin grappling within dealing with as one of
those after effect or second round ripples, those from those
Liberation Day moves by the US administration.
Speaker 1 (12:12):
And when we come back, just how much will rate
decisions be impacted by Donald Trump. Welcome back. I'm Chris
Burke and you're listening to the Bloomberg Australia Podcast today.
I am joined by James McIntire from Bloomberg Economics, known
(12:32):
in some circles as the Oracle, after correctly predicting that
interest rates would be left on hold last month James
is now expecting the RBA to to make that long
awaited rate cut next Tuesday. Look, James, Michelle Bullock copter
a fair bit of flak last month over the RBA's
communication of how it was thinking around interest rates. Obviously
(12:56):
it was a big shot. Was that fair? And have
there been any signs since that she's kind of taken
heat of that or or or reacted to that criticism
at all.
Speaker 2 (13:10):
Well, I think the thing that we need to remember
with what's happening in Australia is that the RBA is
in a bit of an adjustment phase. We had the
review of the RBA and then all of the reforms
that came in place, you know, this new Independent Monetary
Policy Board. We're going to soon get the non RBA
staff members of the board beginning to make speeches. But
(13:33):
I think what was really kind of clear or the
way I saw some of the criticism of the RBA
around what happened in July, which was markets were almost
unanimously expecting that there to be a cut. Economists almost
unanimously were expecting there to be a cut, and the
RBA didn't deliver. What everyone's struggling to get. What I
(13:54):
think is key. There is everyone struggling to get used
to the new RBA. Bullock tried to make the point that, well,
it's not really for us to signal the way that
we used to signal before because there's an independent board
and we don't know what the independent board would do.
I mean that does sort of suggest letting the you know,
the cut out of the bag. That the RBA was
very much in control of monetary policy under the previous board,
(14:18):
but the fact that there wasn't those that that drip
or that you know, feeding to the market of in
turn inside of views from the RBA that maybe markets
had gotten a little bit ahead of themselves expecting a cut.
I think that that's that's you know, people adjusting to that.
No one likes changed the rb A, judging by some
of Bullock's comments, doesn't necessarily love some of the changes,
(14:40):
but those changes, the market needs to adjust to those
changes as well, and expecting you know, things from the
past like a drip feed to be there to value
out if you're if you're headed in the wrong direction. Well,
you know, I think it was a clear signal from
the RBA that you couldn't really rely on that. But Look,
let's think about the last you know, couple of weeks
(15:01):
since the July meeting, we've had We've had the Deputy
Governor out twice, once with a speech, then with a
panel session, and then the Governor giving the landmark and
Eco speech. So we've had two really clear, you know,
or three really clear appearances from the top two officials
(15:23):
at the RBA over the last month, you know, compared
to what you sort of saw between May and July,
you can't really accuse them of hiding this time around.
So I think that, you know, there's been some pretty
clear communication since the July meeting about where things are going.
I think the RBA is probably not going to be
well when they delivered the cut. I think that there's
(15:45):
unlikely to be the degree of criticism that we saw
last time around.
Speaker 1 (15:49):
Having said that Bullock got off fairly lightly compared to
her poor old US counterpart, Jerome Powell at the Federal Reserve,
what are these concerns to attacks from Donald Trump all about,
and how damaging is it proving to be for for
Powell or or in fact the US economy.
Speaker 2 (16:08):
Maybe well, this this is this is you know, kind
of one of the key questions, right, because the value
and the importance of institutions in terms of confidence and
how we all go about making our decisions. You know,
the the up ending of the global trade order and
the confidence shock that that's imvibed through consumers globally is
is is you know, one other piece of evidence of
(16:31):
some of the mammoth policy and economic earthquakes that are
coming out from the US administration. It's not just the
attacks on on Powell. I think we saw the the
the head of the BLS, the Bureau of Labor Statistics,
following the employment figures coming out being being moved on
(16:53):
by Trump. That's that's sent as yet another attack. But
at the end of the day, you know, Powell has
got to try and balance inflation expectations and the degree
to which consumers and firms are going to pass through
or absorb within margins. The impacts of tariffs cutting too
easy is going to possibly lead inflation to be more
(17:19):
problematic than anyone would really like in the US. But
we do still have a confidence shock within that economy
and a consumer that's weak. So it's you know, the
Trump administration would obviously like interest rates down, and it's
not just the front end the Fed funds rate. The
focus for the administration, I would think is also on
(17:39):
the longer end of the bond yields as well, pushing
up those borrowing costs for the for the federal government
given the fiscal the challenging fiscal position there as well,
so you know, wanting more from power, whilst Powell is
trying to avoid another problem that Donald Trump is not
going to want, but that is inflation down the track
that is not really beginning to think about. Is a
(18:01):
difficult position for the Federal Reserve, and one that I
think that we're seeing that those attacks on Powell play out.
I don't think they're likely to go away anytime soon.
Speaker 1 (18:12):
No, it's extraordinary stuff. Look, how big a role do
you see Trump's tariff war playing in your kind of
crystal ball predictions for the coming year.
Speaker 2 (18:25):
It depends where, it depends where you're sort of thinking
in which perspective right when it comes to say, you know,
my coverage for Australia and New Zealand the tariffs ten
percent for Australia, fifteen percent for New Zealand. The US
is an important but not major trading partner, and there's
lots of and also the commodity based nature of the
(18:45):
exports of both of these economies means that there's opportunities
to divert to divert trade, and it's more likely that
the diversion of exports to the US from China and
the like is likely to deliver a disinflationy shock to
these economies. So you know, it's overwhelmingly a disinflationary impact
for Australia and New Zealand, not just sort of when
(19:06):
it comes to the direct impacts, but then also the
indirect impacts through confidence. But we are setting ourselves up
for a potential global monetary policy divergence. The hit to
global growth from trade is probably, you know, is from
the tariffs is going to result in monitship, more monetary
policy easing elsewhere, and a disinflationary impact for the global economy,
(19:29):
whereas in the US, this is what Trump's complaining about.
Power is going to need to weave a delicate balancing
act to try and make sure that you know, the
tariffs don't feed through to domestic inflation too badly, but
as a result that might mean that rate cuts are
slower there. So you know that divergence between US rates
(19:50):
and the rest of the and rates and policy, rates
and the rest of the world is one of the
key pieces of the of the global economic landscape for
the rest of this year and and into twenty twenty six.
Speaker 1 (20:01):
I think okay, so a high chance of a rate
cut in Australia next week, potentially a couple more this
year good news for mortgage holders. But let's also remember
that rate cuts mean the economy needs support, right and
the job market is usually heading south. Then you add
Donald Trump into that mix, and who knows well be
at the end of this month, let alone this year. James,
(20:24):
It's been a pleasure.
Speaker 2 (20:26):
Thank you very much, Chris.
Speaker 1 (20:29):
If you found today's conversation insightful, be sure to follow
the Bloomberg Australia Podcast wherever you listen, and check more
on Bloomberg dot com. This episode was recorded on the
traditional land of the Orangerie and Gadigall Peoples. It was
produced by Paul Allen and edited by Ainsley Chandler and
Rebecca Jones.
The last RBA meeting was a shock. The next one looks.
Speaker 2 (00:06):
Like a lock.
Speaker 3 (00:07):
So very welcome development that we saw inflation come down
really right across the board in those numbers which were
released yesterday. It was a powerful demonstration of the progress
that Australians had made.
Speaker 1 (00:19):
There's not really a good argument for a continued hold.
Speaker 3 (00:23):
If they do decide.
Speaker 1 (00:24):
To hold, I'd like to see what that argument is.
The Reserve Bank of Australia stunned nearly everyone last month
by holding rates steady, but Bloomberg economist James McIntyre saw
it coming with another rate decision just around the corner.
He's back to share what he thinks is on the cards. Hello,
I'm Chris Burkhan. This is the Bloomberg Australia Podcast. Almost
(00:46):
exactly a month ago, the RBA made one of its
most surprising decisions in recent memory by doing absolutely nothing.
Instead of delivering the rate cut that most of us
thought was a sure thing, it held steady q much confusion, frustration,
and maybe a little humility for some of us. James
McIntire from Bloomberg Economics was among the few who correctly
(01:09):
predicted that rates would stay on hold Today James has
brought along his crystal ball to tell us what he
expects what happened next Tuesday when the RBA meets again. James,
Welcome back to the podcast.
Speaker 2 (01:22):
Thanks very much for having me, Chris.
Speaker 1 (01:24):
So, James, what did you see in the data last
month or indeed in the RBA's mindset that nearly everyone
else missed.
Speaker 2 (01:34):
Yeah, so, Las, when we were thinking about the July
RBA meeting, we had a central bank that was like
any central bank, but in Australia's case, balancing a range
of competing factors. None of them were screaming that they
had to move straight away. So the RBA has indicated
that the rates are on the way down, but it's
(01:54):
going to be a gradual process and it's going to
depend on the data. And so with the data that
the RBA had at the time, especially that labor market data,
we saw that look, there's no real compelling reason they
could afford to wait, and they did. And we've seen
that the data since has backed up one that decision
to wait on the inflation front, but it's changed the
(02:17):
story on another front, or the labor market, and it's
really i think line up in a way that's pretty
much a guarantee as much as you get one in
these sorts of things that the RBA will cut at
the August meeting on Tuesday.
Speaker 1 (02:28):
So what exactly is different this time? I mean, what's
changed in the past four weeks or so that makes
you think this is a sure fire bet.
Speaker 2 (02:36):
Well, let's take the two big parts of the puzzle
for any central bank, but for the RBA, the labor
market and inflation. In July, we only had the partial
inflation indicator, and that was suggesting that inflation was actually
very very weak. It was weaker than expected, and that
got markets and a lot of people really jumping onto
(02:57):
the idea that well, that's enough to pull the RBA
over the line. But on the other hand, the labor
market data that we had, the unemployment rate was actually
when they were standing there in July, the data that
we had at that time suggested that the unemployment rate
was below what the RBA was expecting, below the projections
from the main statement of monetary policy. So really, in
(03:18):
my mind it was like, well, there's not enough here
to really push the RBA off the edge and get
them to cut. But as we fast forward and focus
on what we've got Now we've got the full CPI
data and that's back to the RBA up. The RBA
thought it was going to be a little bit warmer
than what the monthly was saying, and that's been the case.
But that CPI is in line with what the RBA
(03:39):
was expecting, so no need to hold them up there.
But the labor market that's telling us a different story now.
So we've had revisions come through to Australia's unemployment rate
and the latest monthly data has indicated that it's now
at the highest in a couple of years and we've
got the unemployment rate trending higher, So that's a bit
of a different story, and that's one that's with that
(04:00):
inflation being where the RBA hoped for, but the labor
market now looking a little softer and a higher unemployment
rate than what they're expecting. That we think is going
to be enough when they recut their forecasts, especially when
they add another six months onto their forecast horizon, which
is something they're going to do at the August meeting.
All of that combined should be enough to flip the
(04:21):
script from that hold in July to getting that cut
in August.
Speaker 1 (04:27):
So just to clarify, you are predicting a cut from
three point eighty five percent to three point six percent
on Tuesday. Yeah, that's right.
Speaker 2 (04:38):
Still sticking with that gradual pace of monetary policy using
twenty five basis points at a time, fifty will be
considered as a matter of routine, I think. But I
don't think that that's where they're going to be to
looking at this time around. There's not enough in the
economy to get that round of cut, I think.
Speaker 1 (04:56):
And what do you reckon? Is it one and done
or is this kind of a renewed easing cycle.
Speaker 2 (05:03):
It's going to be well, we might think it's renewed,
but we're going to I think see these pauses at
the mid quarter meetings with the RBA emphasizing and really
deliberately dragging out these cuts. If the economy holds together
like we've been seeing so far, the cuts dribbling out
once a quarter. So I think there's actually quite a
(05:26):
bit further to go for the RBA. I think that
they need to. They'll be cutting not only in August,
another follow up in November, and a few more next
year as well. A little bit below where the consensus
is and below where the markets are currently tropping out.
I think there's a bit more easing, but there's no
rush to it. I think that's the main.
Speaker 1 (05:45):
Story, isn't it. I mean, Michelle Bullok did emphasize that
at her press conference at the last decision decision that
this was very much about direction and not timing, and
she's since phasizes that again that this is a very
cautious and gradual approach. So what is the RBA trying
(06:06):
to achieve here? What are they balancing?
Speaker 2 (06:09):
Yeah, it's balancing that, making sure a couple of things,
but making sure that that inflation victory is actually one
that's achieved. And we could, you know, we could realistically
see a situation where the labor market is is quite tight,
it stays tight, and as a result, a little bit
(06:30):
of an inflation shock from the rest of the world,
perhaps if something happens on all prices through a geopolitical
spat or if you know, it's not what I think
is going to be the way it turns out, but
if tariffs do inject a new wave of inflation that
manages to spill over into the rest of the world,
I think it's going to be the other way for
(06:50):
the non U S side of the global economy. But
those are things that could actually, you know, see inflation
still be a problem for the RBA. So they're balancing
that they want the labor and they're also trying to
balance this delicate transition in the economy public demand to
private demand. The public side of the economy is driven
demand for most of twenty twenty four. We need the
private side to pick up this year, and that's also
(07:13):
the case in the labor market as well. So if
there's any delay in that, let's say a confidence shock hits,
consumers and businesses decide that they're not going to deliver
the investment wave that their capex expectations suggest is on
the way. If that doesn't happen, the RBA might have
to speed things up a bit and move a little
bit faster with easing to broad that private sector side
(07:35):
of the economy along.
Speaker 1 (07:36):
Yeah, let's just go a bit deeper into that consumer
aspect that you referred to there, because obviously we know
the RBA it repeatedly without fail, it seems, highlights household
spending as a key uncertainty for the outlook, and we
of course know that Australian households are among the most
(07:57):
indebted in the world. So we've just had the latest
household spending data out Tuesday, which is the new data
set that effectively replaces retail sales as they go to
read on consumers. What did Tuesday's report show and are
those numbers likely to influence next week's decision at all?
Speaker 2 (08:19):
Yeah, So I think the key story is that whilst
the headlines for the global economic headlines are very much
focused and zeroed in on tariffs, and that's the main
game for the world economy, but when it comes to
what is that, how will it translate or what would
the RBA be worrying about. In the Australian economy, it's
very much the consumer side of things and getting that upswing.
(08:42):
And so we've seen this retail trade survey that we've
run for seventy five or nearly seventy five years in
Australia come to an end. It was only a very
very smaller and smaller portion of what people were spending.
And now we've got this much wider, bigger data set
on household spending and what that's telling us is that
there has been a little bit of an improvement in
(09:03):
spending in the second quarter, but a bit of that's
been driven by discounting, So consumers have opened their wallets,
but the price had to be right to get them
to step into the store. And there were some other
things as well, like the release of the Nintendo Switch
to which seemed to be something that boosted electronic sales
as well. So we've seen what looks like the consumers
(09:25):
becoming a little bit warmer, but actually when we dig in,
it's really still a very very something to be a
bit circumspect about and not yet assured that the consumers
are stepping up, and we need them to. And the
reason why we need consumers to step up is that
through the course of the last year or so, consumer
spending has been very much Over the last two to
(09:45):
three years, it's very much been driven by population growth
and migration boom. Her capital spending has been the weakest
since the nineteen nineties recession, especially in volume terms. So
we do need consumers in divisi dually to start opening
their wallets, and that's because the projections are that the
migration boom that we have been experiencing is going to
(10:07):
normalize back to regular levels, and so without consumers on
their each consumer spending more. The fact that there's not
as much growth in the number of consumers would leave
especially the retail sector, a very employment heavy sector of
the economy uses a lot of labor. If that sector
is not seeing the type of growth that they need,
(10:28):
then we could see that spill over into the labor
market and leading to a bit of a sharp rise
in the unemployment rates. So the RBA needs consumers to
open their wallets.
Speaker 1 (10:38):
Yeah, really good points, But look, how are we comparing
globally in that regard. Look how is the US consumer
looking well?
Speaker 2 (10:47):
In the latest quarterly data that we've got for GDP,
it didn't look to flash for US consumers. Actually, private
demand being quite a bit of a weak story. And
it's not just the US. If we were to look
look across the ditch at New Zealand as well, a
bit of you know, consumers struggling there collectively. And this
is sort of a little bit of a global focus.
(11:09):
Over the June quarter since Trump made his tariff announcements
and you know, brought an abrupt upending to the to
the global economic order. It's injected such a wave of uncertainty,
not only across financial markets, but it's hitting down to
main street, it's hitting consumer confidence and consumers are sitting
on their hands. You know. We've we've got the estimates
(11:31):
from the RBNZ that it's likely to have a pretty
decent hit to GDP. There similar deal here for Australia,
though you don't see it as badly because of some
of the discounting that went on, But if that wasn't there,
and if the migration wasn't holding up, we would be
looking at a pretty a bit of a hit as well.
(11:52):
So there's this real kind of consumer angst that has
happened post tariffs that central banks are going to probably
have to begin grappling within dealing with as one of
those after effect or second round ripples, those from those
Liberation Day moves by the US administration.
Speaker 1 (12:12):
And when we come back, just how much will rate
decisions be impacted by Donald Trump. Welcome back. I'm Chris
Burke and you're listening to the Bloomberg Australia Podcast today.
I am joined by James McIntire from Bloomberg Economics, known
(12:32):
in some circles as the Oracle, after correctly predicting that
interest rates would be left on hold last month James
is now expecting the RBA to to make that long
awaited rate cut next Tuesday. Look, James, Michelle Bullock copter
a fair bit of flak last month over the RBA's
communication of how it was thinking around interest rates. Obviously
(12:56):
it was a big shot. Was that fair? And have
there been any signs since that she's kind of taken
heat of that or or or reacted to that criticism
at all.
Speaker 2 (13:10):
Well, I think the thing that we need to remember
with what's happening in Australia is that the RBA is
in a bit of an adjustment phase. We had the
review of the RBA and then all of the reforms
that came in place, you know, this new Independent Monetary
Policy Board. We're going to soon get the non RBA
staff members of the board beginning to make speeches. But
(13:33):
I think what was really kind of clear or the
way I saw some of the criticism of the RBA
around what happened in July, which was markets were almost
unanimously expecting that there to be a cut. Economists almost
unanimously were expecting there to be a cut, and the
RBA didn't deliver. What everyone's struggling to get. What I
(13:54):
think is key. There is everyone struggling to get used
to the new RBA. Bullock tried to make the point that, well,
it's not really for us to signal the way that
we used to signal before because there's an independent board
and we don't know what the independent board would do.
I mean that does sort of suggest letting the you know,
the cut out of the bag. That the RBA was
very much in control of monetary policy under the previous board,
(14:18):
but the fact that there wasn't those that that drip
or that you know, feeding to the market of in
turn inside of views from the RBA that maybe markets
had gotten a little bit ahead of themselves expecting a cut.
I think that that's that's you know, people adjusting to that.
No one likes changed the rb A, judging by some
of Bullock's comments, doesn't necessarily love some of the changes,
(14:40):
but those changes, the market needs to adjust to those
changes as well, and expecting you know, things from the
past like a drip feed to be there to value
out if you're if you're headed in the wrong direction. Well,
you know, I think it was a clear signal from
the RBA that you couldn't really rely on that. But Look,
let's think about the last you know, couple of weeks
(15:01):
since the July meeting, we've had We've had the Deputy
Governor out twice, once with a speech, then with a
panel session, and then the Governor giving the landmark and
Eco speech. So we've had two really clear, you know,
or three really clear appearances from the top two officials
(15:23):
at the RBA over the last month, you know, compared
to what you sort of saw between May and July,
you can't really accuse them of hiding this time around.
So I think that, you know, there's been some pretty
clear communication since the July meeting about where things are going.
I think the RBA is probably not going to be
well when they delivered the cut. I think that there's
(15:45):
unlikely to be the degree of criticism that we saw
last time around.
Speaker 1 (15:49):
Having said that Bullock got off fairly lightly compared to
her poor old US counterpart, Jerome Powell at the Federal Reserve,
what are these concerns to attacks from Donald Trump all about,
and how damaging is it proving to be for for
Powell or or in fact the US economy.
Speaker 2 (16:08):
Maybe well, this this is this is you know, kind
of one of the key questions, right, because the value
and the importance of institutions in terms of confidence and
how we all go about making our decisions. You know,
the the up ending of the global trade order and
the confidence shock that that's imvibed through consumers globally is
is is you know, one other piece of evidence of
(16:31):
some of the mammoth policy and economic earthquakes that are
coming out from the US administration. It's not just the
attacks on on Powell. I think we saw the the
the head of the BLS, the Bureau of Labor Statistics,
following the employment figures coming out being being moved on
(16:53):
by Trump. That's that's sent as yet another attack. But
at the end of the day, you know, Powell has
got to try and balance inflation expectations and the degree
to which consumers and firms are going to pass through
or absorb within margins. The impacts of tariffs cutting too
easy is going to possibly lead inflation to be more
(17:19):
problematic than anyone would really like in the US. But
we do still have a confidence shock within that economy
and a consumer that's weak. So it's you know, the
Trump administration would obviously like interest rates down, and it's
not just the front end the Fed funds rate. The
focus for the administration, I would think is also on
(17:39):
the longer end of the bond yields as well, pushing
up those borrowing costs for the for the federal government
given the fiscal the challenging fiscal position there as well,
so you know, wanting more from power, whilst Powell is
trying to avoid another problem that Donald Trump is not
going to want, but that is inflation down the track
that is not really beginning to think about. Is a
(18:01):
difficult position for the Federal Reserve, and one that I
think that we're seeing that those attacks on Powell play out.
I don't think they're likely to go away anytime soon.
Speaker 1 (18:12):
No, it's extraordinary stuff. Look, how big a role do
you see Trump's tariff war playing in your kind of
crystal ball predictions for the coming year.
Speaker 2 (18:25):
It depends where, it depends where you're sort of thinking
in which perspective right when it comes to say, you know,
my coverage for Australia and New Zealand the tariffs ten
percent for Australia, fifteen percent for New Zealand. The US
is an important but not major trading partner, and there's
lots of and also the commodity based nature of the
(18:45):
exports of both of these economies means that there's opportunities
to divert to divert trade, and it's more likely that
the diversion of exports to the US from China and
the like is likely to deliver a disinflationy shock to
these economies. So you know, it's overwhelmingly a disinflationary impact
for Australia and New Zealand, not just sort of when
(19:06):
it comes to the direct impacts, but then also the
indirect impacts through confidence. But we are setting ourselves up
for a potential global monetary policy divergence. The hit to
global growth from trade is probably, you know, is from
the tariffs is going to result in monitship, more monetary
policy easing elsewhere, and a disinflationary impact for the global economy,
(19:29):
whereas in the US, this is what Trump's complaining about.
Power is going to need to weave a delicate balancing
act to try and make sure that you know, the
tariffs don't feed through to domestic inflation too badly, but
as a result that might mean that rate cuts are
slower there. So you know that divergence between US rates
(19:50):
and the rest of the and rates and policy, rates
and the rest of the world is one of the
key pieces of the of the global economic landscape for
the rest of this year and and into twenty twenty six.
Speaker 1 (20:01):
I think okay, so a high chance of a rate
cut in Australia next week, potentially a couple more this
year good news for mortgage holders. But let's also remember
that rate cuts mean the economy needs support, right and
the job market is usually heading south. Then you add
Donald Trump into that mix, and who knows well be
at the end of this month, let alone this year. James,
(20:24):
It's been a pleasure.
Speaker 2 (20:26):
Thank you very much, Chris.
Speaker 1 (20:29):
If you found today's conversation insightful, be sure to follow
the Bloomberg Australia Podcast wherever you listen, and check more
on Bloomberg dot com. This episode was recorded on the
traditional land of the Orangerie and Gadigall Peoples. It was
produced by Paul Allen and edited by Ainsley Chandler and
Rebecca Jones.
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