Brad Olsen: Infometrics Principal Economist on forecast for official cash rate

Infometrics predict the official cash rate (OCR) won’t move until February next year - rather than this November. 

Non-tradeable inflation (inflation that is domestic and not influenced by international factors) has caused issues for the Reserve Bank – say business commentators.  

It makes up almost 60% of the consumer price index (CPI), which the Reserve Bank is trying to reduce. 

Infometrics Principal Economist Brad Olsen told Jack Tame “We kept looking out at the economy and we can’t support our previous view.” 

Olsen says “You’re not going to use monetary policy to get local government rates under control, or insurance premiums.” 

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Episode Transcript

Speaker 1 (00:00):
Used dogs.

Speaker 2 (00:01):
That'd be and bad news if you're longing for Morga
rates to come down sometime soon. Infometrics has just updated
its forecast and now doesn't think the Reserve Bank will
drop the official cash rate until February of next year.
It had previously predicted that rates would start coming down
in November. Brad Olson is infometrics principal economist Kyolder. Kolder,

(00:25):
why have you moved out the date?

Speaker 1 (00:28):
Well, we keep looking out at the economy and probably
more importantly, at how the Reserve Bank is viewing the economy,
and we just can't support our previous view. We thought
it was going to be November that the Reserve Bank
would have enough information to start to make those cuts.
We've now formally pushed that out to February next year,
just given how intense that non tradables inflation have been,

(00:51):
that domestically based pressure. But we are, I guess a
little bit worried. We're a little bit almost in two
minds over this. But we've looked at how strong the
Reserve Bank's view has been so far, you know, looking
at all of their forecasts and their expectations. We just
can't see them moving all that quickly. They're pretty persistent
over their view they need to get inflation down lower.

(01:12):
They haven't got that evidence yet, And if they haven't
got their evidence, we can't really go out and say
we think they'll move ahead of time, because they most
likely probably won't.

Speaker 2 (01:21):
What about fiscal policy, how is the budget factoring in
your forecasts?

Speaker 1 (01:25):
Well, and that's the other thing that sort of seems
to come through. I mean, if you look at the budget,
I think overall, even the Treasury's numbers show that the
government spending over time share should be sort of more contractionery.
It shouldn't add nearly as much into the economy as
it previously might have. So that's a good thing over
the long term. The issue is given how much more

(01:47):
challenging the economy looks like it will be, you know,
with those higher interest rates for longer. Even the Treasury
said also that you know that near term fiscal impulse
might be slightly more positive. If I'm the Reserve Bank
and I'm already worried about inflation remaining too persistent, They're
probably going to have a bit of a black mark
against that. So looking at all that, we can't see

(02:07):
any justification for the Reserve Bank needing to raise interest rates. Again,
we still don't discount it because we think that they're
so worried at the moment we've got a ten percent
chance that they might have to, but so far we're
sort of of the view that, look, it just pushes
it out. I still don't think it has to take
till September or whenever in twenty twenty five that the
Reserve Bank is sort of forecasting on their official cash

(02:29):
rate track. But it's just that pressure that's in the economy.
Economic activity has pulled back, inflation is taking longer to
get there. That means that interest rates will also take
longer to come down.

Speaker 2 (02:40):
Ten percent is not nothing, Brad. I'd be much every
if it was zero pointeen percent.

Speaker 1 (02:47):
Oh, I absolutely agree, And trust me, there was a
lot of conversation in our team around you know, is
is that justified? And we looked at it and we
just went, well, we sort of has to because the
fact that the Reserve Bank not only has listed their
official the cash rate forecast, we could almost get away
from that that you know, the Reserve Bank's been saying
look it's mechanistic and almost saying look it's all cast

(03:08):
but don't believe our forecast, which is hard to interpret
in of itself, but the fact they did that and
also said in their official record of meeting they said, hey, guys,
we actually did think about putting it up. What are
we supposed to look at? I mean, the Reserve Bank
lifts their track, they talk about how they thought about
raising it. That's a pretty strong signal to me that
they haven't discounted it. And if they haven't, then we

(03:29):
sure can't.

Speaker 2 (03:31):
It's interesting, you know, Adrian All made it pretty clear
I think last month, with that last month's policy statement
that when you think about the non tradeables, that the
domestic inflation stuff like rates, stuff like insurance rent prices
that are contributing, you know, massively to that to that
high non tradeables numbers at five point eight or something
at the moment. So what are his chances of trying

(03:52):
to trying to stop those rises?

Speaker 1 (03:55):
Well? And I think so, I mean, the Governor's made
some interesting remarks on that because he much seem to
imply that the Bank thought they could get for those
things under control. You're not going to use monetary policy
to get local government rates under control. You're probably not
going to get them to shift insurance premiums and similar either.
What it's more likely to do is that if those

(04:16):
things remain high, then the Reserve Bank might well have
to keep suppressing harder on the other parts of the
economy to get their aggate inflation pred down. I think
I mean, to be fair, they've been looking through at
those non tradables and saying it's not just these big
thorny things. There's enough general pressure in there as well.
So what they'll probably want to see is that they
if they can't influence some of those big thorny bits,

(04:38):
they'll want to see the rest of non pullback. They'll
also sort of need to see more generally, probably that
hit on consumption. If people aren't spending as much over time,
businesses just shouldn't be able to pass through those costs
quite as much. They'll be worried about losing market shared
and cash flow, so that should filter through. But I
think the Reserve Bank has sort of said that, Look,

(05:00):
they're nervous about that because it just hasn't come down
as quickly. You know, you've had other central banks around
the world they have been able to get their core
inflation down. We haven't managed to achieve that yet and
to be fair until that happens. If on the Reserve Bank,
I'm still going I'm not confident enough about having my target,
and until that happens, I'm not shifting my position. Yeah.

Speaker 2 (05:19):
Hey, thanks Brad. Always appreciate your insights. That is Brad Olsen.
That is Brad Olsen and for Metrix principal economists. For
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