July 8, 2025 • 12 mins
Yesterday afternoon, the Reserve Bank board left the official cash rate on hold at 3.85%. A surprise decision given most economists and financial markets expected a reduction of 25 basis points.
Westpac Chief Economist Lucy Ellis - and former Chief Economist at the Reserve Bank - talks to Sean Aylmer about yesterday's decision, the press conference afterwards, and why she thinks "the RBA is going to get a bit caught out."
Find out more: https://fearandgreed.com.au
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
Welcome to the Fear and Greed Business Interview. I'm Sean
ail May. Yesterday afternoon, the Reserve Bank Board left the
official cash rate on hold at three point eighty five percent,
a surprise decision given most economists and financial markets expected
a reduction of twenty five basis points. In the press
conference after the announcement, Governor Michelle Bullock was at pains
to explain that the decision didn't mean that the Central
(00:27):
Bank is thinking differently about rates. Rather, it's a timing
issue to run through yesterday's announcement. I'm joined by Westpac
chief Economist Lucy Ellis, who of course used to be
the chief economist at the Reserve Bank. Lucy, welcome back
to Fear and Greed.
Speaker 2 (00:41):
Thanks very much, Shaw, and great to be here.
Speaker 1 (00:43):
What do you make of yesterday's decision and the press
conference afterwards, well, Sean.
Speaker 2 (00:50):
The Reserve Bank Board said in its May Minutes that
it wanted to approach policy in a cautious and predictable way,
and it has to be said that this week's decision
really does err on the side of caution rather than predictability.
(01:11):
While they do say that they've got in the next
four weeks, you know, a full quarterly CPI and the
labor force numbers. It's honestly speaking, not a lot of
new information, and nothing that they get in the next
little while is really going to change the decision that
rates are headed down. So the real question was what
(01:31):
are you waiting for? And it does seem that the
RBA has gotten itself into a bit of a view
that you know, they can't look at the monthly CPI
indicator as an indicator of the quarterly I mean, we
have two thirds of the information now, and while it
is pointed to something as shade above what they were
(01:54):
forecasting in May, it's not a big difference. It's like
there's nothing they're going to learn in the next five
weeks that will change their mind. And so it's almost
not a surprise that the decision was split six three,
because you know, I think that was a very finely
balanced judgment. And you know, the argument to wait was, well,
(02:16):
we're waiting because we can, and we're being cautious rather
than you know, policy is restrictive. You know, inflation's at target.
You know, we don't need to be as restrictive as
we were. And I think what was really interesting in
the media conferences, they didn't really talk about the stance
of policy that much. They didn't highlight that policy was restrictive.
(02:38):
But what they did emphasize is, you know, relatively dated
information about inflation that was only barely within the band.
So they emphasized trim mean inflation year ended March quarter. Well, firstly,
we're in July. We have two thirds of the information
about June quarter and a year rended calculation. I mean,
(03:00):
half of the information is from the middle of last year.
So they're using quiet dated information to make that assessment.
Speaker 1 (03:07):
Do you think there's something going on non economically inasmuch
as we have a new Montrey policy setting board, it
operates differently to what it did kind of four or
five meetings ago. The fact that people are voting. We
found out that it was a six to three split
decision yesterday. All this information does it just make it
(03:28):
harder for the Reserve Bank to kind of know what's
going to come out of the meeting before it goes
into the meeting, compared to let's say, twelve months ago
when you were there. For example.
Speaker 2 (03:38):
Look, I think people need to understand that the board
were not patsies. They were not a rubber stamp, and
it was a misreading of the dynamics of the board
and the conduct of the board to assert that they
were just a rubber stamp. I mean, these are very
distinguished people who are accustomed to making decisions under uncertainty.
(04:01):
The assumption that they're just a rubber stamp was false.
I mean, you know, why would the staff put up
a recommendation that they didn't think they could get up.
So I think this one was quite finally balanced, and
I do wonder quite what was going on. I mean,
I don't think it was the case that, you know,
the internal people, you know, the governor, the deputy governor,
(04:21):
and the new Secretary of Treasury were the ones who
voted for a cut. I think that. I think it
was three external members who voted for a cut. It's
a bit hard to know that. They'll never reveal that,
but that's just my sort of read of how things
have played out. But the idea of oh we can
wait another five weeks, will you didn't need to what? Like,
(04:44):
it's not clear what the confirmation they needed. You know,
why are they still not convinced that inflations inside the
band and sustainably there, So you know, let's then look
at the things that they cite as indicators why they
wanted confirmation. You know, they're talking about the recovery and
(05:05):
private sector demand growth. Well, we do well expect that,
but they have been disappointed by that over recent quarters
and have had to revise their consumption growth forecast, their
near term consumption growth forecasts down. They're obviously concerned about
inflation picking back up again, and particularly about unit labor
(05:27):
costs and low productivity. And I thought it was interesting
in the media conference after the meeting that the governor
talked about a conundrum that inflation was coming down but
unit later costs were high. And our view at Westpac
Economics is really that what we're seeing there is a
central bank that still puts a lot of weight on
(05:50):
this sort of unit labor cost idea, on a whole
of economy productivity growth concept that isn't actually that important
for determining inflation. And this is something we've been talking
about for about a year at Westpac Economics, but it
is just something that you know, they don't come to
their views about the economy lightly. They do put a
(06:11):
lot of effort and care and modeling into their view
and so they don't change their mind lightly either.
Speaker 1 (06:17):
Okay, stay with me, Lissy will be back in a minute.
I'm talking to Lizzie Ellis, chief economist at Westpac just
before the break. You're talking about unit labor costs and
just westpac economics view on that Reserve banks view on that.
(06:39):
I just want to delve into that a little bit more. So.
I wasn't quite with you on what you were saying,
is the reserve bank is it an outdated idea, the
idea of productivity and unit labor costs.
Speaker 2 (06:51):
I don't think it's an outdated idea, but I just
think it's one that needs to be handled with care
and not taken literally. So there's still this concern that
inflation might not be sustained at the midpoint of their
target range. They're still concerned about upside risks to inflation
for two reasons. One is the labor market is tighter
(07:13):
than what their models are telling them full employment is.
And secondly, measured productivity growth is quite weak, and they're
reading that as a reason to be concerned that unit
labor costs could start pushing up, putting upward pressure on
overall costs. And although the moment, businesses are struggling to
(07:35):
pass this on, and the Reserve Bank acknowledges this. They
just think that's sort of an upside pressure on domestic inflation.
And I think our response to that would be firstly
the productivity growth. And you just remember, this is just
GDP divided by ours worked. It's just stuff divided by time.
And the problem is that the stuff divided by time
(07:56):
includes sectors like the mining sector, which don't have much
impact on domestic inflation, but also the non market sector
your health and education and childcare and disability care, where
the price isn't set in a market, and so the
idea that prices are a markup over costs, including labor costs,
(08:17):
is just not relevant. And if you restrict yourself to
the parts of the economy where it's a reasonable assumption
or a reasonable thesis that prices are indeed some kind
of markup over costs and the prices are set in
a market, and this is relevant for domestic inflation, that
bit of productivity is actually doing okay. And this is
(08:38):
something we've been saying for quite some time, but it's
just taking the RBA a while to sort of shift
away from the kind of the thesis that they had,
and then I was saying, well, you know, if productivity
growth doesn't pick up, then wages growth will have to slow.
It's like, well, if productivity growth doesn't pick up, well,
then firms won't accept wage increases as big as they
currently are. So this is sort of self correcting. We're
(09:02):
just a lot less worried about this, and this is
something we've been writing about for a while.
Speaker 1 (09:06):
It's nice to hear some good news on productivity back
to rates. Rates will fall though at some point in
the next few months. Lucy, Yeah, well.
Speaker 2 (09:15):
I mean if you listening to the press conference, I mean,
it really felt like, unless they get an upside surprise
in the Dune Court a CPI, they're going to cut
in August. I mean, you're saying, in the next five weeks,
we're going to see this and we're going to have
another opportunity to review. You know, I think there's a
different We did say we're you know at the time
(09:37):
that we didn't think that a rate cut in July
was a shoe in, and that they were wanted to
be cautious, and you know, in retrospect, I should have
said it's not a shoe in, you know, maybe not
change my call. I think we know we were right
to say, oh, there's there's a risk that they don't go,
and that the market was overpricing it. I am still
surprised that in the end they decided to hold. And
(10:02):
you know, the fact that was six' three SPLIT i
think shows you just how just how finely balanced that.
Speaker 1 (10:07):
Was so what's your call now in terms of rate
cuts for the rest of the.
Speaker 2 (10:11):
Year, well we are still expecting further rate, cuts Probably.
August this is now some chance that they delay. Further
they're obviously just you, know remaining to be, convinced BUT
i think more likely than. Not what we thought would
we thought would Be, august then we Thought july is
now going to Be. August and this is just tactics and.
Timing and then the other point being we had, said,
(10:34):
look we don't think that they're going to back that
up back to back to, back and sure, enough so
that just sort of cements the idea that if they
do cut In, august they're not going to back that
up with one In. September they're going to wait Till.
November so it's sort of like basically their statement On
monetary policy, Meetings so the quarterly meetings are the ones
that are, alive and they're going to wait till they've
(10:56):
got that full sweet information before. Deciding and so assuming
we're right about it now Being august for the next,
cut then you Know November February may THE smp ones
cautious and, predictable with an emphasis on, cautious AND i
think that also emphasizes, that you, know it's now more
likely that what we'd called as being the troph which
(11:19):
was two eighty, five is now more, likely because you,
know the more cautious they, are the more likely it
is that they get to the end of the year and, say,
oh criche actually inflation's undershot what we thought and we
need to do. More and that is the basis for
the two cups that we're expecting next, year is we
just think THE rba is going to get a bit caught.
Out our own forecasts do see trimmed meat inflation coming
(11:43):
into the lower end of the two to three percent target,
range and so you, know we just expect that they
get to the end of the year realized that their
previous forecast of two point. Six as far as the
eye can see wasn't what was going to play, out
and so they end up, saying, oh we have to
do a bit more and that's why we think there
are two more cuts next year as, well so two
(12:03):
this year too next.
Speaker 1 (12:04):
Year, lucy thanks for talking To fear And. Greed thanks very.
Speaker 2 (12:07):
Much shone always approves.
Speaker 1 (12:08):
It There's Lucy, Ellis group Chief economist At. Westpac this
is The fear And Greed Business. Interview join us every
morning for the full episode Of fear And greed business
news you can. Use I'm Chane. Elma enjoy. Yourday
Welcome to the Fear and Greed Business Interview. I'm Sean
ail May. Yesterday afternoon, the Reserve Bank Board left the
official cash rate on hold at three point eighty five percent,
a surprise decision given most economists and financial markets expected
a reduction of twenty five basis points. In the press
conference after the announcement, Governor Michelle Bullock was at pains
to explain that the decision didn't mean that the Central
(00:27):
Bank is thinking differently about rates. Rather, it's a timing
issue to run through yesterday's announcement. I'm joined by Westpac
chief Economist Lucy Ellis, who of course used to be
the chief economist at the Reserve Bank. Lucy, welcome back
to Fear and Greed.
Speaker 2 (00:41):
Thanks very much, Shaw, and great to be here.
Speaker 1 (00:43):
What do you make of yesterday's decision and the press
conference afterwards, well, Sean.
Speaker 2 (00:50):
The Reserve Bank Board said in its May Minutes that
it wanted to approach policy in a cautious and predictable way,
and it has to be said that this week's decision
really does err on the side of caution rather than predictability.
(01:11):
While they do say that they've got in the next
four weeks, you know, a full quarterly CPI and the
labor force numbers. It's honestly speaking, not a lot of
new information, and nothing that they get in the next
little while is really going to change the decision that
rates are headed down. So the real question was what
(01:31):
are you waiting for? And it does seem that the
RBA has gotten itself into a bit of a view
that you know, they can't look at the monthly CPI
indicator as an indicator of the quarterly I mean, we
have two thirds of the information now, and while it
is pointed to something as shade above what they were
(01:54):
forecasting in May, it's not a big difference. It's like
there's nothing they're going to learn in the next five
weeks that will change their mind. And so it's almost
not a surprise that the decision was split six three,
because you know, I think that was a very finely
balanced judgment. And you know, the argument to wait was, well,
(02:16):
we're waiting because we can, and we're being cautious rather
than you know, policy is restrictive. You know, inflation's at target.
You know, we don't need to be as restrictive as
we were. And I think what was really interesting in
the media conferences, they didn't really talk about the stance
of policy that much. They didn't highlight that policy was restrictive.
(02:38):
But what they did emphasize is, you know, relatively dated
information about inflation that was only barely within the band.
So they emphasized trim mean inflation year ended March quarter. Well, firstly,
we're in July. We have two thirds of the information
about June quarter and a year rended calculation. I mean,
(03:00):
half of the information is from the middle of last year.
So they're using quiet dated information to make that assessment.
Speaker 1 (03:07):
Do you think there's something going on non economically inasmuch
as we have a new Montrey policy setting board, it
operates differently to what it did kind of four or
five meetings ago. The fact that people are voting. We
found out that it was a six to three split
decision yesterday. All this information does it just make it
(03:28):
harder for the Reserve Bank to kind of know what's
going to come out of the meeting before it goes
into the meeting, compared to let's say, twelve months ago
when you were there. For example.
Speaker 2 (03:38):
Look, I think people need to understand that the board
were not patsies. They were not a rubber stamp, and
it was a misreading of the dynamics of the board
and the conduct of the board to assert that they
were just a rubber stamp. I mean, these are very
distinguished people who are accustomed to making decisions under uncertainty.
(04:01):
The assumption that they're just a rubber stamp was false.
I mean, you know, why would the staff put up
a recommendation that they didn't think they could get up.
So I think this one was quite finally balanced, and
I do wonder quite what was going on. I mean,
I don't think it was the case that, you know,
the internal people, you know, the governor, the deputy governor,
(04:21):
and the new Secretary of Treasury were the ones who
voted for a cut. I think that. I think it
was three external members who voted for a cut. It's
a bit hard to know that. They'll never reveal that,
but that's just my sort of read of how things
have played out. But the idea of oh we can
wait another five weeks, will you didn't need to what? Like,
(04:44):
it's not clear what the confirmation they needed. You know,
why are they still not convinced that inflations inside the
band and sustainably there, So you know, let's then look
at the things that they cite as indicators why they
wanted confirmation. You know, they're talking about the recovery and
(05:05):
private sector demand growth. Well, we do well expect that,
but they have been disappointed by that over recent quarters
and have had to revise their consumption growth forecast, their
near term consumption growth forecasts down. They're obviously concerned about
inflation picking back up again, and particularly about unit labor
(05:27):
costs and low productivity. And I thought it was interesting
in the media conference after the meeting that the governor
talked about a conundrum that inflation was coming down but
unit later costs were high. And our view at Westpac
Economics is really that what we're seeing there is a
central bank that still puts a lot of weight on
(05:50):
this sort of unit labor cost idea, on a whole
of economy productivity growth concept that isn't actually that important
for determining inflation. And this is something we've been talking
about for about a year at Westpac Economics, but it
is just something that you know, they don't come to
their views about the economy lightly. They do put a
(06:11):
lot of effort and care and modeling into their view
and so they don't change their mind lightly either.
Speaker 1 (06:17):
Okay, stay with me, Lissy will be back in a minute.
I'm talking to Lizzie Ellis, chief economist at Westpac just
before the break. You're talking about unit labor costs and
just westpac economics view on that Reserve banks view on that.
(06:39):
I just want to delve into that a little bit more. So.
I wasn't quite with you on what you were saying,
is the reserve bank is it an outdated idea, the
idea of productivity and unit labor costs.
Speaker 2 (06:51):
I don't think it's an outdated idea, but I just
think it's one that needs to be handled with care
and not taken literally. So there's still this concern that
inflation might not be sustained at the midpoint of their
target range. They're still concerned about upside risks to inflation
for two reasons. One is the labor market is tighter
(07:13):
than what their models are telling them full employment is.
And secondly, measured productivity growth is quite weak, and they're
reading that as a reason to be concerned that unit
labor costs could start pushing up, putting upward pressure on
overall costs. And although the moment, businesses are struggling to
(07:35):
pass this on, and the Reserve Bank acknowledges this. They
just think that's sort of an upside pressure on domestic inflation.
And I think our response to that would be firstly
the productivity growth. And you just remember, this is just
GDP divided by ours worked. It's just stuff divided by time.
And the problem is that the stuff divided by time
(07:56):
includes sectors like the mining sector, which don't have much
impact on domestic inflation, but also the non market sector
your health and education and childcare and disability care, where
the price isn't set in a market, and so the
idea that prices are a markup over costs, including labor costs,
(08:17):
is just not relevant. And if you restrict yourself to
the parts of the economy where it's a reasonable assumption
or a reasonable thesis that prices are indeed some kind
of markup over costs and the prices are set in
a market, and this is relevant for domestic inflation, that
bit of productivity is actually doing okay. And this is
(08:38):
something we've been saying for quite some time, but it's
just taking the RBA a while to sort of shift
away from the kind of the thesis that they had,
and then I was saying, well, you know, if productivity
growth doesn't pick up, then wages growth will have to slow.
It's like, well, if productivity growth doesn't pick up, well,
then firms won't accept wage increases as big as they
currently are. So this is sort of self correcting. We're
(09:02):
just a lot less worried about this, and this is
something we've been writing about for a while.
Speaker 1 (09:06):
It's nice to hear some good news on productivity back
to rates. Rates will fall though at some point in
the next few months. Lucy, Yeah, well.
Speaker 2 (09:15):
I mean if you listening to the press conference, I mean,
it really felt like, unless they get an upside surprise
in the Dune Court a CPI, they're going to cut
in August. I mean, you're saying, in the next five weeks,
we're going to see this and we're going to have
another opportunity to review. You know, I think there's a
different We did say we're you know at the time
(09:37):
that we didn't think that a rate cut in July
was a shoe in, and that they were wanted to
be cautious, and you know, in retrospect, I should have
said it's not a shoe in, you know, maybe not
change my call. I think we know we were right
to say, oh, there's there's a risk that they don't go,
and that the market was overpricing it. I am still
surprised that in the end they decided to hold. And
(10:02):
you know, the fact that was six' three SPLIT i
think shows you just how just how finely balanced that.
Speaker 1 (10:07):
Was so what's your call now in terms of rate
cuts for the rest of the.
Speaker 2 (10:11):
Year, well we are still expecting further rate, cuts Probably.
August this is now some chance that they delay. Further
they're obviously just you, know remaining to be, convinced BUT
i think more likely than. Not what we thought would
we thought would Be, august then we Thought july is
now going to Be. August and this is just tactics and.
Timing and then the other point being we had, said,
(10:34):
look we don't think that they're going to back that
up back to back to, back and sure, enough so
that just sort of cements the idea that if they
do cut In, august they're not going to back that
up with one In. September they're going to wait Till.
November so it's sort of like basically their statement On
monetary policy, Meetings so the quarterly meetings are the ones
that are, alive and they're going to wait till they've
(10:56):
got that full sweet information before. Deciding and so assuming
we're right about it now Being august for the next,
cut then you Know November February may THE smp ones
cautious and, predictable with an emphasis on, cautious AND i
think that also emphasizes, that you, know it's now more
likely that what we'd called as being the troph which
(11:19):
was two eighty, five is now more, likely because you,
know the more cautious they, are the more likely it
is that they get to the end of the year and, say,
oh criche actually inflation's undershot what we thought and we
need to do. More and that is the basis for
the two cups that we're expecting next, year is we
just think THE rba is going to get a bit caught.
Out our own forecasts do see trimmed meat inflation coming
(11:43):
into the lower end of the two to three percent target,
range and so you, know we just expect that they
get to the end of the year realized that their
previous forecast of two point. Six as far as the
eye can see wasn't what was going to play, out
and so they end up, saying, oh we have to
do a bit more and that's why we think there
are two more cuts next year as, well so two
(12:03):
this year too next.
Speaker 1 (12:04):
Year, lucy thanks for talking To fear And. Greed thanks very.
Speaker 2 (12:07):
Much shone always approves.
Speaker 1 (12:08):
It There's Lucy, Ellis group Chief economist At. Westpac this
is The fear And Greed Business. Interview join us every
morning for the full episode Of fear And greed business
news you can. Use I'm Chane. Elma enjoy. Yourday
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