Episode Transcript
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Speaker 1 (00:06):
Welcome to Fear and Greed Q and A where we
ask and answer questions about business, investing, economics, politics and more.
I'm Natalie McDonald and today the RBA has cut interest rates,
but how much further will they go? Belinda Allen is
a senior economist at Commonwealth Bank. Belinda, Welcome to Fear and.
Speaker 2 (00:24):
Greed Q and A Hi Nadlie, Great debay.
Speaker 1 (00:27):
He Now, first things first, I'd love to know were
there any surprises for you out of the Reserve Bank
announcement yesterday?
Speaker 2 (00:34):
Certainly not on the cash right move. All economists, markets
are fully priced to expect that cash right cut in August.
Probably where the big surprise was was in the forecast
were refresh and there was a word that kept coming
up in the questions the Governor got asked yesterday, and
that was all around productivity. The Reserve Bank lowered its
(00:54):
productivity growth forecasts, which means potential growth in Australia of
the next couple years now looks a little bit softer.
But that's like a different topic. In terms of the
cash rate, no surprise.
Speaker 1 (01:06):
But what we did have last time was a real
shock from the RBA by keeping rates on hold since then,
of course we've seen inflation for the June course to
come in soft than expected, an uptick in unemployment. It
begs the question did the Reserve Bank get it wrong
at the last meeting or would you agree with comments
that came through from the RBA governor that it was
(01:27):
appropriate timing.
Speaker 2 (01:30):
Look, it was five weeks ago, and I think what
we've seen over that five week period is confirmation from
the data that the economy is evolving. How the RBA
expected five weeks probably doesn't mean too much in terms
of the impact of the lower cash rate on the economy.
It probably did impact sentiment and maybe led households and
(01:52):
businesses maybe to question how many more interest rate cuts
were going to get. But in hindsight, seeing the confidence
the LBA now has in the inflation outlook really shows
us that we'll get more rate cuts in the Australian economy.
Speaker 1 (02:09):
Just on that, just to jump to the question of
the date, how many more rate cuts are you pricing
in at the moment and when are you anticipating them?
Speaker 2 (02:18):
We have one more rate cut in our base case
scenario here at Commewealth's Bank. We do expect the Reserve
Bank to cut the cash right again in November. The
clear risk lies with an additional rate cut in twenty
twenty six. Although when we look at our forecast versus
the Reserve forecast, we are a little bit more optimistic
(02:40):
on the economic recovery here in Australian. I think we
can see a scenario where the Australian economy improves a
little bit faster, trimmed mean remains at the midpoint of
the Reserve Banks tiger bands, so they don't need to
go as low. Certainly. I can also see a scenario
where maybe the labor market deteriorates a little bit more
and the LBA does have to go a little bit
(03:02):
steeper into an easing cycle next year.
Speaker 1 (03:05):
And that does speak to some of the really interesting
commentary that came out where with in terms of where
Australia sets versus some of our international pairs and the
idea that rates don't necessarily need to go as low
because we didn't go as high in the first place.
But there was some sort of pointed commentary towards the
Federal Reserve. What was your take on that.
Speaker 2 (03:25):
I mean, it's a very different situation here in Australia
versus what's happening in the US. Obviously a lot of
question marks in the US about the independence of the
US Federal Reserve, about how many more interra straight cuts
will happen in the US versus here, and obviously the
influencer President Trump is trying to have on the US
(03:46):
Federal Reserve. We have a very different system here in Australia.
I think we can all agree, particularly after that on
whole decision in July, that we have a very independent
central bank and that can only be a really positive thing,
I think for policy make here in Australia.
Speaker 1 (04:01):
So if we look at the economic calendar as it
stands today, we have wages data tomorrow, we've got the
labor force figures. What are you expecting? I think Matik
is that markets are really going to be looking for
this idea of will it reaffirm the irba's rate call
or is there going to be some of a source
of regret perhaps.
Speaker 2 (04:21):
Well maybe not a source of regret, but maybe an
earlier rate cut. I think that's now what we in
the market are looking for is what could change that
quarterly cadence that the Reserve Bank has had so far
in terms of cutting the cash rate in twenty twenty five.
We know the Reserve Bank wants to look at the
quarterly CPI. We next get that at the end of October,
(04:43):
which means November is the most likely outcome for that
next rate cut. But as you said, we get some
really important data today and tomorrow, and I think in
particular that unemployment rate will be crucial. So we expect
the unemployment rate to stay part at four er point
three percent. If you see that continue to drift to
(05:03):
the upside, then you can certainly talk about, as I
said an earlier right Cup, potentially at that late September
board meeting, so that will be the focus. I think
looking at their data is just how the late market's
holding up after what has been two pretty soft reports.
Speaker 1 (05:21):
Blinda, you mentioned earlier the comments around productivity really being
kind of that surprise. Of course, we are looking to
the roundtable to the Productivity Commission. The Reserve Bank governor
wouldn't be drawn on what her comments will be there,
But there's also this real line that there is only
so much the Reserve Bank can do and that that
(05:42):
idea of productivity really sits with government. Do you have
an idea or understanding of what models or policies could
be put in place to promote that.
Speaker 2 (05:53):
It's interesting the Governor said she was going to be
there to set the scene, so certainly talk about the
macroeconomic landscape, and that has certainly been one that's been
a little bit softer the last couple of years in
terms of what we could see in terms of the
productivity summit. I certainly hope there's a lot of discussions
around what could generate improvements in business investment. We know
(06:17):
that's been one area lacking in the Australian economy of late.
Whether or not that's being driven by lack of consument
demand in the Australian economy, I think that's a big factor,
a lack of dynamism. And then also what are the
hurdles for businesses to invest at the moment? Is it
red tape, is it the taxation background. I think it's
(06:38):
unpacking all of those elements that could really see business
investment grow and working together to try to make that
as seamless as possible to drive business investment forward. So
I think I'm hoping that we certainly come to some
sort of consensus on what needs to be done to
(06:58):
unlock that as well as framing it in what we
know a government will probably want to ensure that any changes,
particularly around taxes, a budget neutral, if not budget positive,
So I think that's a framework we also need to
look at.
Speaker 1 (07:13):
And Blinda, just quickly wanting to get your take in
terms of what this interest rate cut means for the
housing market. Are we going to see it supercharge in
terms of prices as we head into a spring selling season.
Speaker 2 (07:26):
Perhaps, Look, it's a modest cutting cycle, so when we
look at our models on how to force us home
prices around one hundred basis point easing cycle should generate
around a ten percent increase in home prices, So that's
what we're working off. So far, we're looking like we're
(07:48):
on track for that. So we see around a six
percent lift in home prices this year, four percent next year.
It's been a pretty modest recovery to date. We haven't
seen a real acceleration in home price growth. We do
expect that to continue. There are still some challenges, of
course around housing affordability that could put a headwind on
(08:11):
expected price moves in the housing market, but we certainly
have seen the housing market respond to lower interest rates.
It's a momentum market. Of course it's going to respond
to interest rates, but at this point it looks like
it's been as expected in terms of the home price
recovery as interest rates do come down.
Speaker 1 (08:29):
Belinda, appreciate your insights today. Thank you so much for
talking to Fear and Greed.
Speaker 2 (08:33):
Great. Thank you.
Speaker 1 (08:35):
That was Blinda Allen, senior economist at Commonwealth Bank. If
you've got something you'd like to know, then send through
your question on LinkedIn, Instagram, Facebook or at fearinngreed dot
com dot au. I'm Natalie matcdonald and this is Fear
and Greed Q and a