Q+A: Is the economy too strong for an interest rate cut?

We've had a lot of data coming out recently. The Westpac–Melbourne Institute Consumer Sentiment Index surged 12.8%. The NAB business conditions measure also rose. CBA boss Matt Comyn has come out and said that the Australian economy remains resilient.

With all this in mind, is the economy too strong to hope for interest rate cuts next year? 

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Episode Transcript

Speaker 1 (00:05):
Welcome to Fear and Greed Q and A, where we
ask and answer questions about business, investing, economics, politics and more.
I'm Michael Thompson, and good morning Sean Ayle.

Speaker 2 (00:14):
Good morning Michael.

Speaker 1 (00:15):
Sean. Today, if we have to pick one of those
categories for this episode to fall into, it falls squarely
into the economics category.

Speaker 2 (00:23):
That's good.

Speaker 1 (00:23):
It's good news. It's very good news because this is
your area of expertise, which maybe setting you up a
little bit here, isn't it. But we've had a lot
of data coming out recently. We talked yesterday and over
the last couple of days as well, we've had kind
of the West Back Melbourne Institute readings coming through talking
about consumer confidence. We had the National Australian Bank Business

(00:45):
Conditions Measure, we had the household spending from Wealth Bank
that we were talking about in today's episode. The question
is is the economy too strong to hope for interest
rate cuts next year?

Speaker 2 (01:02):
HM? So if I was Shane Oliver or the wonderful
Dynamssena who's part of our show, they'd say, well, we
think there's going to be another one next year. If
I was Warren Hogan, I would say Nope, not a chance.
So there is no definitive answer to that. What really
took I took note of was Matt Common, the boss

(01:24):
of Commonwealth Bank this week. Commonwealth Bank has all this
credit card data, debit card data, lots of home loans,
lots of deposits. They kind of know what's going on
in the household sector. For Matt Common to come out
and say that the Australian economy remains resilient, economic growth
is recovering, disposable income is rising for many households, that

(01:48):
is significant. He's only going to say that if he's
convinced and the Commonwealth Bank's economists are convinced that things
are picking up somewhat, So that is really promising. Now
you mentioned that consumer sentiment reading, was it one hundred
and three point eight? It means more optimist and pessimous,
you know out just part COVID best in seven years.

(02:12):
That is a rogue reading, but still still it might
suggest that we are happier.

Speaker 1 (02:19):
Then it may not be as high necessarily as that,
but certainly it would be kind of heading in that
direction by the sound of it.

Speaker 2 (02:25):
Yeah, yes, I don't know the answer to that, Like
I'm fudging that totally the National Australia Bank Sentiment and
Business Conditions Index. What was really interesting in that is
that there's capacity constraints in the economy. Now, you have
capacity constraints in the economy when things are going okay
and you can't produce more stuff. Now. The offshoot to that,
of course is inflation, which comes back to your question

(02:48):
about interest rates next year. If we're getting inflation, we
are not going to get interest rate cuts Reserve Bank.
You know, is inflation is front and center for the
Reserve Bank. And if the data from National Australia, from Westpac,
from what Matt Common says is true, then we're not
getting any more rate cuts. I think the difference that

(03:08):
we've seen this week is this data is so much
stronger than it's been previously. There's been hints of it,
but it is still much stronger.

Speaker 1 (03:18):
And while you do have kind of those outlies that
big jump right, there does seem to be some consistency
and that there is positivity right that you look at
them as a whole rather than individual things, and that
they do seem to be telling a fairly consistent story.

Speaker 2 (03:35):
Yes, I think what's interesting is this is what Jim
Chalmers argues that the growth in the economy is shifting
from the public sector to the private sector. So it's
not the government that is propping up the economy. I don't.

(03:55):
They're not adding to growth, but there is still a
lot of help from much higher wages. And I mean
there's a record number of bureaucrats. You did a story
last week that you know, the states have almost two
million people employed. The feeds are just under it's about
three undred and eighty thousand or thereabouts. So the governments
are still propping up to some extent. But when you

(04:15):
shift the driver of growth to the private sector, that
is when you really find out whether the economy is
going okay or not.

Speaker 1 (04:27):
Okay, I want to look at it just quickly from
two different perspectives. Okay, the perspective of yours and mine,
I'm guessing are actually probably quite closely aligned. No, homeowners, okay,
and what they make of this and the potential end
for rate cuts, but small business owners as well, what

(04:47):
do they make of this data of the improvement in
kind of consumer confidence a bit more kind of household spending,
et cetera. Should they be looking to good times ahead?
Kind of heading into Christmas or is really the only
way to know that. However it plays out over the
next month.

Speaker 2 (05:07):
They shouldn't be looking for worse times over the next
few months. And if you're a retailer, like the Black
Monday sales going to be all black Friday, Cyber Monday.
There you go, combine them into one. Yeah, that's the
great weekend, The great weekend all important, the run up
to Christmas all important. That's not just retailers, but hospitality
those sorts of groups as well. And it actually looks

(05:30):
okay for them, Like the outlook does look kind of okay.
We've had a few surveys out notwithstanding administrations are still
at very high levels and liquidations at very high levels,
but it just does look a bit better. It's for
the more business next, the Reserve Bank has said that
it's liaison a program with the small business sector. Suggests

(05:52):
the worst is over for that. Take the homeowner side
of the equation. We all want lower interest rates, right,
but we've had three cuts already. Most people, the majority,
are still paying the higher rate of interest if the
economy picks up. Also, if your house is suddenly worth
you know, after a year up nine percent for the year.

(06:13):
The wealth effect, the wealth the wealth effect, that's it
that kicks in big time. So I don't mind if
my house is going to keep appreciating and I'm still
paying more because I've never changed my repayments from that
same here, I don't mind, you know, like I'm not
hanging for lower interest rates. I suppose the other thing.

(06:34):
And this is what many economists have been predicting for
a long time. We had the Global Financial Crisis, right,
we ended up having interest rates during COVID, But you
know that whole period in the run up between the
GFC and COVID falling, staying low, ultra low in COVID.
Now we are kind of back to more normal. And
so whatever the interest rate is now, I mean the

(06:55):
cash rates three point six percent, let's say you're paying
five points something for your homelan normal. What we were
playing before wasn't normal. So people should really get used
to this type of interest.

Speaker 1 (07:07):
Rate, okay, Which then essentially means the pressure on the
question that we asked that we started with, is the
economy too strong basically to hope for interest rate cuts
next year? It might happen, it might not happen, and
it just can't bank on it.

Speaker 2 (07:25):
Yeah, you certainly can't bank on it. The Reserve Bank
has talked about what they call the neutral of inflation,
and up until probably that last meeting that they had,
last board meeting, they said that interest rates aren't detracting
from growth. They've sort of changed their mind and that
they're saying, well, maybe they're about neutral. And if they're
in neutral, that's where the Reserve Bank wants to be. Yeah,
you know, four and a half percent unemployment's great, inflation

(07:46):
underneath three percent interest rates where they are, I think
the bank could be quite happy with that.

Speaker 1 (07:51):
Okay, all right, thanks very much, Sean.

Speaker 2 (07:53):
Thanks Michael.

Speaker 1 (07:53):
If you've got a question that you'd like us to
dig into, then send it through on LinkedIn, Instagram, Facebook,
or at fear and green ac com dot au. I'm
Michael Thompson and this Fear and Greed Q and A