00:00So, you know, hawkish hold, I guess, is the expectation. But what is the RBA waiting for here?
00:06Because it's a difficult situation where you've got the big fall in property prices.
00:11How that's going to feed through to broader sentiment gauges is obviously the big worry.
00:15But inflation has been pretty sticky for a while now.
00:20Well, good morning, Hardy. Thanks for having me on.
00:23Look, we're expecting a hold today. And as you say, I think you've correctly characterized it a hawkish hold.
00:30And the key catalyst for that is inflation.
00:32And I think, most importantly, the June quarter inflation report that we got a couple of weeks ago.
00:40And digging a little bit deeper into that report, I think there were some encouraging signs there.
00:44I mean, you're right to highlight, and I think the RBA will highlight today again, that inflation is too high.
00:50But it is moving in the right direction.
00:52So if we're looking at the RBA's favored trim mean measure of inflation,
00:56in that June quarter report, we saw a third consecutive quarterly deceleration in inflation.
01:03And if not for the oil price spike related to the Middle East,
01:06inflation in trim mean terms would have annualized in the June quarter,
01:09pretty close to the top of the RBA's 2% to 3% target band.
01:12So I think it's good news there, consecutive downside surprises vis-à-vis the RBA's forecasts.
01:19And I think compositionally, they would be encouraged, even if they don't say it so explicitly today,
01:25that some of the pass-through that we feared from the oil price shock hasn't come through
01:29in quite as pronounced ways as we were really worried about.
01:32So we're not out of the woods by any stretch.
01:35But I think that that inflation print was really the catalyst.
01:38Now, especially as it's happening against the backdrop, as you say,
01:42of this sizeable adjustment in the housing market,
01:44and I would say also in the labour market,
01:46where we're starting to see the unemployment rate increase,
01:49underemployment rate increase,
01:50both those things are happening a little bit faster than the RBA is expecting.
01:55And so I think that can make them feel comfortable
01:58that the disinflationary pulse we've seen is a sustainable one going forward.
02:03So we think the RBA is probably, the door is probably closed to further rate hikes this cycle,
02:09but that they'll sound quite hawkish and cautious, I would say,
02:13and that they'll deliver a hawkish hold later on today.
02:16Yeah, let's talk a bit more about the property market,
02:18because clearly the tightening cycle plus the tax changes have been pretty potent.
02:23Do you expect further downside, particularly when it comes to places like Melbourne and Sydney?
02:28Absolutely, we do.
02:28Our base case hasn't changed since May,
02:32and that is that prices at the national level will fall by 5% to early next year.
02:38I think the downside risks to that base case have increased,
02:43and that certainly in Sydney and Melbourne we'll see much larger adjustments lower.
02:49And that that is an important part of the puzzle,
02:51because as you said earlier, inflation has been sticky in some sub-components,
02:55but if house prices continue to adjust in that way,
02:58I think it's likely to cap the upside risk to, say, house construction costs,
03:04which is the largest sub-component of the inflation basket.
03:08And I think this is really an important piece of the puzzle for the RBA
03:11as they try and engineer a soft landing and bring inflation sustainably back to target.
03:16You know, I don't want to draw too close comparisons
03:19between China's property market and Australia.
03:21Obviously there's lots of structural differences,
03:23but the one thing that was very evident
03:25was how closely tied household sentiment, retail sentiment, consumer sentiment
03:29is to household wealth, which is obviously held in property.
03:34Is that largely also the case here, and do you worry about that pass-through?
03:38It is a very important channel of monetary policy.
03:42Higher interest rates, lower house prices, negative wealth effect,
03:45slower consumption growth,
03:47and that's exactly what we're expecting to see more evidently
03:50over the second half of this year.
03:51And so on the base case, our base case, that house prices fall,
03:55peak to trough around 5%,
03:57we think that'll take roughly 90 base or 100 base points or so
04:02off consumer spending growth,
04:04which is currently tracking year-on-year rate of around 2.5%.
04:07We think it'll roughly halve over the back half of the year,
04:10and that falling house prices is an important piece of that puzzle.
04:14I think where I'd sort of caution about being too negative on this
04:19is just that from a financial stability point of view,
04:22I think Australia's in a fairly robust position,
04:26courtesy of 10 years of macroprudential policy,
04:29responsible lending rules,
04:30the Royal Commission in the banking sector,
04:32which has, I think, built resilience into the financial system,
04:36created buffers on household balance sheets,
04:38and should allow the Australian economy
04:41to sustain quite a sizeable adjustment in house prices
04:44without it sort of presenting
04:46sort of a disorderly adjustment to the broader economy.
04:49We're having this conversation on Census Day,
04:52Census Night, of course,
04:53and it sort of makes you ask a lot of questions
04:56about how well Australians are doing economically,
05:00financially, compared to, you know,
05:01maybe when the last census was done, right?
05:03You see a lot of the political campaigning
05:05around how poorly Australians are doing.
05:09Do you think things are actually that bad
05:10if you kind of look under the hood?
05:12Well, if you take the consumer sentiment surveys at face value,
05:16then people are pretty down in the dumps.
05:20That said, we've found empirically
05:23there's not actually a very strong correlation,
05:26recently at least,
05:27between those soft consumer sentiment surveys
05:31and actual consumption,
05:33which has been quite resilient.
05:35I think you're right to highlight, you know,
05:36some households are certainly under pressure
05:39and at a micro level,
05:40this tightening cycle will make life very difficult
05:43for some households
05:44and particularly the period of, you know,
05:47high inflation,
05:47which is particularly damaging
05:49for those on lower incomes.
05:51But overall, let's take a step back.
05:53The economy is growing.
05:55Let's take a step back.
05:56The unemployment rate has a four handle on it,
05:58which is historically low.
06:00And so I'd caution against sort of the doomsday scenarios
06:03on, you know,
06:05just the Australian consumer and the broader economy.
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