Welcome to the Fear and Greed Business Interview. I'm Sean Almam. Yesterday the Reserve Bank Board left interest rates on hohold as expected, but the bank is starting to sound a little more positive about the inflation outlook. We've spoken many times to economist Warren Hogan, who has one of the best track records on predicting rates. He was the only economist to predict a year out the official cash rate would hit four point thirty five percent. Also one of the first to say that if there was an interest rate cut coming, it wouldn't happen this year. Warren, You've been proven correct. Warren, of course, is Managing director of equ Economics and Economic Advisor at Judo Bank. Welcome back to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Almam. Yesterday the Reserve Bank Board left interest rates on hohold as expected, but the bank is starting to sound a little more positive about the inflation outlook. We've spoken many times to economist Warren Hogan, who has one of the best track records on predicting rates. He was the only economist to predict a year out the official cash rate would hit four point thirty five percent. Also one of the first to say that if there was an interest rate cut coming, it wouldn't happen this year. Warren, You've been proven correct. Warren, of course, is Managing director of equ Economics and Economic Advisor at Judo Bank. Welcome back to Fear and Greed.

Thanks for having me on the show, Sean, it's a great pleasure.

Thanks for having me on the show, Sean, it's a great pleasure.

What do you make of the Reserve Bank Board meeting? Yes, so this statement afterwards and Michelle Bullock's comments.

What do you make of the Reserve Bank Board meeting? Yes, so this statement afterwards and Michelle Bullock's comments.

Yeah, I think it was a really important and really smart way of playing this from the RBA board. So obviously no rate and no consideration of it. We know that they're not even thinking about it. But after six months of hanging a raid hike over the heads of the Australian people and the Australian economy. They have pulled back, and it's for good reason. They are essentially trying to jawbone their way through this inflation problem, i e. The narrow path by not taking rates to the sort of levels they might have in the past or what other central banks have done overseas. Jaw Boning is a critical part of this. But the politics is tricky, not just in terms of Canberra and an upcoming election, but the broader community. You know, they don't like raid hikes. They want to see a raid cut. So with a long summer break coming and this is the biggest break we've ever seen for the RBA board were not getting back together for about nine or ten weeks, and with all the sort of political stuff we're going to see over the summer, they just thought we're going to pull back. You know, we're going to pull a rhetoric back, We're going to park the jaw boning. And I think that's really smart because the reality is is that with such a big brain, the whole thing could change. It may not, but they will deal with what's the economy doing. Early in twenty twenty five when they next sit down. And of course we've got some important stuff coming over the summer, and that is this new Interest Rate Committee that has now been legislated, and of course the appointment of new members by the government. They don't want to poke the bear, they don't want to upset the government any more than they have to, and so I think this is a smart move. But as the Governor said in the press conference, this doesn't tell us anything about what's going to happen next.

Yeah, I think it was a really important and really smart way of playing this from the RBA board. So obviously no rate and no consideration of it. We know that they're not even thinking about it. But after six months of hanging a raid hike over the heads of the Australian people and the Australian economy. They have pulled back, and it's for good reason. They are essentially trying to jawbone their way through this inflation problem, i e. The narrow path by not taking rates to the sort of levels they might have in the past or what other central banks have done overseas. Jaw Boning is a critical part of this. But the politics is tricky, not just in terms of Canberra and an upcoming election, but the broader community. You know, they don't like raid hikes. They want to see a raid cut. So with a long summer break coming and this is the biggest break we've ever seen for the RBA board were not getting back together for about nine or ten weeks, and with all the sort of political stuff we're going to see over the summer, they just thought we're going to pull back. You know, we're going to pull a rhetoric back, We're going to park the jaw boning. And I think that's really smart because the reality is is that with such a big brain, the whole thing could change. It may not, but they will deal with what's the economy doing. Early in twenty twenty five when they next sit down. And of course we've got some important stuff coming over the summer, and that is this new Interest Rate Committee that has now been legislated, and of course the appointment of new members by the government. They don't want to poke the bear, they don't want to upset the government any more than they have to, and so I think this is a smart move. But as the Governor said in the press conference, this doesn't tell us anything about what's going to happen next.

What will happen next?

What will happen next?

Do you reckon? I wish I knew.

Do you reckon? I wish I knew.

Michelle Book would like you to know too.

Michelle Book would like you to know too.

Yeah, she would late to know, so that'd make it for a lot better sleep at night. Loop. I mean, I can I can see how this can play out. You know, we are making progress the last quarterly CPI stripping out all the noise and all the stuff, and the government is looking a bit better, but there's a long way to go and before we can be comfortable. But the economy soft so we could be there and we could start to see rate cuts in the middle of the next year. I really don't see one happening in well, certainly not February, and something really significant would have to shift. What's worried me the whole time, and what is the basis is of a lot of my work is we've finished the nominal tightening. It's eighteen months. It takes to work through. We've had one rate hike in the last eight ten months, all at four hundred and twenty five basis points of tightening we saw which all of us thought was going to knock this economy off its perch. We've absorbed it and it's exiting the system. Now. It's all about the real interest rate, the RBA cash rate minus inflation, and that's not very high. It's less than one percent. The RBA cash rates not much higher than core inflation, and history shows it probably needs to be higher. People will argue it doesn't, and there's all these different views on it. My view, given that I think the world's changed since the pandemic, demographics, a whole bunch of stuff. What scares me what I think is going to be the basic is a one percent real interest rate going to get inflation down and keep it there? And I just don't think it will. I hope I'm wrong. We just don't know. So we just got to see if we start to see the consumer business spend more. As we are head into twenty five, it's not great news. We really do need to keep demanding the economy software for a little bit longer to ensure inflation gets all the way down. So we just wait and see. I fear that the opportunity to take out some insurance this year against an economy that takes off again, it was missed, and the political environment made it very hard for them to take out that insurance. It was very costly insurance. And I just hope for all of our sakes that we don't see an economy that really starts to pick up pace through twenty twenty five and inflation where the next year starts to pick up again, because then we could be looking at lots of rad hikes in the recession. And I just hope that doesn't happen. It's not the core of view, but it's a risk.

Yeah, she would late to know, so that'd make it for a lot better sleep at night. Loop. I mean, I can I can see how this can play out. You know, we are making progress the last quarterly CPI stripping out all the noise and all the stuff, and the government is looking a bit better, but there's a long way to go and before we can be comfortable. But the economy soft so we could be there and we could start to see rate cuts in the middle of the next year. I really don't see one happening in well, certainly not February, and something really significant would have to shift. What's worried me the whole time, and what is the basis is of a lot of my work is we've finished the nominal tightening. It's eighteen months. It takes to work through. We've had one rate hike in the last eight ten months, all at four hundred and twenty five basis points of tightening we saw which all of us thought was going to knock this economy off its perch. We've absorbed it and it's exiting the system. Now. It's all about the real interest rate, the RBA cash rate minus inflation, and that's not very high. It's less than one percent. The RBA cash rates not much higher than core inflation, and history shows it probably needs to be higher. People will argue it doesn't, and there's all these different views on it. My view, given that I think the world's changed since the pandemic, demographics, a whole bunch of stuff. What scares me what I think is going to be the basic is a one percent real interest rate going to get inflation down and keep it there? And I just don't think it will. I hope I'm wrong. We just don't know. So we just got to see if we start to see the consumer business spend more. As we are head into twenty five, it's not great news. We really do need to keep demanding the economy software for a little bit longer to ensure inflation gets all the way down. So we just wait and see. I fear that the opportunity to take out some insurance this year against an economy that takes off again, it was missed, and the political environment made it very hard for them to take out that insurance. It was very costly insurance. And I just hope for all of our sakes that we don't see an economy that really starts to pick up pace through twenty twenty five and inflation where the next year starts to pick up again, because then we could be looking at lots of rad hikes in the recession. And I just hope that doesn't happen. It's not the core of view, but it's a risk.

On that basis. If you're talking about really interest rates need to be higher than one percent, even if we get inflation to three percent, let's say one percent plus four point three five percent. Anyway, is it the fact that means since the GFC we've had ultra low interest rates. Is this our new normal low. Should we just not well, should we stop talking about the need to cut rates plenty of times and say, yeah, maybe we do need to cut it once or twice, but this is life going forward.

On that basis. If you're talking about really interest rates need to be higher than one percent, even if we get inflation to three percent, let's say one percent plus four point three five percent. Anyway, is it the fact that means since the GFC we've had ultra low interest rates. Is this our new normal low. Should we just not well, should we stop talking about the need to cut rates plenty of times and say, yeah, maybe we do need to cut it once or twice, but this is life going forward.

Yeah, And that's the point. That's what I've been trying to get across to the community or the people I speak to in business, is that whether we cut rates or not or whatever, this is the new normal. It was an unusual period between the GFC and COVID. We're not in that world anymore. And the cash rates probably going to average somewhere between three and a half and four and a half for the next ten years. So in the current environment, given the narrow path, I mean, not only is it not clear that they actually can cut rates at all, but if they do, it's probably only one or two times. And that's actually increasingly becoming the view of economists and forecasters that you see in the surveys. So I think that's a really important point, and it speaks to the biggest issue that is sitting here for monitory policy, and that is where we came from, the real stress out there. And the thing that's really an issue is that a lot of people took on really big mortgages, smart people, doctors, lawyers.

Yeah, And that's the point. That's what I've been trying to get across to the community or the people I speak to in business, is that whether we cut rates or not or whatever, this is the new normal. It was an unusual period between the GFC and COVID. We're not in that world anymore. And the cash rates probably going to average somewhere between three and a half and four and a half for the next ten years. So in the current environment, given the narrow path, I mean, not only is it not clear that they actually can cut rates at all, but if they do, it's probably only one or two times. And that's actually increasingly becoming the view of economists and forecasters that you see in the surveys. So I think that's a really important point, and it speaks to the biggest issue that is sitting here for monitory policy, and that is where we came from, the real stress out there. And the thing that's really an issue is that a lot of people took on really big mortgages, smart people, doctors, lawyers.

Bankers, podcasters, Warren podcastcasters. Yes, and you're talking my story here.

Bankers, podcasters, Warren podcastcasters. Yes, and you're talking my story here.

Go on. Well, we did it when rates were really low, and we did it with a bit of comfort from what the governor said back then about keeping them low for a while. And the fact is we probably you know, the question is should we have taken rates out low? And of course the massive move up and rates, the nominal tightening, is what shifted the game for so many people. And we want to go back to where we were, but we just aren't. And you know, if you can't finance some mortgage at this rate, then you've got to seriously look at it, because I don't think you're going to in any structural, longer term sense, get a much lower mortgage rate. And there is still a risk that they could have to go higher, maybe not in the short term, but in twenty six or twenty seven. Who knows if the cash rate has to go to five and a half percent. It did in the United States, it did in New Zealand, and that's another percentage point, and that really is a significant further shift for many people.

Go on. Well, we did it when rates were really low, and we did it with a bit of comfort from what the governor said back then about keeping them low for a while. And the fact is we probably you know, the question is should we have taken rates out low? And of course the massive move up and rates, the nominal tightening, is what shifted the game for so many people. And we want to go back to where we were, but we just aren't. And you know, if you can't finance some mortgage at this rate, then you've got to seriously look at it, because I don't think you're going to in any structural, longer term sense, get a much lower mortgage rate. And there is still a risk that they could have to go higher, maybe not in the short term, but in twenty six or twenty seven. Who knows if the cash rate has to go to five and a half percent. It did in the United States, it did in New Zealand, and that's another percentage point, and that really is a significant further shift for many people.

Stay with me. We'll be back in a minute. I'm talking to Warren Hogan, Managing director of EQ Economics and economic advisor at Judo Bank. What about the economic cycle? You mentioned that earlier on well, two things. I want to talk about, the economic cycle and the changes to the Reserve Bank that are coming next year. The bank has always since you know in McFarland fill Low, they've always spoken about, you know, if they don't cut rates, or they do cut rates in economic cycle, that's being political, if they're not just following their judgment. Do you think that's the case.

Stay with me. We'll be back in a minute. I'm talking to Warren Hogan, Managing director of EQ Economics and economic advisor at Judo Bank. What about the economic cycle? You mentioned that earlier on well, two things. I want to talk about, the economic cycle and the changes to the Reserve Bank that are coming next year. The bank has always since you know in McFarland fill Low, they've always spoken about, you know, if they don't cut rates, or they do cut rates in economic cycle, that's being political, if they're not just following their judgment. Do you think that's the case.

Yeah, Look, I've always thought, particularly when it comes to an election campaign, that that's not the right way that the government goes into caretaking the RB should I mean, I was there when Glenn Stevens hiked in the two thousand and seven election campaign, and I'd been saying for a long time myself saw less tho who I worked with, that they should be going, that they could have gone earlier. The fact that they didn't go and they left it to that point was their fault. But if they waited another month until after the election, was that going to change anything. They're the ones who probably should have done it earlier and left themselves in that position so I've had a strong view that once you get into a campaign there shouldn't be any But in the moment we're talking about political pressure about movements in rates, and not just a hike, but also the need for a cut six months out. So I think this is the problem that the politicization of monetary policy started with Howard in the ninety six election, with the debt buses and all that stuff. That coalition government utilized the sort of the fear of debt, and then of course that's when mortgage debt really took off in this country, the changes in banking, and it's just got worse and worse, and it's now at this I hope crescendo a hat peak, because you know, there's people who frame this election has been rate cut, you'll win, rate hike, you'll lose. No change this minority government. I mean, it's not that simple. But it's gettingerous. It's getting dangerous for our politics, and it's getting dangerous for the RBA, and I think it's not a good development at all.

Yeah, Look, I've always thought, particularly when it comes to an election campaign, that that's not the right way that the government goes into caretaking the RB should I mean, I was there when Glenn Stevens hiked in the two thousand and seven election campaign, and I'd been saying for a long time myself saw less tho who I worked with, that they should be going, that they could have gone earlier. The fact that they didn't go and they left it to that point was their fault. But if they waited another month until after the election, was that going to change anything. They're the ones who probably should have done it earlier and left themselves in that position so I've had a strong view that once you get into a campaign there shouldn't be any But in the moment we're talking about political pressure about movements in rates, and not just a hike, but also the need for a cut six months out. So I think this is the problem that the politicization of monetary policy started with Howard in the ninety six election, with the debt buses and all that stuff. That coalition government utilized the sort of the fear of debt, and then of course that's when mortgage debt really took off in this country, the changes in banking, and it's just got worse and worse, and it's now at this I hope crescendo a hat peak, because you know, there's people who frame this election has been rate cut, you'll win, rate hike, you'll lose. No change this minority government. I mean, it's not that simple. But it's gettingerous. It's getting dangerous for our politics, and it's getting dangerous for the RBA, and I think it's not a good development at all.

Okay, what about the new interest rates setting board? Do you think that will have made much of a difference next year?

Okay, what about the new interest rates setting board? Do you think that will have made much of a difference next year?

No, I don't. I mean the muscle behind monetary policy remains the RBA. And for all the criticisms, justified or otherwise, this is an institution that contains some of the most dedicated, smartest people in our nation and economists. Definitely, and that's the muscle I mean, is the treasurer like the marketing is sort of saying, oh, well, we've passed the legislation with the help of the Greens, they're going to stack the board and cut rates in April. I mean, the treasure is not going to do that, and the RBA board isn't going to do that. The kind of people. I mean, people have opinions, but look, you come in as an individual and no matter how smart you are or what information you got, and try and carry the day across the board and that muscle that is the RBA. That's not the right view. It's not going to work. So I don't think our monetary policy is going to change, and I don't think the treasure is going to do anything silly with the appointments.

No, I don't. I mean the muscle behind monetary policy remains the RBA. And for all the criticisms, justified or otherwise, this is an institution that contains some of the most dedicated, smartest people in our nation and economists. Definitely, and that's the muscle I mean, is the treasurer like the marketing is sort of saying, oh, well, we've passed the legislation with the help of the Greens, they're going to stack the board and cut rates in April. I mean, the treasure is not going to do that, and the RBA board isn't going to do that. The kind of people. I mean, people have opinions, but look, you come in as an individual and no matter how smart you are or what information you got, and try and carry the day across the board and that muscle that is the RBA. That's not the right view. It's not going to work. So I don't think our monetary policy is going to change, and I don't think the treasure is going to do anything silly with the appointments.

Okay, last line then Warren this time twelve months, what are interests? So it's going to be.

Okay, last line then Warren this time twelve months, what are interests? So it's going to be.

Like I actually think the safest bet is four point three five. I think there's a slightly bigger chance that they'll be higher than materially lower, but it's marginal, and so I'm going to completely cop out and say they're going to be exactly where they are, and that could well be some record for how long rates have stowed where they are.

Like I actually think the safest bet is four point three five. I think there's a slightly bigger chance that they'll be higher than materially lower, but it's marginal, and so I'm going to completely cop out and say they're going to be exactly where they are, and that could well be some record for how long rates have stowed where they are.

Yeah, I don' think that's a cop out because most people would come and say that they'll be lower. So I think that's actually going out on a bit of a branch on that one.

Yeah, I don' think that's a cop out because most people would come and say that they'll be lower. So I think that's actually going out on a bit of a branch on that one.

Yeah, well there may be some cuts. That is that is the easy view to have. I just don't think moniture policy is restrictive anymore, and I don't think this level of interest rates is extraordinary. I think it's the new norm.

Yeah, well there may be some cuts. That is that is the easy view to have. I just don't think moniture policy is restrictive anymore, and I don't think this level of interest rates is extraordinary. I think it's the new norm.

Warren, thank you for talking to Fear and Greed.

Warren, thank you for talking to Fear and Greed.

Thanks John.

Thanks John.

That was Warren Hogan, Managing director of EQ Economics and Economic Advisor at Judo Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed. Daily businesses for people who make their own decisions. I'm shanielma Enjoy your day.

That was Warren Hogan, Managing director of EQ Economics and Economic Advisor at Judo Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed. Daily businesses for people who make their own decisions. I'm shanielma Enjoy your day.