Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. Yesterday the Reserve Bank cut the official cash rate by twenty five basis points, saying inflation has fallen substantially from its peak in twenty twenty two as higher interest rates have worked to take the steam out of the economy. It was widely tipped, with all four big banks quickly passing on the rate cut to customers, but there's still plenty of uncertainty over the economic outlook. Luke Yeaman is the chief economist at Commonwealth Bank. Luke, welcome to Fear and Greed.

Welcome to the Fear and Greed Business Interview. I'm Sean Aylmer. Yesterday the Reserve Bank cut the official cash rate by twenty five basis points, saying inflation has fallen substantially from its peak in twenty twenty two as higher interest rates have worked to take the steam out of the economy. It was widely tipped, with all four big banks quickly passing on the rate cut to customers, but there's still plenty of uncertainty over the economic outlook. Luke Yeaman is the chief economist at Commonwealth Bank. Luke, welcome to Fear and Greed.

Thanks Sean. It's great to be here.

Thanks Sean. It's great to be here.

The decision was expected. What about the commentary in the statement from the Reserve Bank as well as Michelle Bullock in her press conference. What were there any surprises in that? What do you think the Bank's thinking.

The decision was expected. What about the commentary in the statement from the Reserve Bank as well as Michelle Bullock in her press conference. What were there any surprises in that? What do you think the Bank's thinking.

Yeah, I don't think there are any major surprises. As you said, the interest rate cut was widely tipped by us and many other economists and market commentators. I think there was an important changing tone in the Reserve Bank comentry and then the press conference from the governor, and I think fundamentally what's changed is the Reserve Bank until now has taken a very cautious approach. They've been wanting to see inflation come down, they've wanted to see the hard data showing that that's occurring, and they've been at pains to point out the upside risks to the outlook. I think that changed yesterday. I think the Reserve Bank now has acknowledged that the risks to inflation much more balanced. They've become less concerned about the upside risks. They've been talking for a while about sticky services inflation, things like rents and insurance. They're less worried about that now having seen some of the hard data come in. They've been talking about the strength of the labor market. They're still mentioning that, but I think it was less of an emphasis for the governor in a press conference, and they're now talking much more about the downside risks to inflation. They've seen their forecast downgraded for GDP growth, particularly for household consumption, where we're seeing a bit of softness, and clearly the global situation is starting to weigh on their thinking. And this was the first time, importantly that the governor has openly said that those global factors will be deflationary, not inflationary. So when you put all that together, I think there's been a substantial shift in tire and much more worried about the downside risks than the upside risks and adopting a well balanced approach.

Yeah, I don't think there are any major surprises. As you said, the interest rate cut was widely tipped by us and many other economists and market commentators. I think there was an important changing tone in the Reserve Bank comentry and then the press conference from the governor, and I think fundamentally what's changed is the Reserve Bank until now has taken a very cautious approach. They've been wanting to see inflation come down, they've wanted to see the hard data showing that that's occurring, and they've been at pains to point out the upside risks to the outlook. I think that changed yesterday. I think the Reserve Bank now has acknowledged that the risks to inflation much more balanced. They've become less concerned about the upside risks. They've been talking for a while about sticky services inflation, things like rents and insurance. They're less worried about that now having seen some of the hard data come in. They've been talking about the strength of the labor market. They're still mentioning that, but I think it was less of an emphasis for the governor in a press conference, and they're now talking much more about the downside risks to inflation. They've seen their forecast downgraded for GDP growth, particularly for household consumption, where we're seeing a bit of softness, and clearly the global situation is starting to weigh on their thinking. And this was the first time, importantly that the governor has openly said that those global factors will be deflationary, not inflationary. So when you put all that together, I think there's been a substantial shift in tire and much more worried about the downside risks than the upside risks and adopting a well balanced approach.

So that certainly gave it leeway to cut interest rates yesterday, and I know Michelle Belk also talked about the fact that they had discussed a fifty basis point cut. She said that as per usual, that's what you'd expect. I'm not quite so sure whether she's whether that's right or not. What do you think it points towards in coming months? Will there be another rate cut to you think so?

So that certainly gave it leeway to cut interest rates yesterday, and I know Michelle Belk also talked about the fact that they had discussed a fifty basis point cut. She said that as per usual, that's what you'd expect. I'm not quite so sure whether she's whether that's right or not. What do you think it points towards in coming months? Will there be another rate cut to you think so?

With inflation now, the trim mean inflation, which is the most closely watched measure the RBO tracks, is now back in the target band two point nine percent annually and even lower if you look at the six month annualized rate, and the RBA downgraded slightly their forecast for the trim mean. They now expect trim mean inflation to run at two point six percent annually from around the middle of this year and to stay there over the whole forecast horizon. And that was with an underlying assumption. It was an assumption, not a forecast, but an underlying assumption of a cash rate going to three point two percent. So I think that does mean that there is room to continue normalizing the cash rate over the course of the next few months and the rest of this year. We'd previously been expecting two further rate cuts, taking the cash rate down to about three point three five percent. We still think that's the level I'll cut too, but we have brought forward slightly our expectation of when that will occur. So we previously thought we'd see one rate cut in August and another one in November, following each of the major quarterly CPI releases. We now think there's a case to move a little more quickly towards neutral. So we're now expecting a rate cut in August and September, and I think there is a risk that it could even come a little earlier than that.

With inflation now, the trim mean inflation, which is the most closely watched measure the RBO tracks, is now back in the target band two point nine percent annually and even lower if you look at the six month annualized rate, and the RBA downgraded slightly their forecast for the trim mean. They now expect trim mean inflation to run at two point six percent annually from around the middle of this year and to stay there over the whole forecast horizon. And that was with an underlying assumption. It was an assumption, not a forecast, but an underlying assumption of a cash rate going to three point two percent. So I think that does mean that there is room to continue normalizing the cash rate over the course of the next few months and the rest of this year. We'd previously been expecting two further rate cuts, taking the cash rate down to about three point three five percent. We still think that's the level I'll cut too, but we have brought forward slightly our expectation of when that will occur. So we previously thought we'd see one rate cut in August and another one in November, following each of the major quarterly CPI releases. We now think there's a case to move a little more quickly towards neutral. So we're now expecting a rate cut in August and September, and I think there is a risk that it could even come a little earlier than that.

You talk about normalizing in neutral, what is neutral for the cash rate?

You talk about normalizing in neutral, what is neutral for the cash rate?

Look, it's a very difficult debate to know exactly where the neutral rate is. As I said, the Governor mentioned that three point two cash rate was in their forecasts consistent with inflation in the middle of the band and unemployment remaining relatively low, so that gives us some guide to their thinking. Something around that three and a quarter range might be neutral. We've done some analysis in the team over recent months looking at some of the RBA models, and when you look at the average of the different technical models they use to assess neutral, we came out with the number somewhere around two point nine. So I think something around three to three and a quarter percent would be broadly neutral. And the Governor has said that today's cut creates a less expansionary position for the RBA, but that it's still contractionary. So I think there is still a bit more room to go before they move towards the neutral rate.

Look, it's a very difficult debate to know exactly where the neutral rate is. As I said, the Governor mentioned that three point two cash rate was in their forecasts consistent with inflation in the middle of the band and unemployment remaining relatively low, so that gives us some guide to their thinking. Something around that three and a quarter range might be neutral. We've done some analysis in the team over recent months looking at some of the RBA models, and when you look at the average of the different technical models they use to assess neutral, we came out with the number somewhere around two point nine. So I think something around three to three and a quarter percent would be broadly neutral. And the Governor has said that today's cut creates a less expansionary position for the RBA, but that it's still contractionary. So I think there is still a bit more room to go before they move towards the neutral rate.

Okay, say with me, Luke. We'll be back in a minute. My guest this morning is CBA Chief Economist Luke Gayman. Luke. Before the break, we talked about what the reserve banks thinking, or we think they're thinking, and how many more interest rate cuts there might be. What's that for a notice? Commonwealth Bank, along with the other major lenders, we're very quick to say we're going to reduce mortgage rates by twenty five basis points. It seems that the transmission mechanism from when the reserve bank does the thing to when it hits me seems to be pretty quick at the moment. I know that academic economists they could take eighteen months or so. But just talk us through that. Do you think that there's shifting rates because it happens so quickly now it will affect us sooner or not?

Okay, say with me, Luke. We'll be back in a minute. My guest this morning is CBA Chief Economist Luke Gayman. Luke. Before the break, we talked about what the reserve banks thinking, or we think they're thinking, and how many more interest rate cuts there might be. What's that for a notice? Commonwealth Bank, along with the other major lenders, we're very quick to say we're going to reduce mortgage rates by twenty five basis points. It seems that the transmission mechanism from when the reserve bank does the thing to when it hits me seems to be pretty quick at the moment. I know that academic economists they could take eighteen months or so. But just talk us through that. Do you think that there's shifting rates because it happens so quickly now it will affect us sooner or not?

It's just say the standard models. There's a big debate in economics circles about how long these transmission channels take to work through. I think typically something in the twelve to eighteen months is what the economic models would tell you takes for a cutting interist rate to flow through to actual demand on the ground. As you say, the actual pass through in terms of what people see in their bank account is a lot quicker than that. There's I think a few different effects that you're working with you. On the one hand, the cut in rates provides an immediate boost to sentiment, So if you're looking at making a big purchase, you're thinking about your family finance, is a cut to the rate gives you an immediate confidence boost. So I think we will continue to see consumer confidence numbers step up as we as people become more confident. The Reserve Bank has moved into an interst rate cutting cycle. That will help you some of those cost of living pressures, but it does then take time for a household to actually see that flow through into their finances and start to make decisions to adjust their savings and spending behavior. And I think one of the key question marks that we've been grappling with at CBA is how consumers will respond as instratets do come down. Will they continue to save more of the income that they've been putting away recently and that headroom gets put into savings or doers to go into spending. And so far, what we've seen over the course of this year is a relatively soft recovery in household consumption and so a rate cut will certainly help on that front, but we are seeing still some caution in that consumer sector and people are a little reluctant to go back out and spend in a big way. So far, that's a key watch point for this year.

It's just say the standard models. There's a big debate in economics circles about how long these transmission channels take to work through. I think typically something in the twelve to eighteen months is what the economic models would tell you takes for a cutting interist rate to flow through to actual demand on the ground. As you say, the actual pass through in terms of what people see in their bank account is a lot quicker than that. There's I think a few different effects that you're working with you. On the one hand, the cut in rates provides an immediate boost to sentiment, So if you're looking at making a big purchase, you're thinking about your family finance, is a cut to the rate gives you an immediate confidence boost. So I think we will continue to see consumer confidence numbers step up as we as people become more confident. The Reserve Bank has moved into an interst rate cutting cycle. That will help you some of those cost of living pressures, but it does then take time for a household to actually see that flow through into their finances and start to make decisions to adjust their savings and spending behavior. And I think one of the key question marks that we've been grappling with at CBA is how consumers will respond as instratets do come down. Will they continue to save more of the income that they've been putting away recently and that headroom gets put into savings or doers to go into spending. And so far, what we've seen over the course of this year is a relatively soft recovery in household consumption and so a rate cut will certainly help on that front, but we are seeing still some caution in that consumer sector and people are a little reluctant to go back out and spend in a big way. So far, that's a key watch point for this year.

Yeah, Michelle Well talked about the fact that household spending was reasonably cautious given that real wages are now rising again. Is that unusual?

Yeah, Michelle Well talked about the fact that household spending was reasonably cautious given that real wages are now rising again. Is that unusual?

Look, it's not entirely unusual when you come out of a period of economic pain that we've seen recently. Of the course of the last year, households have been hit with higher inflation, higher interest rates, various international shocks playing into the confidence of households. So it's not entirely surprising that people are taking a fairly cautious approach and wanting to see their finances improve before they spend in a bigger way. We did see a step up in the December quarter last year. We saw quite a bit of spending come through the official statistics and our own internal spending data that we track, and so there was a question, then, is that the start off a bigger and stronger recovery. I think in essence most of that was related to some big sales events and some big one off events that led households to loosen the purse strings a little more. But we haven't seen that carry through. We haven't seen that momentum carry through into the first quarter of this year, and that suggests there is still a level of caution playing into the consumer decision making process. Luke.

Look, it's not entirely unusual when you come out of a period of economic pain that we've seen recently. Of the course of the last year, households have been hit with higher inflation, higher interest rates, various international shocks playing into the confidence of households. So it's not entirely surprising that people are taking a fairly cautious approach and wanting to see their finances improve before they spend in a bigger way. We did see a step up in the December quarter last year. We saw quite a bit of spending come through the official statistics and our own internal spending data that we track, and so there was a question, then, is that the start off a bigger and stronger recovery. I think in essence most of that was related to some big sales events and some big one off events that led households to loosen the purse strings a little more. But we haven't seen that carry through. We haven't seen that momentum carry through into the first quarter of this year, and that suggests there is still a level of caution playing into the consumer decision making process. Luke.

Putting all this together, how is the Australian economy of performing at the moment.

Putting all this together, how is the Australian economy of performing at the moment.

Overall, the Australian economy is very well placed, and there wasn't quite a sense of declaring victories today from the Governor, but there was a sense of vindication that having taken a fairly cautious approach to cutting rates, we've now got a situation where core inflation is sitting back inside the RBA's target band. We're seeing growth step up steadily, not in a very strong way because of that caution in the consumer sector, but we're seeing growth kick up quite steadily, and we still have unemployment at historically low levels. For Australia to hold an unemployment rate and the low fours after all of the shocks that we've seen over the past year's actually quite a remarkable outcome. So when you look at that altogether, I think the Istraani economy is well placed. But we heard the word uncertainty a very large number of times in the government press conference yesterday, and that is really the key thing going forward is what are those global factors mean for Australia and how do they play out from here?

Overall, the Australian economy is very well placed, and there wasn't quite a sense of declaring victories today from the Governor, but there was a sense of vindication that having taken a fairly cautious approach to cutting rates, we've now got a situation where core inflation is sitting back inside the RBA's target band. We're seeing growth step up steadily, not in a very strong way because of that caution in the consumer sector, but we're seeing growth kick up quite steadily, and we still have unemployment at historically low levels. For Australia to hold an unemployment rate and the low fours after all of the shocks that we've seen over the past year's actually quite a remarkable outcome. So when you look at that altogether, I think the Istraani economy is well placed. But we heard the word uncertainty a very large number of times in the government press conference yesterday, and that is really the key thing going forward is what are those global factors mean for Australia and how do they play out from here?

I mean, now I'm asking you the impossible question, but what do they mean? What does the tariff will mean? And what I suppose it's about how people respond to them tariffs as much as the tariffs themselves. How do you think it flows from here overall?

I mean, now I'm asking you the impossible question, but what do they mean? What does the tariff will mean? And what I suppose it's about how people respond to them tariffs as much as the tariffs themselves. How do you think it flows from here overall?

Overall, I think Australia, compared to many other countries, is quite well placed. So in that sense we have we're insulated to an extent from these shocks. We don't have large direct trade links into the US, and so the Governor talked quite a lot about the uncertainty effects. So while we don't know exactly where the final tariff and trade war will land and what the final tariff rates will be globally, what we do know is there's a lot of uncertainty in the system today. And if you're trying to make a big decision as a business to invest or, you're trying to make a decision as an employer to hire or consume, it to spend, all of this uncertainty does hold back activity, and the Governor was highlighting that point in her comments that uncertainty itself is quite a constraint on growth. So that's the first thing to watch for, and I think that will play into weaker growth overall, both overseas and to an extent here in Australia. The actual final landing point for this trade war is still very uncertain, and you have had some positive developments the de escalation by the US and China, where we saw tariff's ramping up very quickly up to one hundred and twenty five and one hundred and fifty percent. The fact that there's been a coming together between the US and China to help bring those tariff rates back down takes off the table some of the really more severe downside snows that we could have seen. But it's very clear we're going to still see some pretty big shocks in the global economy over the course of the next few months. That's going to hit US growth, It's going to affect China and flow through to Australia. But as I said, we think fundamentally Australia is quite well placed to ride out this storm.

Overall, I think Australia, compared to many other countries, is quite well placed. So in that sense we have we're insulated to an extent from these shocks. We don't have large direct trade links into the US, and so the Governor talked quite a lot about the uncertainty effects. So while we don't know exactly where the final tariff and trade war will land and what the final tariff rates will be globally, what we do know is there's a lot of uncertainty in the system today. And if you're trying to make a big decision as a business to invest or, you're trying to make a decision as an employer to hire or consume, it to spend, all of this uncertainty does hold back activity, and the Governor was highlighting that point in her comments that uncertainty itself is quite a constraint on growth. So that's the first thing to watch for, and I think that will play into weaker growth overall, both overseas and to an extent here in Australia. The actual final landing point for this trade war is still very uncertain, and you have had some positive developments the de escalation by the US and China, where we saw tariff's ramping up very quickly up to one hundred and twenty five and one hundred and fifty percent. The fact that there's been a coming together between the US and China to help bring those tariff rates back down takes off the table some of the really more severe downside snows that we could have seen. But it's very clear we're going to still see some pretty big shocks in the global economy over the course of the next few months. That's going to hit US growth, It's going to affect China and flow through to Australia. But as I said, we think fundamentally Australia is quite well placed to ride out this storm.

Quite the time to take up the job as cheap of economist, as of Australia's biggest bank, luth like, how long you've been in the job for I.

Quite the time to take up the job as cheap of economist, as of Australia's biggest bank, luth like, how long you've been in the job for I.

Think I've come up to three months now, all three months.

Think I've come up to three months now, all three months.

You may as well take it on when things are happening.

You may as well take it on when things are happening.

It's good to be where the action is. It's always important to be having interesting thing is to look at. That's for sure.

It's good to be where the action is. It's always important to be having interesting thing is to look at. That's for sure.

That's for sure. Luke, thank you for joining Fear and Greed.

That's for sure. Luke, thank you for joining Fear and Greed.

Pleasure to be here.

Pleasure to be here.

Thanks. That was Luke Yaman, chief economist at Commonwealth Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed, daily business news for people make their own decisions. I'm Sean A. Elmer. Enjoy your day.

Thanks. That was Luke Yaman, chief economist at Commonwealth Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed, daily business news for people make their own decisions. I'm Sean A. Elmer. Enjoy your day.