Grappling with the same kind of things that the US is.
Are they not? And know the point being that employment
remains strong. They can see a little drop off in adds
and vacancies, but not materially huge. What do they do?
Is it, as Phil was just saying last week, that perhaps after this current
environment we live in, that the lags now for monetary policy to work are just
much, much longer? Or is it deeper than that?
Well, I think Australia is in a little bit of a different situation to the US,
wages growth in Australia is much lower. Now we've only just started to see wages
growth running above 3 per cent annual pace, whereas in the US wages growth is
running at 6 percent on some measures. So Australia doesn't have the same
issues as the US in that inflation story.
And we think inflation will come down quite significantly next year.
Not to the RBA two to three per cent target band, but well below its current
level of over 7 per cent on a headline basis.
So I think that is the reason they didn't
do anything. Give you a sense how basic things play
into this as well and how they've been accounted for.
Well, of course, the basic facts are important for the inflation story
because we have to take into account all the monthly change in the CPI.
But even if we look at all the broad pressures on inflation, liquids prices
are coming down. In Australia, we've had impacts from the
floors that are increasing fresh food that made vegetable prices.
All of those things have now turned around.
All those Covid supply chain issues globally have improved significantly.
Transport costs are back down to the pre Covid levels.
Commodity prices are well down on that takes earlier this year.
Rental growth is still contributing to inflation, but all the housing
indicators are pointing down. So I think rental rental prices will
start to take off in the next few months, and that's at least what some of
the leading rental pricing disease is telling us.
So the story is really around wages growth.
How high will wages growth become? Will we see some wage price spiral
emerging in Australia? I think the answer is no.
So I think the RBA can be comfortable knowing that they've done quite a lot in
a very short space of time. Still, the RBA has not done some say
another twenty five in February and another twenty five by October next
year. What are you anticipating?
What does it need to do? Well, we are actually expecting that
today's rate hike will be the last in this cycle.
But I just read the statement and they did make a comment, that same comment
that they've made, recent statements that we look to increase interest rates
further over the period ahead. I was actually anticipating them to to
soften that commentary, to potentially say that they would take a pause in
early next year. So maybe we could see another one or two
interest rate hikes in early 2023. But I find it really difficult to see
Australia managing a cash rate above three and a half percent because of the
impact to households. All those interest payments, Australian
households hold a very large level of debt, about one hundred and ninety
percent of our income. And we are much more sensitive to
interest rate changes because of the way our housing market works with variable
interest rates or very short term fixed rates.
So Australian households are much more leverage and we're much more sensitive
to interest rate changes. I think it will be difficult for the RBA
to raise rates above three and a half percent.
From here on, our list goes to Japan, right?
Or recession to get inflation down. I just don't.
That's necessary. Given the high level of debt, as you
mentioned, and given expectations of further rate increases, might that put a
dampener on the RBA ISE growth projection of one and a half percent
next year? I think with this low costs, assuming
that the cash rate moves in line with market dictations, which made the cash
rate above three and a half percent, I would say I want a half percent growth
looks optimistic. We're having growth running in about 1
1/2 percent by the end of next year. But that's on the assumption that the
cash rate pretty much stops at its current level and potentially even goes
down the second half of next year. So if the RBA keeps hiking rates, then
we're going to see sub 1 percent growth here in Australia, most likely.
I want to get a sense of, you know, I think you guys are anticipating a fall
of house prices between 15 and 20 percent top to bottom in the September
quarter next year. Now the point being that that that is
something that the RBA would be happy with given given that it is the wealth
effect, which it does support a lot of spending there in Australia, and that
can take the sheen of growth even further.
I think the obvious costs for home prices would probably be quite similar
to ours. They published some of the higher price
forecasts and models before, and I think that the current environment would be in
line with their own full cost of 15 20 percent decline.
Look, that will have a big negative impact, household wealth, as you said.
But on the one hand, the RBA probably wants to see some weakening in the
housing market, one to take some exuberance out of the housing market,
which was a big driver of high prices here in Australia for the past two
years. 2.
It wants to see lower risky lending. So lending to high debt to income
households or households, that is generally considered a riskier
investment. Maybe some investors as well.
So there's a sweet spot here. The RBA wants to see some downward
pressure on consumer spending, but not too much where you would want to
generate a serious growth down to.