0:05

Welcome to the Fear and Greed business interview. I'm

0:07

Sean Aylmer. Yesterday afternoon the Reserve

0:09

Bank board left interest rates on hold

0:12

as was widely expected, but the

0:14

Central Bank did revise its inflation

0:16

forecast to 3. 8% up

0:19

significantly from the 3. 3%

0:21

I think it was in its previous

0:23

forecast. My guest today is Westpac's Chief

0:26

Economist Luci Ellis. Luci is in

0:28

a very unique position to comment on what the Reserve

0:30

Bank board might be thinking. Until October

0:32

last year, Luci was Assistant Governor at

0:35

the Reserve Bank. Luci Ellis. Welcome to Fear and Greed.

0:37

Thanks, Sean. It's great to be here.

0:40

So what did you make firstly of

0:42

the outcome and the wording

0:45

of the statement from the Reserve Bank

0:47

board? They weren't overly

0:49

aggressive or overly hawkish in what

0:51

they thought on rates. Did that surprise you?

0:54

It didn't actually. We did expect

0:56

them to become more hawkish

0:58

in their language, and they did. And they talked about

1:00

how they were being vigilant around

1:02

the upside risks. But

1:05

I think they're also mindful that

1:07

in November they reacted

1:09

and took out some insurance to some upside

1:12

risks after the September

1:14

quarter CPI. And then of course the December

1:16

quarter CPI and all the real side

1:18

data in the December quarter turned

1:21

out to be below expectations

1:23

and their February forecasts went

1:25

straight back down and reversed out the forecast

1:28

upgrades. They are expecting

1:30

a bumpy ride, and I think it's important

1:32

that they don't treat every bump as a

1:34

change in trend. It was right that they

1:37

were more hawkish and more vigilant about the

1:39

upside risks, but I think

1:42

making sure that this isn't just yet another

1:44

bump is the appropriate thing to do.

1:46

Now, Michelle Bullock, who obviously

1:49

you worked with closely for many years is

1:51

making it very clear she doesn't want to give an indication

1:54

of whether the next move is up or down, and

1:56

that is her job as the governor of

1:58

the Reserve Bank. We respect that. Luci Ellis,

2:00

you used to be in that sort of role

2:02

now you're in a totally different role, what do you think

2:04

will happen to rates?

2:07

Our central case is that rates are

2:09

on hold. We do think there are upside

2:11

risks. We think there are states of the world in

2:13

which they do end up

2:15

raising rates, but we just don't think that's

2:17

the most likely outcome. We

2:19

look at the configuration of incredibly

2:22

weak consumer spending,

2:24

of a household sector that's been squeezed

2:27

of a labour market that is easing

2:30

although some of the lagging indicators

2:32

like unemployment haven't eased

2:35

as much as some of the leading edge indicators

2:38

such as job ads or vacancies.

2:42

So things are turning

2:44

out broadly as was expected. Inflation

2:47

is coming down, discretionary

2:49

inflation, things like dining out are

2:51

all actually very close to their pre-

2:54

pandemic rates. But there is

2:56

this lingering element of

2:59

indexation of

3:01

insurance and of course the

3:04

outworkings of strong population growth

3:06

and what that's done to housing inflation.

3:08

And all of that will unwind over time but

3:11

I can quite understand that the RBA is

3:13

very alert to the risk that this doesn't

3:15

come down fast enough.

3:17

So your central case is that rates are on hold,

3:19

do you think the next move will be down

3:22

rather than up?

3:23

If things turn out as we expect, so our

3:25

central case will then around

3:28

about November, we expect the RBA

3:30

would have enough comfort to have seen

3:32

enough of a decline in inflation to be

3:35

ready to withdraw some of the

3:37

tight stance of policy. The board

3:39

does assess policy as being tight

3:42

and they'll get to a point

3:44

as inflation starts to approach the target

3:46

range that they no longer

3:48

need to be as tight and they can start withdrawing

3:51

some of the tight stance of policy and come

3:53

back to something a little bit more average

3:56

in terms of the level of interest rates and

3:58

no longer be constraining the economy.

4:01

But we just don't think they have enough

4:03

comfort with the current trajectory,

4:05

particularly in light of the upside

4:08

surprise in March quarter. So

4:10

we just think they're going to wait for more

4:12

information. If inflation

4:14

does keep coming down as they would like, then

4:18

they'll be in a position that they can start cutting rates.

4:20

And we recently pushed out our assessment

4:22

of when that was likely to November

4:25

from September.

4:26

Stay with me Luci. We'll be back in a minute. I am

4:36

speaking to Luci Ellis Group Chief Economist

4:38

at Westpac. Luci,

4:40

you've been inside the bank and to most

4:42

people out there the bank is just this big

4:44

black box or gray box actually

4:48

at the top of Martin Place there. As

4:50

you talk, you sound like a true market economist,

4:52

but I mean all these discussions that the

4:55

market economists have here, presumably

4:57

they're all taking place inside the

5:00

bank. Is the debate much

5:02

different inside the bank to

5:04

outside the bank?

5:06

Well, I think we're all looking at mostly the same data.

5:09

There are some differences in the sense that, for

5:12

example, the Reserve Bank has its liaison

5:14

program so it's talking

5:16

to firms in a somewhat different way. I mean,

5:18

obviously we are a bank, we have a lot

5:20

of customers. We talk to those customers as

5:22

well and we do glean insights

5:25

in an increasingly systematic way from

5:27

our customers. But we don't have over 20

5:30

years of a liaison

5:32

program in the same way. But

5:34

by and large, we have the same data sets.

5:37

There are some things that the public sector has access

5:39

to, like single touch payroll

5:41

and some of the micro data that the private

5:43

sector doesn't have access to but all the macro

5:45

data, we are looking at it in

5:48

very similar ways. Where there

5:50

has been a bit of an evolution has been

5:52

in the outworkings from the RBA

5:54

review, some of the recommendations

5:56

there were things like that they

5:58

now needed to be more explicit about

6:00

their assessment of where the economy was relative

6:03

to full employment and where the economy

6:05

was relative to potential output.

6:07

And what that's doing is

6:10

making the RBA staff put

6:12

their models more front and center. I

6:15

think they have quite sensibly made

6:17

it clear that no one model is perfect,

6:20

that you need to use judgment. But

6:22

what I am seeing is a bit more of

6:24

a shift of the way the RBA is conveying

6:27

its analysis to being a little bit more

6:29

model driven and a little bit more like

6:31

some of the other advanced economy

6:33

central banks where you have much more of an academic

6:35

flavour.

6:37

And what about Michelle Bullock her job, not

6:39

so much as an economist I suppose, but

6:41

as a representative of the bank, particularly

6:43

because she's now to giving press

6:45

conferences with which none of her predecessors

6:48

ever had to do, how do you think she's

6:51

evolving into that role?

6:53

I would just point out that for

6:55

many, many years, the RBA had

6:58

been rolling out

7:00

its senior staff to give speeches

7:02

where you had live Q& A that was recorded

7:05

and transcribed afterwards. And so

7:07

in many respects, that was a substitute for

7:09

media conferences. And one

7:11

thing you might've noticed is there's actually been a lot fewer

7:13

speeches outside of the policy

7:16

decision. Now, part of that's because

7:18

obviously my successor is new,

7:20

the deputy governor's new, everyone's still

7:23

settling in, so you haven't seen

7:26

a lot of the other senior staff giving

7:28

that many speeches. I mean, the assistant

7:31

governor of financial markets gave a speech that

7:33

was very straight down the line

7:35

about their new operating model

7:37

in how they're going to manage

7:39

the level of reserves. You had the assistant

7:41

governor of financial system talk

7:44

about SME finance, but you've had

7:46

very little communication outside

7:48

of those media conferences and parliamentary

7:51

appearances and the

7:54

policy round about monetary

7:56

policy and their assessment of the economy. And so

7:58

there's been a trade- off between

8:01

the kind of discussions about the economic

8:03

outlook that used to happen and

8:07

what's now happening. So we're

8:09

getting the media conferences, but we are getting

8:11

fewer speeches and we're not getting

8:13

speeches with Q& A after them.

8:16

And so it does appear to have

8:18

been a bit of a trade- off, at least in the short term, while

8:20

the other senior staff settle in. I

8:22

think the people who were clamouring for a media

8:25

conference may need to have been a

8:27

bit more careful about what they wished for because

8:29

there already was a lot of that opportunity

8:32

to communicate and to communicate

8:34

off the cuff. So in that sense, Michelle

8:37

and all of the other senior staff have had plenty

8:40

of practice going up before Parliament,

8:42

going up in media Q&A, this is

8:45

just a much more scrutinised

8:47

event. I will say the way the

8:50

RBA is communicating now

8:52

has definitely improved.

8:55

Some of the things they did on the SMP

8:58

made it much more accessible. And they're all things that people

9:00

would've liked to have done before, but sometimes

9:03

you have to be told to do it by someone

9:06

external, that's just the way the public

9:08

sector works. And I

9:10

think it does really validate at

9:12

least one of the recommendations

9:14

out of the RBA review, which was to resource

9:17

their communications function differently and

9:19

communicate differently. And I think that

9:22

recommendation has been heard and

9:24

responded to.

9:25

Now, Luci, I think I'm

9:28

right in saying you started at the bank in 1991.

9:30

In fact, I think I'm right in saying I started as a graduate

9:32

on the same day you started as a graduate at the

9:34

Reserve Bank.

9:35

That is correct. And you had the desk

9:37

next to mine.

9:37

Indeed.

9:38

Yeah. Well, that

9:41

was something that I would not have forecast.

9:42

No. Nor

9:45

I. Do you miss it? I mean, I'm sure you're

9:47

loving working at Westpac no doubt, but do

9:49

you miss the bank given it was such a major

9:51

part of your life for such a long time?

9:53

Look, I think you get to a point in your life

9:55

that it's time for a change and the right

9:57

role came up at the right moment for

9:59

me. So look, I'll be honest,

10:02

six months in, I am really

10:04

enjoying it. I couldn't be happier having

10:06

moved. I think it was the right thing to

10:08

do, and I think

10:11

it's provided an opportunity

10:13

to join the dots in a different

10:15

way. I think I was always very

10:18

mindful having spent quite a bit of time in the financial

10:20

stability side about the

10:23

need to see the system as a whole

10:25

and connect everything together. And

10:27

it's nice to be able to talk about monetary and fiscal

10:29

policy together instead of just

10:31

about one of them and pretend that the other one is

10:33

something that you don't even comment

10:35

on much.

10:36

Yeah. Luci, thank you very much for talking

10:38

to Fear and Greed.

10:40

You're very welcome. Thanks, Sean.

10:42

That was Luci Ellis Group Chief Economist

10:44

at Westpac. This is the Fear and Greed

10:46

business interview. Join us every morning for the

10:48

full episode of Fear and Greed, Australia's best business

10:51

podcast. I'm Sean Aylmer. Enjoy

10:53

your day.