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Fear & Greed, Fear and Greed

Inflation has fallen to a two-year low, with an annual rate of 4.1%. So will it be enough to see the Reserve Bank cut interest rates this year?

Gareth Aird, Head of Australian Economics at the Commonwealth Bank, shares his predictions, as well as his take on the performance of the RBA.

Find out more: https://fearandgreed.com.au

See omnystudio.com/listener for privacy information.

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Sean Aylmer: Welcome to the Fear and Greed Business interview. I’m Sean

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Sean Aylmer: Aylmer. It’s been a big week for the Australian economy.

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Sean Aylmer: Yesterday’s CPI data revealed inflation has fallen to a two-

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Sean Aylmer: year low with an annual rate of 4.1%. The December

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Sean Aylmer: quarter increase of 0. 6% was the lowest quarterly increase

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Sean Aylmer: since March 2021 and earlier in the week we learned

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Sean Aylmer: retail sales slumped 2. 7% in December, the sharpest monthly

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Sean Aylmer: drop since the pandemic lockdowns in mid- 2020. Retail sales

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Sean Aylmer: per capita are actually down about 4% year- on- year.

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Sean Aylmer: So what’s it all mean for interest rates, for business,

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Sean Aylmer: for consumers, for the economy more broadly? Gareth Aird is

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Sean Aylmer: the Commonwealth Bank’s head of Australian economics. Gareth, welcome back

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Sean Aylmer: to Fear and Greed. You’re almost a regular Gareth, I’d say.

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Gareth Aird: Good day, Sean. Look, it’s nice to be back. I

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Gareth Aird: haven’t been on for a while, but was on pretty

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Gareth Aird: regular through last year, which was good.

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Sean Aylmer: Well, we appreciate it. Yesterday’s December quarter CPI data, what

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Sean Aylmer: does it tell us?

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Gareth Aird: Well, it was good news. Story it tells us that

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Gareth Aird: inflation has continued to moderate in Australia and the rate

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Gareth Aird: of inflation has actually come down more than most analysts

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Gareth Aird: expected and I think, importantly, from a Reserve Bank perspective,

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Gareth Aird: the rate of inflation has come down more than the

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Gareth Aird: central bank anticipated.
What the data is basically showing is that rate

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Gareth Aird: hikes work, the economic data more broadly has been slowing,

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Gareth Aird: growth in demand has eased. You mention retail sales at

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Gareth Aird: the opening. That’s picking up the fact that the consumer

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Gareth Aird: is slowing and, by extension, it then becomes harder for

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Gareth Aird: businesses to put price rises through. So, some pretty encouraging

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Gareth Aird: data there and I think it’s welcome news really for consumers out there.

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Sean Aylmer: We hear a lot about services versus goods inflation and that’s

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Sean Aylmer: something that we seem to have been a bit focused

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Sean Aylmer: on over the past 6 months. The idea that goods

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Sean Aylmer: inflation has come down as supply chains have opened up.

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Sean Aylmer: Services inflation a little stickier, what happened there?

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Gareth Aird: Well, I think it’s helpful to think back what happened

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Gareth Aird: several years ago when we came out of the pandemic.

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Gareth Aird: That was goods inflation picked up very quickly, but service

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Gareth Aird: inflation lagged. We had some issues with some supply chains

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Gareth Aird: during the pandemic. We also had a lot more demand

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Gareth Aird: than usual for goods because that was basically the consumer

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Gareth Aird: items that we could purchase, whereas we couldn’t do a

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Gareth Aird: lot on the services side. So we had this big

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Gareth Aird: lift in goods inflation. And then, around about 6 to

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Gareth Aird: 9 months later, services inflation started to really pick up.

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Gareth Aird: Then, if we look back at the past year, what

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Gareth Aird: we can see is that goods inflation has come down

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Gareth Aird: more swiftly than services inflation. That’s not just a story

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Gareth Aird: in Australia, that’s a global one, but I think it’s

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Gareth Aird: helpful to just think about the fact that goods inflation

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Gareth Aird: did start lifting earlier and, therefore, it was always going

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Gareth Aird: to come down a little bit more quickly than the services

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Gareth Aird: side of the economy.

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Sean Aylmer: What’s it all mean for interest rates, Gareth?

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Gareth Aird: Well, I think in the very short term, it means

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Gareth Aird: that we’re going to see policy on hold next week

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Gareth Aird: with the Reserve Bank’s first meeting of 2024. Heading into

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Gareth Aird: the data print yesterday, the focus was really on whether

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Gareth Aird: or not we got a CPI which was stronger in

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Gareth Aird: line or weaker than the Reserve Bank had been expecting,

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Gareth Aird: because that would guide analysts in the markets as to

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Gareth Aird: whether or not the RBA would leave the cash rate

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Gareth Aird: on hold or hike. But the fact that we’ve had

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Gareth Aird: quite a miss relative to the RBAs forecast on the

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Gareth Aird: softer side means that the Reserve Bank will leave the

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Gareth Aird: cash rate on hold and we think they’re done in terms

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Gareth Aird: of their tightening cycle.
They’ve put a lot through and they put

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Gareth Aird: a lot through very quickly, and it does take time

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Gareth Aird: for the inflation data to respond to what the RBAs

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Gareth Aird: done, but the central bank will clearly welcome yesterday’s inflation

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Gareth Aird: report. It will enable them to keep the cash rate

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Gareth Aird: on hold. They’ll downwardly revise their inflation forecast as well,

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Gareth Aird: simply for the fact that inflation has come in below

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Gareth Aird: where they expected to see it. I think, as we

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Gareth Aird: go through this year, it’ll just be a matter of

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Gareth Aird: time as to when we’re all debating when the first

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Gareth Aird: cut in the cash rate is actually likely to occur.

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Gareth Aird: We’ve got a call out there we think it’ll be

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Gareth Aird: September. There’s still a fair bit of water to pass

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Gareth Aird: under the bridge before we get there, but we’re pretty

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Gareth Aird: comfortable now with the idea that the next move is

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Gareth Aird: down and it’ll happen in the second half of this year.

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Sean Aylmer: Stay with me, Gareth. We’ll be back in a minute.

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Sean Aylmer: I’m speaking to Gareth Aird, Commonwealth Bank’s head of Australian

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Sean Aylmer: Economics. So a cut potentially in September. A lot of

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Sean Aylmer: water to flow under the bridge, as you said. What

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Sean Aylmer: is it that the Reserve Bank will be… I mean,

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Sean Aylmer: is it inflation that it’s going to be focused on? Does it

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Sean Aylmer: want to get to that 2 to 3% target band

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Sean Aylmer: before it does anything? Is the last percentage point the

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Sean Aylmer: hardest? I’m just wondering what the flow from here is like.

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Gareth Aird: Look, it’s a good question and it’s a broad question. The central

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Gareth Aird: Bank is focused on a lot of things. Their primary

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Gareth Aird: focus is the rate of inflation and getting inflation back

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Gareth Aird: to target, but they know that inflation is a lagging

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Gareth Aird: indicator. The rate of change in inflation is very heavily

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Gareth Aird: influenced by what’s happening in terms of demand growth in

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Gareth Aird: the economy, and then also the labor market. The Reserve

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Gareth Aird: Bank is trying to keep or preserve, as they say,

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Gareth Aird: as many gains in employment as possible as they get

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Gareth Aird: inflation back to target.
What we’ve seen over the backend

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Gareth Aird: of last year is the unemployment rate has been rising,:

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Gareth Aird: hit a cyclical low of just under 3.5% and it’s

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Gareth Aird: now 3. 9%. So, this stage, the RBA would not

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Gareth Aird: be concerned about the lift in unemployment, but I think

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Gareth Aird: as we go through this year with our forecast that

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Gareth Aird: the unemployment rate will continue to rise, there will come

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Gareth Aird: a point where the Reserve Bank puts a little bit

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Gareth Aird: more weight on what’s happening in terms of the uptrend in

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Gareth Aird: the unemployment rate, and then overlays that with what they’re

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Gareth Aird: seeing on the prices side of things.
Our expectation here

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Gareth Aird: is that the central bank will not actually wait for

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Gareth Aird: inflation to get back to target before cutting the cash

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Gareth Aird: rate. Because if they were to do that, they wouldn’t

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Gareth Aird: be cutting the cash rate this year because it’s very

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Gareth Aird: hard to get the annual rate back to 2 to

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Gareth Aird: 3% simply because we’ve got a big 1. 2% quarterly

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Gareth Aird: increase from the September quarter of last year stuck in

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Gareth Aird: the annual calculations.
So we’ll still see inflation above target

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Gareth Aird: as we go through this year, but I think as

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Gareth Aird: we go through the year with the unemployment rate rising,

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Gareth Aird: the Reserve Bank will put more weight on the recent

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Gareth Aird: inflation data. And if they can see a clear disinflationary

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Gareth Aird: trend still apparent in the data, keeping in mind we

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Gareth Aird: got 0.8% on the quarter yesterday, if they then see that

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Gareth Aird: step down to 0. 7%, even with the annual rate still

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Gareth Aird: above 3%, they can look at inflation on a 6

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Gareth Aird: month annualized basis and say, ” It’s pretty much job done.

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Gareth Aird: We don’t want the unemployment rate to rise too much.

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Gareth Aird: We know inflation will respond in time with what we

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Gareth Aird: do on the rates side, so we really should step

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Gareth Aird: in front of it now, take policy away from its

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Gareth Aird: restrictive setting, and that way we can aim for the

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Gareth Aird: soft landing.”

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Sean Aylmer: This year, we’re going to have a bit of a

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Sean Aylmer: different Reserve Bank. We have a new governor, Michele Bullock,

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Sean Aylmer: but we also have a board who are going to

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Sean Aylmer: have to vote and we’re going to find out how

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Sean Aylmer: they voted. We’re going to have a press conference afterwards.

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Sean Aylmer: The bank itself has a brand new chief economist and a

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Sean Aylmer: new deputy governor, all that stuff. Is it going to

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Sean Aylmer: make much of a difference, do you think, to how

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Sean Aylmer: it works?

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Gareth Aird: I think the short answer is no, it shouldn’t in

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Gareth Aird: terms of the decisions. The central bank still has the

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Gareth Aird: inflation target. They still have the objective of full employment.

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Gareth Aird: There has been a focus though in the recent communication

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Gareth Aird: between the government and the central bank in terms of

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Gareth Aird: its charter to stress the midpoint of the target, but

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Gareth Aird: I think that’s more just what you aim for. If

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Gareth Aird: you want to get inflation in the 2 to 3%

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Gareth Aird: band, it makes sense to aim for 2. 5%.
In

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Gareth Aird: terms of the changes that are coming in this year,

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Gareth Aird: they’re not all happening in one go. So we first

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Gareth Aird: get the press conference after the board meeting, on the

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Gareth Aird: day of the board meeting, at 3: 30. So that’ll

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Gareth Aird: happen next week and we’ll get the statement of monetary

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Gareth Aird: policy as well. That’ll be published at the same time

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Gareth Aird: as the decision is announced and we move to the

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Gareth Aird: new schedule of a meeting every 6 weeks from next

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Gareth Aird: week, but we don’t actually get the new monetary policy

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Gareth Aird: board coming in until the second half of this year.

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Gareth Aird: It’ll probably be around July. So we’re going to have

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Gareth Aird: changes taking place at a couple of times throughout the

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Gareth Aird: year.
I think what’ll be more interesting is when we

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Gareth Aird: get the new monetary policy board, because we don’t know

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Gareth Aird: what that’s going to look like at the moment. And

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Gareth Aird: the fact that there’s going to be a published vote

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Gareth Aird: once that board is voting, I think creates a little

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Gareth Aird: bit of interest out there as to how united or

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Gareth Aird: not the board is. I think the governor will straight

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Gareth Aird: away be asked who voted for what and was the

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Gareth Aird: RBA on the majority side of the vote. Because it

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Gareth Aird: is possible that the RBA, so the governor and the

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Gareth Aird: deputy governor, vote actually in the minority, which would create

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Gareth Aird: a pretty interesting dynamic. But I think that’s probably the

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Gareth Aird: more interesting event when the new monetary policy board takes

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Gareth Aird: up its role as opposed to just the change in

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Gareth Aird: the meeting schedule and the press conferences.

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Sean Aylmer: A final question, and perhaps it’s a bit unfair, you

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Sean Aylmer: have been an economist for a while, Gareth, and you’re

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Sean Aylmer: head of Australian economics at Commonwealth Bank, you know the

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Sean Aylmer: Reserve Bank. Do you think it’s done a good job

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Sean Aylmer: in the last 18 months post… and I’m saying post

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Sean Aylmer: the comment by then Governor Phil Lowe that rates wouldn’t

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Sean Aylmer: rise. Once rates started to rise, from that point to

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Sean Aylmer: now, do you think they’ve done a good job?

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Gareth Aird: Look, that’s obviously a subjective question. I think they’ve basically

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Gareth Aird: done what they’ve had to do, which is raise rates

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Gareth Aird: pretty aggressively given they were late to the party. That

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Gareth Aird: always meant they were going to increase rates very quickly.

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Gareth Aird: They’ve done that and the result of those decisions has

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Gareth Aird: resulted in a slow down the economy. Inflation now is

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Gareth Aird: coming down. So their policy decisions have clearly worked to

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Gareth Aird: slow the economy.
They’ve tried to thread the needle here

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Gareth Aird: of keeping the unemployment rate as low as possible while

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Gareth Aird: slowing the economy. And if you look at the data

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Gareth Aird: at the moment, you’d say, ” Things are going to plan.”

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Gareth Aird: The unemployment rate is still very low and the rate

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Gareth Aird: of inflation is coming down. So if they can manage

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Gareth Aird: to time the easing correctly and get the rate- cutting

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Gareth Aird: cycle calibrated correctly, then they should be able to return

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Gareth Aird: inflation to target and keep the unemployment rate relatively low.

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Gareth Aird: I think if that happens, we’d have to say they’ve

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Gareth Aird: done a particularly good job through this cycle.

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Sean Aylmer: Gareth, thank you for talking to Fear and Greed.

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Gareth Aird: Nice to have a chat.

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Sean Aylmer: That’s Gareth Aird, Commonwealth Bank’s head of Australian Economics. This

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Sean Aylmer: is the Fear and Greed Business Interview. Join us every

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Sean Aylmer: morning for the full episode of Fear and Greed, Australia’s

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Sean Aylmer: best business podcast. I’m Sean Aylmer. Enjoy your day.