Alan Kohler on why the RBA is ‘high fiving’

Sam Hawley: When the Reserve Bank board members meet for the first time this year, they might be patting each other on the back. Inflation has come right down to a two-year low, meaning they won't need to raise interest rates again. Today, ABC TV's finance expert, Alan Kohler, explains what needs to happen now for rates to start falling and he gives us his prediction on when that might happen. I'm Sam Hawley on Gadigal land in Sydney. This is ABC News Daily.

Sam Hawley: Alan, RBA meetings, it would be really good, wouldn't it, if we could just ignore them like we used to, like in the good old days when rates were really low and they just stayed there, but now we sort of focus on them a lot.

Alan Kohler: Well, that's right. We do focus on them. Well, you know, interest rates have put up pretty rapidly since the pandemic and that's made things very difficult for a lot of households.

Sam Hawley: Sure has. I mean, they went up, what was it, 13 times in 15 months, something like that?

Alan Kohler: That's right.

Sam Hawley: Yeah, a lot. Okay. We do expect now, though, don't we, that they're going to stay on hold for a little while. Does that, Alan, mean that the RBA board is a happy bunch of people?

Alan Kohler: Oh, they're happy. They're very happy. In fact, I think they'd be high-fiving. Because they've managed to control inflation without a recession and that's very rare. You know, they're not the only ones in the world who have done that, but they've done it anyway. I mean, inflation isn't yet back below their target range of 2 per cent to 3 per cent, but, you know, it's clearly well on the way and, you know, there's not a general recession. So, yeah, they're very happy.

Sam Hawley: Well, the inflation figure's at 4.1 per cent. That's a pretty big drop from where it was, isn't it?

Alan Kohler: Well, that's right. It was close to 8 per cent and a year ago 5.4 per cent. So, look, I think it's clear that inflation is well down and I think the Reserve Bank itself is forecasting that inflation will keep coming down and will get inside their target range of 2 per cent to 3 per cent in the middle of next year.

Sam Hawley: Okay. So a bit later in this discussion we're going to come to your prediction about when rates will actually start going in the other direction, which is what we really all want to know. But before we go there, let's have a look at this Reserve Bank meeting because it's going to be a bit different this time in the sense that the Reserve Bank Governor, Michele Bullock, is now required to actually speak to us through a press conference after the decision is made and that's also what happens in the US, right?

Alan Kohler:It is. And the other two changes are that there's going to be a reduction in the number of meetings per year from 11 to eight and the meetings will be two days or at least a day and a half. So they get together on Monday afternoon. They get a bunch of presentations from the staff about what's going on in the economy. They get to sleep on it overnight and then start again at 9 o'clock the next morning and presumably ask questions, spend the morning cogitating and questioning and then decide. So the decision will be announced at the normal time of 2.30pm and then there'll be a press conference with Michelle Bullock at 3.30pm, an hour after the statement. So that is what happens in the US. It's happened for many, many years and they also have the same number of meetings and they are also two days in the US.

Sam Hawley: Is that a better system, do you think, that the Reserve Bank Governor, the Governor, stand up and say, this is why we're doing this and we get a better explanation, do we?

Alan Kohler: We do and I think it's a much better system obviously and the Governor subjects herself to questioning from journalists in the room. I mean it can be a bit confusing. Like on Thursday morning the Federal Reserve in the US had a meeting and they put out a statement and then the Chairman, Jerome Powell, as usual, had his press conference...

Jerome Powell, Chairman, US Federal Reserve: Good afternoon. The economy has made good progress toward our dual mandate objectives.

Alan Kohler: What he said at the press conference was a bit different to what was in the statement or at least the tone of it was. They started talking in the statement about when they're going to start reducing interest rates and that was quite a significant change. But in the press conference, Jerome Powell was asked directly, "What about March? Will the first cut be in March?" And he said, oh, no, no. Based on the meeting today,

Jerome Powell, Chairman, US Federal Reserve: I would tell you that I don't think it's likely...

Alan Kohler: There was a bit of confusion out of that. So I do think that Michele Bullock is going to have to watch it, you know, that she holds the line. Otherwise everyone gets too confused.

Sam Hawley: While we're just talking about the US, then, we've been diverted somewhat. We will come back to interest rates here. But what is happening in the US, Alan? How is it looking, I suppose?

Alan Kohler: Well, the thing is it's very similar in some ways. I mean, the Federal Reserve would be high-fiving. They've managed to get inflation down to well below what it was without a recession. And, in fact, the US economy is incredibly strong. Employment data came out on Saturday morning, our time for January, and it was almost 400,000 jobs, which is double what the market had expected. So there, you know, things are going tremendously well in the US economy.

Sam Hawley: All right. Well, Alan, let's return then to that question of when interest rates will start to fall, which everyone is hoping will be sooner rather than later, of course. You've outlined three things that have to happen before rates go down. One is inflation's coming down, which is happening, which is a good thing. Then there's unemployment, and then there's GDP growth. So let's just step through those one by one. Inflation. What number is the key number? Where does it actually need to be sitting for the RBA to say, okay, now we can consider bringing rates down again?

Alan Kohler: Well, their forecast for the end of this year is 3.3 per cent inflation. That's in December for the year. As long as they're confident that they're on course for 3.3 per cent inflation by the end of this year and below 3 per cent by the end of the following year, in the second half of the following year, 2025. So really they need confidence that that's on the way.

Sam Hawley: So they might not drop rates though until it gets to that 3.3 per cent?

Alan Kohler: Oh, no. Well, they need to be confident that they're on the way towards it. So by September they'll have a decent idea of whether they're going to make their forecast.

Sam Hawley: Okay. All right. The second factor, of course, is unemployment, and employment's really strong still in this country. But unemployment needs to go up, does it, before the RBA can actually cut rates?

Alan Kohler: Well, look, central banks and the Reserve Bank are still stuck in the idea that you need unemployment to rise for inflation to come down, and that's a 70-year-old idea. The conventional wisdom in macroeconomics is that as unemployment rises, inflation comes down, and if unemployment falls, inflation goes up. The view is that higher unemployment means that workers have less bargaining power, and therefore wages don't grow as much. So they've forecast a rise in unemployment to 4.2 per cent by the end of this year, and they've also forecast that unemployment, by the time they get inflation back to below 3 per cent, the unemployment rate needs to be 4.5 per cent. So from 3.9 to 4.5 per cent, that would be another 100,000 or so people out of work.

Sam Hawley: Wow. Sounds a bit rough.

Alan Kohler: It sounds rough. That's right. I mean, if you're talking percentages and, you know, a little bit of an increase in unemployment, the unemployment rate, then, you know, no big deal. But if you're talking the number of people, that certainly drives it home.

Sam Hawley: All right. Then, Alan, the third factor you look at is GDP growth, and I guess people's eyes sometimes glaze over when we talk about these things, GDP, et cetera. So what needs to happen with that? And actually, what is it? Just remind us.

Alan Kohler: GDP stands for gross domestic product. It's basically the output of the entire country. You know, if you saw the country as a company, that would be its production. The most recent GDP number was 2.1 per cent, which is pretty modest growth. I mean, you know, the average GDP growth, you'd expect to be 3 or so. But the Reserve Bank is predicting that that comes down slightly to 2 by the end of this year. They do want that kind of slowdown in the economy generally. The problem with GDP growth is that it's such a broad measure that it's difficult to pin things down. For much of the past couple of years, GDP growth would have been negative without the amount of immigration that's been going on. So what economists tend to look at is GDP per capita. So you just take the GDP and you divide it by the number of people in the country, the population, and you end up with a GDP per capita. And for much of the time over the past couple of years, it's been negative. So, you know, there's been talk in the media and economists of a per capita recession, which is true.

Sam Hawley: So let's talk a bit more about that per capita recession then, because we're not in a recession, as you mentioned earlier, and the economy is doing really well. But we, on a personal level, still feel like things are really tough, don't we?

Alan Kohler: Well, a lot of people do, that's for sure. You know, the Reserve Bank actually puts out a chart of the number of people who are going backwards, where their spending is per month greater than their income, and it's up to 15 per cent. So those are the people going backwards. They're really doing it tough. A lot of people aren't going backwards who are doing it tough because the only reason they're not going backwards is because they've cut back their spending. And so at a rough estimate, I reckon about 40 of the country are doing what you'd call doing it tough. And that is very high. But the GDP number shows that we're not in a recession, largely because of immigration, also exports are very strong, particularly to China. Our GDP is not in a recession, but as I said, the GDP per capita is either in recession or flat. And a very large number of households in this country are, as you say, doing it tough.

Sam Hawley: In their own personal recession.

Alan Kohler: That's right. So, you know, you can talk about a general recession and a personal recession. So there are people, there are a lot of people in this country having a personal recession.

Sam Hawley: All right, Alan, let's now get to your predictions then, or your feelings about what's going to happen in the months ahead. You've outlined those three conditions that the RBA really needs to see are being met. So just tell me when do you expect they will be met and that interest rates will start to actually fall and some of that pressure will be taken off families?

Alan Kohler: The market, the futures market is predicting a rate cut in August or September. Most economists are predicting similar timing on a rate cut. So sort of early in the second half, August or so. There's one economist, Deutsche Bank, Phil O'Donohue, who's saying March is a possibility. I don't think that's going to happen. But, you know, the different opinions make the world go round and there's tons of those.

Sam Hawley: And we always like hearing yours, Alan. Thank you so much for joining us again.

Alan Kohler: Not at all. It's been a pleasure, Samantha.

Sam Hawley: Alan Kohler is the finance presenter on ABC TV's 7pm News. If you want to know what's going to happen to the cost of living this year, have a look at Tax Cuts and Your Bills in 2024. That's in your feed from last Monday. This episode was produced by Bridget Fitzgerald. Audio production by Sam Dunn. Our supervising producer is David Coady. I'm Sam Hawley. To get in touch with the team, please email us on abcnewsdaily at abc.net.au. Thanks for listening.