00:00:01
Speaker 1: Hello. I'm Rebecca Jones and this is the Bloomberg Australia podcast, where each week we go behind the biggest stories shaping Australia's place and global business.
00:00:11
Speaker 2: Well.
00:00:11
Speaker 3: The Reserve Bank is this morning warning a recession may be the only way to drive inflation out of the economy. The rate rise will put further pressure on borrowers already feeling the pinch from higher petrol prices.
00:00:24
Speaker 2: We do understand that this puts additional pressure on people who were already feeling these pressures in our economy even before the escalation of the conflict in the Middle East, which is making things hard up.
00:00:36
Speaker 1: Inflation is proving a stubborn beast to tame. For the second straight meeting, the RBA has lifted interest rates again, but could things get even worse? A widening more in Iran is threatening to push up fuel costs and that's adding fresh pressure on inflation, interest rates and our mortgages. So what does all this mean for the economic outlook from here? To discuss this and more, I'm joined by James McIntyre. James is an economist for Bloomberg Economics. James, this is not the start to twenty twenty six that you expected back to back rate hikes. What happened? How did we get here?
00:01:19
Speaker 4: Yeah, that's right, Beck, This is definitely not what When I was sitting thinking about taking a Christmas break and pondering the year ahead for twenty twenty six, like several I'd expected that we would be seeing the RBA eventually, you know, after weathering a little bit of a bump up in inflation, eventually pivoting to rate cuts this year. But the first couple of weeks of the year have seen a very significant pivot from the central Bank, big shift from where they were in October and to some extent November in terms of their assessment of the inflation risks in the domestic economy. And then over the last couple of weeks we've had what looks to be a major shock to global energy supplies and a supplies of a whole range of commodities hit the global economy. And that's what we're just beginning to see the RBA grapple with right now.
00:02:17
Speaker 1: And of course we're referring to what's happening in Iran, and that is of course a very fast moving situation, very much still a live news cycle. Right, James. The RBA came out of the blocks had this year discussing capacity pressures in the economy and demand exceeding supply. Can you help me sort of decode that. What is it that they're worried about specifically? Is it the labor market or what's the fuss here?
00:02:46
Speaker 4: Well, it's a famous Australian film called The Castle and in that the solicitor Dennis Denudo, who's defending a family who's about to lose their home to an airport, is at the High Court saying it's the vibe. And before the Iran shock we were getting similar messages from the RBA that they were worried about some things in the economy and the vibe on inflation had shifted. They were grasping or identifying issues like capacity utilization from business surveys being elevated and the labor market. Before we had the unemployment rate dipped down to below their forecasts dip down to four point one percent. Before that, they were talking about the labor market and perceptions around it being a little tighter than they had been expecting. But there was very much this vibe shift within the economy towards a little bit more pressure between supply and demand, and this capacity pressure coming through Now. I think the labor market is an incredibly important piece of the puzzle here and has been a big, big part of what the RBA's decision to raise rates in March. It wasn't just the shock that we've sent to energy prices in the area. It was this pressure within the labor market. Now, the labor market, or the amount of employment growth in the economy, it had gone pretty much how i'd expected, it slowed, and it's slowed quite dramatically. We've got one percent employment growth, which is running well below working age population growth at nearly one point eight percent, and by the way, that looks like that's going to be remaining a little bit higher than we expected thanks to some excess net overseas migration. But back to that labor market, jobs growth is slowed, but that unemployment rate is very low, and it's setting off alarms at the RBA about capacity or a tight labor market. And I'm scratching my head, going, what's what's the issue here, what's changed or what's shifted because I'd thought my outlook had been that we would be seeing that unemployment rate rising, but what's happened is we've had a participation rate decline over the last year, over the course of the last year. That has surprised many, It surprised me, and I think it's probably quietly surprise the RBA. And now we've got a much tighter labor market than they were expecting, and that's a big part of I think the decision to hike.
00:05:09
Speaker 1: And what causes the decline in the participation.
00:05:12
Speaker 4: Rate, well, I dug into this actually because we have been experiencing over the last decado so a structural increase in the participation rate. We've been seeing rising female workforce participation. It's still got a little bit further to go as a result of reforms that we've made to labor markets and things like childcare and the culture in all of our organizations within Australia over the eighties and nineties and twenty and twenty tens, and we're seeing ongoing dividends and female workforce participation from those long overdue improvements, many would suggest across that's front, and we've also seen increasing workforce participation in the sixty five plus cohort, the pension we used to be eligible at sixty five years and now at sixty seven, so some of it is still that going occurring. But Australians are also working longer as well. That has still got a way to run as well. So these are two structural tailwinds that have been pushing up the participation rate over recent years. But over the last twelve months the winds blew in the other direction and that's been a surprise to us. I think there's still a further structural increase in the participation rate to go. But what it does mean is that instead of the RBA looking at an unemployment rate of four point eight, four point nine or five percent, they're staring at four point one percent. And we've got a very different policy discussion and a very different macro environment within Australia's economy to absorb this energy and supply shock that's coming from the conflict in Iran.
00:06:51
Speaker 1: We had Amy Bainbridge Pensions are put here at Bloomberg on the podcast a couple of weeks ago, when she was referring to that idea amount that people need now to have a you know, a so called comfortable retirement, and how that was one of the reasons that people were staying in the workforce a little longer than perhaps they were previously. It's interesting though, to consider that the participation rate has dropped despite all of these forces. As you say, women you know, entering the workforce for longer and longer periods of time and earlier on, and people staying a little bit longer than perhaps they did in days of old James. There is a big piece of the macro puzzle that we haven't really talked about yet, and that's the Aussie dollar. You know, usually it's a shock absorber for the economy, but so far the Aussie is at its strongest in three years versus the US dollar, and that's at almost a nine year high on a trade weighted basis. What does that mean for the inflation picture?
00:07:53
Speaker 4: This is this is interesting because we've got this major shock. And usually when there's a big shock to global to the global outlook, you see markets take that risk off view. And Australia has traditionally been the Aussie dollar a risk on currency or a risk currency. But here we are in an environment where there is this major shock, but the currency has been holding firm and rising against a range of other currencies. And so what that means is that well, we're not getting when it comes to the energy shock, we're not getting as much of that spillover from high energy prices back into domestic prices as we might have. Now that might feel a bit academic, because we are facing you know, in a matter of three or four weeks, we've seen a fifty percent increase in the cost of fuel at the petrol bout for households, but you know, it could have been worse. But what it means for the RBA is that there is a very very strong link between shifts in the the trade weighted index and imported consumer goods prices. The structure of Australia's economy. We've got an oversized agricultural sector, a massively oversized mining sector, and a much smaller compared to the average advanced economy manufacturing sector. A lot of our consumer and capital goods are important and so that exchange rate matters for them. And so what we're seeing right now is that appreciation of the exchange rate means that you know, might have the RBA as we begin to see more well, we're currently in the fog of ore and central bankers are having to deal with the economic side of that. But as those clouds begin to clear overcoming months, we might see that if the osiitola holds firm, we're not going to see as much of a double whammy when it comes to any of the inflation rippless that come from this big supply shock that's coming out of the Middle East disruptions.
00:09:53
Speaker 1: I guess that's something circling back to the RBA's decision on Tuesday. A question raised with god Governor Bullock at their post meeting press conference was the fact that the decision to hike in March was it unanimous. Can you explain to us why that point is particularly interesting, especially when we've seen some structural changes around the processes at the RBA in recent times.
00:10:21
Speaker 4: Yeah, this is quite an interesting sort of extra element to the story for the RBA. Around about a year ago, so we're twelve months into a new structure stemming out of the RBA Review and a new structure that implemented a Monetary Policy Decision Board, which is a dedicated board that's constituted of in theory, macroeconomists or people with some extra expertise to really be able to challenge the Central Bank's view when it comes to making that all important policy decision. Lots of other central banks have these. Governor bull look pointed out though in a press conference that things are a little bit different for the RBA. Those central banks that have a dedicated monetary policy board, the central banks staff tends to outnumber the other members of the board. However, for the RBA, it's a nine person board, but only two of the staff. Two of the members on that board are RBA staff. So there is a significance, you know, there is It's obviously going to be much more difficult relative to other central banks for the central bank's own view or recommendation to come up. The challenge is going to be greater, and so there is some concerns as we have yet to kind of really see the next leg of RBA reform, which is members of this Monetary Policy Board begin to communicate their own views about how they see the economy in the world publicly. We haven't really heard from them yet. We're not quite sure who's a hawk, who's a dove, and how they're going to be approaching the monetary policy discs, and so we're not quite sure what that board is going to do when they disagree with the view put forward by the RBA of what the policy recommendation should be. Two board members and one thousand economists versus seven other members of the public with whose views we don't quite know yet. So that's going to that's you know today or the May March decision was one that Governor you know that the statement identified was very close round five votes to four. Bullock disclosed that actually the four were supporting a hike, they just supported it later, So that would be waiting for a little bit more information and making that decision to hike in May, when you would do the full fork you know, you'd receive the quarterlydi and you do a full quarterly forecast update and really get a lot more information about how the situation in the Middle East is evolving and what the spillovers to the global and domestic economy are versus going now, but it might not always be the case. And what does that mean if the Central Bank governor Governor Bullock has to front up to a post meeting press conference and defend a decision that she and her deputy and the Central Bank themselves don't necessarily really agree with. But the other seven members of the board voted to move ahead on so that's kind of one of the very interesting pieces of where things are with the RBA.
00:13:24
Speaker 1: So it was it was a very close call this week. Is there a solution there, Is it more transparency? Is it really understanding who is a dove and who is a hook within that composition of the board.
00:13:37
Speaker 4: Well, that will evolve. So it's still new. We need to remember that it's only twelve months in and we haven't yet got we haven't yet got to the phase where we've got a full round of appointments to this new board. There's still some legacy board members and then we're also yet to hear what the or see these new board members begin to communicate publicly and get a sense of how they think and what they've ue are. So there's still more of the story to come on how the RBA board and policy making, monetary policy decision making in Australia is going to look.
00:14:12
Speaker 1: So let's get a bit of global context here, James. How does Australia sit right now relative to the other big central backs around the world. Are we lagging leading or are we just in a completely different cycle.
00:14:26
Speaker 4: Yeah, Look, I think this sort of positioning of Australia, as were they was Australia late to raise rates after the COVID shock, or you know, while trying to emphasize or secure some of the gains in the labor market late to high and now are we in our own different cycle. I think we need to sort of step that back one level and look at, well, where are labor markets in different economies because this shock is going to hit every economy different and the circumstances of each economy for how their central banks are going to respond. And so we've got the Federal Reserve in the US, We've got the labor market story there with that week non farm payrolls growth, and they've fed likely to be even though there is this energy price shock coming to a different extent in the feed through to the US economy, they'll have their response there. If we look across the Tasman to New Zealand, a much higher unemployment rate, a labor market that's sputtering for a recovery, and economy that's starting to rebound there, that's a different scenario that that central bank is facing. The scope for the rbn Z to wait and see, but that labor market in Australia, the tightness the four point one percent unemployment rate. That's really what we think had the RBA having to get off the bench when it saw this new inflation threat coming to the economy. So I think the labor market really really matters, and in the RBA's case, we've seen them react to the current shock. How However, where we go from here really depends on how the shock unfolds, how inflation expectations in the domestic economy unfold, and also how the labor market pans out overcoming months.
00:16:19
Speaker 1: Finally, what is the base case James? What is the base case for now? Are we talking about the next move from the RBA being a cut a hold for now? Or maybe put another way, how many more hikes will it take until the strait of homos is open?
00:16:36
Speaker 4: That's that's right, right, Like the RBA has a hammer and so how many how many times do they have to hit the nail to fix this problem? The problem being that you can't do anything with Australian monetary policy to resolve a bottleneck in the global energy system, energy supplies and all of the relevant spillovers that we're increasingly becoming aware of by the day, as the disruption from the Middle East unfolds. So we're lucky that there's a couple of weeks until the RBA's next meeting at the beginning of May that they're likely to know. We might have a bit of a picture about what energy prices will do. But between now and May it will be crucial for the RBA to see what the spillovers are in the economy and how people are responding. One of the responses in the economy is that we will need to keep an eye out for is one of the responses that was instrumental on containing inflation last time around in twenty twenty two when we had the energy shock from the outbreak of conflict between Russia and Ukraine, and that is the federal government. What might the federal government and some of the state governments do. There were big energy subsidies, both for electroricity prices but also a harving of the fuel excise to try and ease some of that pain that consumers are feeling at the petrol pump. If we have some of those moves coming in from the federal government, it could buy the RBA a bit of time. If we have the situation in the straight of Hall moves resolve quickly and the global economic damage being only mild instead of extreme from a prolonged closure and disruption to energy supplies, then maybe we could have the RBA being on hold for quite some time. Or however, the longer things go on in the Middle East, the greater the risk of global recession, the bigger the risk that whilst we've had the RBA delivered these back to back hikes, a third hike might not be coming and the next move might be a cut once it's clear what the damage is across not only the global economy but the damage here at home.
00:18:50
Speaker 1: Thank you, James. And there just is so much to watch, isn't there. And of course we're talking on Wednesday morning, and we've just heard from Australian Prime Minister Anthony Albanzi that he will convene a meeting of the National Cabinet to discuss this very issue. Just before we go, let's give the last word to Governor Michelle Bullock. Here she is at the RBA press conference on Tuesday, responding to a question from Bloomberg's Michael Heath on the board composition and just how tricky this task.
00:19:17
Speaker 3: Is the reality of our board as you have pointed out, it's quite unusual in that respect in that the bank representatives there's two and there's seven non bank representatives. That is very unusual. I'm not sure if there's any other countries around the world that have that. Most have a majority representation by the bank staff, if you like. So that's just a way it is. And as I said earlier, particularly in circumstances like this, where you know it's very difficult, it's uncertain, there are two very good arguments to do two different things, then reasonable people can differ, and that's a positive thing. The other point that the review made was it did feel that the bank was a little too insular, and so if we are being challenged by outside views, then I don't take that personally that is a positive thing. I don't know if that would is going to happen, but you know, my own view is that this is the structure we've got, We've got to work with it, and ultimately, economics is this is not a science. This is you know, this is difficult stuff, and reasonable people can hold different views very reasonably. So that's you know, and I think the meeting today with its split decision and the process it went through I thought was an excellent demonstration of how that can be very positive.
00:20:50
Speaker 1: If you found today's conversation insightful, be sure to follow the Bloomberg Australia Podcast wherever you listen, and check for more reading on Australia's economy, including the latest from Bloomberg economist James McIntyre at Bloomberg dot com. This episode was recorded on the traditional lands of the Rebundary and Gadigal people. It was produced by Paul Allen and edited by Ainsley Chandler and Chris Burke. I'm Rebecca Jones and we'll see you next week.
Speaker 1: Hello. I'm Rebecca Jones and this is the Bloomberg Australia podcast, where each week we go behind the biggest stories shaping Australia's place and global business.
00:00:11
Speaker 2: Well.
00:00:11
Speaker 3: The Reserve Bank is this morning warning a recession may be the only way to drive inflation out of the economy. The rate rise will put further pressure on borrowers already feeling the pinch from higher petrol prices.
00:00:24
Speaker 2: We do understand that this puts additional pressure on people who were already feeling these pressures in our economy even before the escalation of the conflict in the Middle East, which is making things hard up.
00:00:36
Speaker 1: Inflation is proving a stubborn beast to tame. For the second straight meeting, the RBA has lifted interest rates again, but could things get even worse? A widening more in Iran is threatening to push up fuel costs and that's adding fresh pressure on inflation, interest rates and our mortgages. So what does all this mean for the economic outlook from here? To discuss this and more, I'm joined by James McIntyre. James is an economist for Bloomberg Economics. James, this is not the start to twenty twenty six that you expected back to back rate hikes. What happened? How did we get here?
00:01:19
Speaker 4: Yeah, that's right, Beck, This is definitely not what When I was sitting thinking about taking a Christmas break and pondering the year ahead for twenty twenty six, like several I'd expected that we would be seeing the RBA eventually, you know, after weathering a little bit of a bump up in inflation, eventually pivoting to rate cuts this year. But the first couple of weeks of the year have seen a very significant pivot from the central Bank, big shift from where they were in October and to some extent November in terms of their assessment of the inflation risks in the domestic economy. And then over the last couple of weeks we've had what looks to be a major shock to global energy supplies and a supplies of a whole range of commodities hit the global economy. And that's what we're just beginning to see the RBA grapple with right now.
00:02:17
Speaker 1: And of course we're referring to what's happening in Iran, and that is of course a very fast moving situation, very much still a live news cycle. Right, James. The RBA came out of the blocks had this year discussing capacity pressures in the economy and demand exceeding supply. Can you help me sort of decode that. What is it that they're worried about specifically? Is it the labor market or what's the fuss here?
00:02:46
Speaker 4: Well, it's a famous Australian film called The Castle and in that the solicitor Dennis Denudo, who's defending a family who's about to lose their home to an airport, is at the High Court saying it's the vibe. And before the Iran shock we were getting similar messages from the RBA that they were worried about some things in the economy and the vibe on inflation had shifted. They were grasping or identifying issues like capacity utilization from business surveys being elevated and the labor market. Before we had the unemployment rate dipped down to below their forecasts dip down to four point one percent. Before that, they were talking about the labor market and perceptions around it being a little tighter than they had been expecting. But there was very much this vibe shift within the economy towards a little bit more pressure between supply and demand, and this capacity pressure coming through Now. I think the labor market is an incredibly important piece of the puzzle here and has been a big, big part of what the RBA's decision to raise rates in March. It wasn't just the shock that we've sent to energy prices in the area. It was this pressure within the labor market. Now, the labor market, or the amount of employment growth in the economy, it had gone pretty much how i'd expected, it slowed, and it's slowed quite dramatically. We've got one percent employment growth, which is running well below working age population growth at nearly one point eight percent, and by the way, that looks like that's going to be remaining a little bit higher than we expected thanks to some excess net overseas migration. But back to that labor market, jobs growth is slowed, but that unemployment rate is very low, and it's setting off alarms at the RBA about capacity or a tight labor market. And I'm scratching my head, going, what's what's the issue here, what's changed or what's shifted because I'd thought my outlook had been that we would be seeing that unemployment rate rising, but what's happened is we've had a participation rate decline over the last year, over the course of the last year. That has surprised many, It surprised me, and I think it's probably quietly surprise the RBA. And now we've got a much tighter labor market than they were expecting, and that's a big part of I think the decision to hike.
00:05:09
Speaker 1: And what causes the decline in the participation.
00:05:12
Speaker 4: Rate, well, I dug into this actually because we have been experiencing over the last decado so a structural increase in the participation rate. We've been seeing rising female workforce participation. It's still got a little bit further to go as a result of reforms that we've made to labor markets and things like childcare and the culture in all of our organizations within Australia over the eighties and nineties and twenty and twenty tens, and we're seeing ongoing dividends and female workforce participation from those long overdue improvements, many would suggest across that's front, and we've also seen increasing workforce participation in the sixty five plus cohort, the pension we used to be eligible at sixty five years and now at sixty seven, so some of it is still that going occurring. But Australians are also working longer as well. That has still got a way to run as well. So these are two structural tailwinds that have been pushing up the participation rate over recent years. But over the last twelve months the winds blew in the other direction and that's been a surprise to us. I think there's still a further structural increase in the participation rate to go. But what it does mean is that instead of the RBA looking at an unemployment rate of four point eight, four point nine or five percent, they're staring at four point one percent. And we've got a very different policy discussion and a very different macro environment within Australia's economy to absorb this energy and supply shock that's coming from the conflict in Iran.
00:06:51
Speaker 1: We had Amy Bainbridge Pensions are put here at Bloomberg on the podcast a couple of weeks ago, when she was referring to that idea amount that people need now to have a you know, a so called comfortable retirement, and how that was one of the reasons that people were staying in the workforce a little longer than perhaps they were previously. It's interesting though, to consider that the participation rate has dropped despite all of these forces. As you say, women you know, entering the workforce for longer and longer periods of time and earlier on, and people staying a little bit longer than perhaps they did in days of old James. There is a big piece of the macro puzzle that we haven't really talked about yet, and that's the Aussie dollar. You know, usually it's a shock absorber for the economy, but so far the Aussie is at its strongest in three years versus the US dollar, and that's at almost a nine year high on a trade weighted basis. What does that mean for the inflation picture?
00:07:53
Speaker 4: This is this is interesting because we've got this major shock. And usually when there's a big shock to global to the global outlook, you see markets take that risk off view. And Australia has traditionally been the Aussie dollar a risk on currency or a risk currency. But here we are in an environment where there is this major shock, but the currency has been holding firm and rising against a range of other currencies. And so what that means is that well, we're not getting when it comes to the energy shock, we're not getting as much of that spillover from high energy prices back into domestic prices as we might have. Now that might feel a bit academic, because we are facing you know, in a matter of three or four weeks, we've seen a fifty percent increase in the cost of fuel at the petrol bout for households, but you know, it could have been worse. But what it means for the RBA is that there is a very very strong link between shifts in the the trade weighted index and imported consumer goods prices. The structure of Australia's economy. We've got an oversized agricultural sector, a massively oversized mining sector, and a much smaller compared to the average advanced economy manufacturing sector. A lot of our consumer and capital goods are important and so that exchange rate matters for them. And so what we're seeing right now is that appreciation of the exchange rate means that you know, might have the RBA as we begin to see more well, we're currently in the fog of ore and central bankers are having to deal with the economic side of that. But as those clouds begin to clear overcoming months, we might see that if the osiitola holds firm, we're not going to see as much of a double whammy when it comes to any of the inflation rippless that come from this big supply shock that's coming out of the Middle East disruptions.
00:09:53
Speaker 1: I guess that's something circling back to the RBA's decision on Tuesday. A question raised with god Governor Bullock at their post meeting press conference was the fact that the decision to hike in March was it unanimous. Can you explain to us why that point is particularly interesting, especially when we've seen some structural changes around the processes at the RBA in recent times.
00:10:21
Speaker 4: Yeah, this is quite an interesting sort of extra element to the story for the RBA. Around about a year ago, so we're twelve months into a new structure stemming out of the RBA Review and a new structure that implemented a Monetary Policy Decision Board, which is a dedicated board that's constituted of in theory, macroeconomists or people with some extra expertise to really be able to challenge the Central Bank's view when it comes to making that all important policy decision. Lots of other central banks have these. Governor bull look pointed out though in a press conference that things are a little bit different for the RBA. Those central banks that have a dedicated monetary policy board, the central banks staff tends to outnumber the other members of the board. However, for the RBA, it's a nine person board, but only two of the staff. Two of the members on that board are RBA staff. So there is a significance, you know, there is It's obviously going to be much more difficult relative to other central banks for the central bank's own view or recommendation to come up. The challenge is going to be greater, and so there is some concerns as we have yet to kind of really see the next leg of RBA reform, which is members of this Monetary Policy Board begin to communicate their own views about how they see the economy in the world publicly. We haven't really heard from them yet. We're not quite sure who's a hawk, who's a dove, and how they're going to be approaching the monetary policy discs, and so we're not quite sure what that board is going to do when they disagree with the view put forward by the RBA of what the policy recommendation should be. Two board members and one thousand economists versus seven other members of the public with whose views we don't quite know yet. So that's going to that's you know today or the May March decision was one that Governor you know that the statement identified was very close round five votes to four. Bullock disclosed that actually the four were supporting a hike, they just supported it later, So that would be waiting for a little bit more information and making that decision to hike in May, when you would do the full fork you know, you'd receive the quarterlydi and you do a full quarterly forecast update and really get a lot more information about how the situation in the Middle East is evolving and what the spillovers to the global and domestic economy are versus going now, but it might not always be the case. And what does that mean if the Central Bank governor Governor Bullock has to front up to a post meeting press conference and defend a decision that she and her deputy and the Central Bank themselves don't necessarily really agree with. But the other seven members of the board voted to move ahead on so that's kind of one of the very interesting pieces of where things are with the RBA.
00:13:24
Speaker 1: So it was it was a very close call this week. Is there a solution there, Is it more transparency? Is it really understanding who is a dove and who is a hook within that composition of the board.
00:13:37
Speaker 4: Well, that will evolve. So it's still new. We need to remember that it's only twelve months in and we haven't yet got we haven't yet got to the phase where we've got a full round of appointments to this new board. There's still some legacy board members and then we're also yet to hear what the or see these new board members begin to communicate publicly and get a sense of how they think and what they've ue are. So there's still more of the story to come on how the RBA board and policy making, monetary policy decision making in Australia is going to look.
00:14:12
Speaker 1: So let's get a bit of global context here, James. How does Australia sit right now relative to the other big central backs around the world. Are we lagging leading or are we just in a completely different cycle.
00:14:26
Speaker 4: Yeah, Look, I think this sort of positioning of Australia, as were they was Australia late to raise rates after the COVID shock, or you know, while trying to emphasize or secure some of the gains in the labor market late to high and now are we in our own different cycle. I think we need to sort of step that back one level and look at, well, where are labor markets in different economies because this shock is going to hit every economy different and the circumstances of each economy for how their central banks are going to respond. And so we've got the Federal Reserve in the US, We've got the labor market story there with that week non farm payrolls growth, and they've fed likely to be even though there is this energy price shock coming to a different extent in the feed through to the US economy, they'll have their response there. If we look across the Tasman to New Zealand, a much higher unemployment rate, a labor market that's sputtering for a recovery, and economy that's starting to rebound there, that's a different scenario that that central bank is facing. The scope for the rbn Z to wait and see, but that labor market in Australia, the tightness the four point one percent unemployment rate. That's really what we think had the RBA having to get off the bench when it saw this new inflation threat coming to the economy. So I think the labor market really really matters, and in the RBA's case, we've seen them react to the current shock. How However, where we go from here really depends on how the shock unfolds, how inflation expectations in the domestic economy unfold, and also how the labor market pans out overcoming months.
00:16:19
Speaker 1: Finally, what is the base case James? What is the base case for now? Are we talking about the next move from the RBA being a cut a hold for now? Or maybe put another way, how many more hikes will it take until the strait of homos is open?
00:16:36
Speaker 4: That's that's right, right, Like the RBA has a hammer and so how many how many times do they have to hit the nail to fix this problem? The problem being that you can't do anything with Australian monetary policy to resolve a bottleneck in the global energy system, energy supplies and all of the relevant spillovers that we're increasingly becoming aware of by the day, as the disruption from the Middle East unfolds. So we're lucky that there's a couple of weeks until the RBA's next meeting at the beginning of May that they're likely to know. We might have a bit of a picture about what energy prices will do. But between now and May it will be crucial for the RBA to see what the spillovers are in the economy and how people are responding. One of the responses in the economy is that we will need to keep an eye out for is one of the responses that was instrumental on containing inflation last time around in twenty twenty two when we had the energy shock from the outbreak of conflict between Russia and Ukraine, and that is the federal government. What might the federal government and some of the state governments do. There were big energy subsidies, both for electroricity prices but also a harving of the fuel excise to try and ease some of that pain that consumers are feeling at the petrol pump. If we have some of those moves coming in from the federal government, it could buy the RBA a bit of time. If we have the situation in the straight of Hall moves resolve quickly and the global economic damage being only mild instead of extreme from a prolonged closure and disruption to energy supplies, then maybe we could have the RBA being on hold for quite some time. Or however, the longer things go on in the Middle East, the greater the risk of global recession, the bigger the risk that whilst we've had the RBA delivered these back to back hikes, a third hike might not be coming and the next move might be a cut once it's clear what the damage is across not only the global economy but the damage here at home.
00:18:50
Speaker 1: Thank you, James. And there just is so much to watch, isn't there. And of course we're talking on Wednesday morning, and we've just heard from Australian Prime Minister Anthony Albanzi that he will convene a meeting of the National Cabinet to discuss this very issue. Just before we go, let's give the last word to Governor Michelle Bullock. Here she is at the RBA press conference on Tuesday, responding to a question from Bloomberg's Michael Heath on the board composition and just how tricky this task.
00:19:17
Speaker 3: Is the reality of our board as you have pointed out, it's quite unusual in that respect in that the bank representatives there's two and there's seven non bank representatives. That is very unusual. I'm not sure if there's any other countries around the world that have that. Most have a majority representation by the bank staff, if you like. So that's just a way it is. And as I said earlier, particularly in circumstances like this, where you know it's very difficult, it's uncertain, there are two very good arguments to do two different things, then reasonable people can differ, and that's a positive thing. The other point that the review made was it did feel that the bank was a little too insular, and so if we are being challenged by outside views, then I don't take that personally that is a positive thing. I don't know if that would is going to happen, but you know, my own view is that this is the structure we've got, We've got to work with it, and ultimately, economics is this is not a science. This is you know, this is difficult stuff, and reasonable people can hold different views very reasonably. So that's you know, and I think the meeting today with its split decision and the process it went through I thought was an excellent demonstration of how that can be very positive.
00:20:50
Speaker 1: If you found today's conversation insightful, be sure to follow the Bloomberg Australia Podcast wherever you listen, and check for more reading on Australia's economy, including the latest from Bloomberg economist James McIntyre at Bloomberg dot com. This episode was recorded on the traditional lands of the Rebundary and Gadigal people. It was produced by Paul Allen and edited by Ainsley Chandler and Chris Burke. I'm Rebecca Jones and we'll see you next week.
