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Chapter 1: What is the main topic discussed in this episode?
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The Reserve Bank is starting its deliberations today on whether to hike interest rates once again. The National Australia Bank seems to have disappointed with its results and warns about the state of the economy. Meanwhile, there's a mixed report card from this week's auctions. Just how fragile is the property market right now? Welcome to ABC Business Daily. I'm Carrington Clarke.
And I'm ABC Business Reporter Steph Chalmers.
Steph, happy RBA decision eve. Let's maybe start with this result from National Australia Bank. This is their half yearly result. It is one of Australia's most important companies.
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Chapter 2: What are the current deliberations of the Reserve Bank regarding interest rates?
Exactly. So it's to do with software capitalisation. So capitalisation is something in accounting where companies will be, rather than booking a huge expense in one financial period, they say, hey, this is actually an asset to our company and then they spread that out over the coming years. years ahead.
So for something like a piece of software, they might say, we expect to use this over 10 years, so we're going to have it on our balance sheet as an asset for that length of time. And what NAB's now done is said, technology is actually moving much faster than we had previously thought.
Chapter 3: How did NAB's recent results impact the perception of the economy?
So that software isn't going to be adding value to our balance sheet for as long as we thought. So they've rearranged their finances essentially to account for some of that technology becoming outdated quicker than they thought for having a lower value. And they've also increased the threshold for when they will use that accounting process from $5 million to $20 million.
So I guess reflecting the fact that perhaps software is becoming more expensive, more complicated.
Chapter 4: What does the mixed report card from recent property auctions indicate?
So in order for the software to be considered an asset, that they'll use this accounting treatment on there, set the threshold higher. So I thought that was quite interesting that that's something we're probably going to see a lot of companies grappling with how they valued things that are now becoming superseded even more fast? And how do they actually deal with that going forward?
Chapter 5: How fragile is the property market in Australia right now?
So we could see that as a bit of a theme in the main company reporting season, perhaps that companies are trying to grapple with, hey, AI is moving super fast. Is this stuff we've predicted is going to be an asset to us actually no longer that relevant?
Yeah, and I think there are a couple of interesting things going on with this that could be important for other companies and for, say, the economy. I think one thing to note is the big Australian banks are probably the first movers or close to the first movers here in Australia, at least, because they've got...
huge bank balances that allow them to actually spend the money on changing their processes to utilize artificial intelligence.
And we know this is a major focus of the big banks that they're trying to really embed artificial intelligence into all parts of their business because they think it's going to help them make more money, make their processes more efficient and therefore help their bottom line and their profit.
So that's going to be – they're kind of probably going to be ahead pretty far up the queue when it comes to this transformation. But I think you're also right. I think other companies are going to be doing this quicker.
And it also has ramifications for Australian technology companies because, again, it goes to the heart of how quickly this technology is becoming superseded and perhaps some of the contracts that the big banks had with service software as a service providers that perhaps they are in trouble because –
We are seeing the banks using artificial intelligence and maybe they're using it to tailor their own types of software or agents, whatever it might be, which means they won't have the same appetite to buy software as a service as they did previously, perhaps. But I'm also fascinated by... potentially, the negative effects of artificial intelligence on these big banks.
Now, we know with what's been happening with Mythos, this is the next AI model that has been seen as so potentially dangerous that it was given first to a selection of companies so that they could
fix their own holes in their defenses because the anthropic says that mythos was so powerful at seeking out faults in different platforms that actually they wanted to give these technology companies, banks, et cetera, over in the United States in particular, time to work it through on their systems. But do we know much about how the banks are going to respond here in Australia?
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Chapter 6: What factors contributed to NAB's 19% drop in statutory net profit?
What did you make of this number? And more generally, where do you see the property market currently sitting ahead of this crucial decision by the Reserve Bank about whether or not to hike interest rates again?
Yeah, it was interesting in reporting these numbers, Cotality was referring to perhaps there's like a bit of a better match between buyer and seller price expectations. And that's keeping that around that 60% clearance rate level you referred to. So perhaps buyers are starting to see things become slightly more affordable or
able to jump in on and sellers are perhaps coming to terms with the reality that things aren't as hot as they were last year. And that was reflected as well in the dwelling value prices we got on Friday from Cotality. So national home prices rose around 0.3% in April, but they fell in Sydney and Melbourne.
So that's that trend we've been seeing where the major markets have taken a turn and property values are going slightly down. Obviously, it's kind of cold comfort for people. These are obviously still extremely expensive property markets, but it is that kind of sign that the interest rate rises we've already seen this year having an impact.
Perhaps people who are looking to take out a loan are seeing that they're able to borrow less and all those things contribute to taking a bit of heat out of the property market.
The context is so critical, isn't it? So we had, according to Cotality, over the past year, dwelling prices in Australia still grew almost 10%. I mean, that's an extraordinarily high rate of growth in a market that was, by most measures, when you compare incomes to how much a house or an apartment costs, are very, very expensive.
And so that was the kind of starting point before we saw kind of everything shift, didn't we? We first saw inflation numbers running too hot, so the Reserve Bank decided to hike interest rates. You've obviously seen the war in the Middle East. That's created even greater inflationary pressure because of the oil shock. Now, the market betting at the
The Reserve Bank hike interest rates another quarter of a percentage point when it hands down its decision tomorrow. It becomes a little less certain after that as far as consensus is concerned. Markets seem to be betting on at least one more tomorrow and then another one. But we do have, for example, the NAB suggesting it's going to be one and done, the bank that released its results today.
Westpac, on the other hand, it's suggesting we'll see three more to come. year, which would be quite an extraordinary rise in this calendar year.
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Chapter 7: How is technology affecting the financial decisions of banks?
predicated on whatever the financial market is predicting in terms of interest rates because they obviously have to pick some setting to base their forecasts on. But it isn't impossible for them to go against the market. We saw last year there was one month where people – I think it was people thought rates were going to be cut and they kept them on hold.
I think that's what happened one month. And that was quite shocking because it kind of makes you think that there's a reason they are wanting to do this more than just following the trend. So I think if we saw the RBA hold tomorrow, it would be sending a very strong signal because the market is so heavily weighted towards a rate hike.
So you have to think that they are factoring that into their thinking as well. the signal they're sending and so much of what the RBA does as well is around messaging because as you say people are putting their money in places based on where they think the central bank is going so that has a real world effect as well.
The importance of messaging should never be understated. They want markets to be calm. They want people to feel good about the state of the economy, but also to try to kind of gently guide them along a particular path. At the moment, they're trying to guide people down a slightly less inflationary path, which is why they're hiking interest rates, but they also don't want people to panic.
And so I think if they do something that goes completely against consensus, then that can, as you say, shock the markets. And that's not what they're intending either. So there has been nothing to suggest that they are going to go against consensus in saying that it was literally one vote last time, right? It was only one swing vote that determined
that rates were hiked at the last meeting as opposed to kept on hold. And so it is possible that that one person, we don't know who that person is, may have changed their mind and wants now there to be a little bit more data to see how the rate rises we've already seen are actually flowing through the economy.
On the other hand, the argument would be we can't wait because this is such a dangerously high moment for inflation and that they want to continue to put downward pressure on it. so that it doesn't get out of control. But it'll be a fascinating meeting and obviously a lot riding on it for individuals, but also for the state of the economy. That is it for today's episode of ABC Business Daily.
We will be back with another episode tomorrow where it will come out just after the interest rate decision. Remember, you can also find our latest episode of Fuelcast in the feed right before this one. Make sure you're following us on ABC Listen or wherever you get your podcasts. And if you'd like to send in a question, you can email abcbusinessdaily at abc.net.au. Catch you next time, Steph.
Bye.
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