Q+A: Why are economists split on rates?
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What is the main topic discussed in this episode?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Michael Thompson and good morning, Sean Aylmer. Good morning, Michael. Sean, today I'm asking the question, you're answering them. Hopefully that's the way it's going to go. Lately, we've seen a huge gap between what different market economists think will happen to interest rates. They're all respected individuals. They're all very experienced, but some are saying we've got more hikes to come. Some are saying the next move will be a cut. They couldn't be more different. So why? Why the giant gap?
So let's give the arguments for why there could be a rate rise and the arguments for while they'll be on hold or could fall. And that explains the gap. So the arguments why interest rates will rise, we have inflation in the system. Now, there's two parts to that. Part of it is the Middle East, the cost of oil. It's more expensive. Transport costs are more expensive. So we all understand that one.
Why are economists so split on the future direction of interest rates?
The other part, which we sort of think about less, is capacity constraints within the economy. So what we had at the end of last year, which is why inflation started to pick up again, is not enough capacity. for the demand that was coming through from consumers and from business. So they were pushing up prices. We just weren't making enough stuff. And this is where the productivity argument where the rubber hits the road. If we were more productive, we'd make more stuff. We wouldn't have inflation. That's not what happened. So inflation is a big reason why rates might rise. The economy is actually resilient. We still have an unemployment rate in the low fours. That's pretty good. We have a 4.5% increase in wages, which went through for the modern award.
That's pretty high. We've actually got consumer demand reasonably okay. So all that suggests there is demand in the economy. Maybe we need higher interest rates. Then you have all the global pressures, the global supply chain disruptions, all that stuff out of the Middle East. So plenty of good reasons why you should lift interest rates. Why you should drop them. Mm-hmm. Mm-hmm. So we've already had three interest rate hikes this year. They take 12 to 18 months to work their way through the economy. Therefore, we have still got a lot of pain from those interest rates to work through the economy, to slow the economy. And that's a really good reason. You think, well, let's just wait for a while to see how much they work their way through and
not do anything for the time being. Second good reason, those budget changes really have hurt the housing market. We are seeing that already. Home loan applications in June were lower than they have been. Investor market is certainly lower. The first home buyer market is lower as well, which is kind of interesting.
What inflation drivers make economists argue for more rate hikes?
Third reason, the economy is definitely slowing. We have seen all sorts of forecasts that are saying it'll come in at 2% this financial year or less. That's well below trend. And then, you know, if the things in the Middle East pick up, sorry, if things improve, not pick up, improve, then some of those price pressures will come off. So basically, we have two sides of the same coin. One, where they've got economists like Westpac's Lucy Ellis. She's still calling for two interest rate hikes. Used to be the chief economist of the Reserve Bank. She's worried about this stubbornly high inflation, about capacity constraints in the economy. about what's happening in the Middle East. You have others. Sally Auld from National Australia Bank thinks rates will be on hold because we've got all the impact of interest rates over the last half year.
The three interest rate hikes we've already had. We're already seeing softer economic growth. Things in the Middle East are getting better.
How do capacity constraints and productivity influence inflation and rate calls?
That's why you're not going to lift interest rates. And I think her call, I might be wrong, her call is that the next move in interest rates will be down.
So in the end, then, it is just a different analysis of the same or rather probably quite similar analysis of the facts, but then a different interpretation of the
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:05–1:10
2
Why are economists so split on the future direction of interest rates?
1:10–3:06
3
What inflation drivers make economists argue for more rate hikes?
3:06–4:05
4
How do capacity constraints and productivity influence inflation and rate calls?
4:05–6:09