Big banks bet on a rate hike - ABC News & Headlines – Australian Broadcasting Corporation

The price of Brent Crude has climbed back above one hundred dollars a barrel in response to rising concerns that the ongoing conflict in the Middle East is spreading. 

Here in Australia, the Coalition is touting a new fuel excise proposal as the price of diesel climbs closer to spikes not seen since the beginning of the conflict.

Meanwhile, analysts from Australia's big four banks agree that a September rate hike from the Reserve Bank is looking increasingly likely.  

So what do the latest auction clearance rates do to fill in the Australian property picture? 

And just how deep a downturn is on the horizon?

Carrington Clarke and ABC News Business Editor Michael Janda break it all down on ABC Business Daily.

We'd love to hear your questions! If there’s business and economic news that has you stumped or you'd like further insight into, we're here to help. Send a short voice recording to Carrington and the team at abcbusinessdaily@abc.net.au and we'll attempt to answer it.

This content was transcribed automatically and may contain errors. Read more on how the ABC is automatically creating audio transcripts.

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Speaker 3: But it was, the Americans believe, all a dreadful mistake.

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Speaker 5: Most Americans actually think this war is a mistake.

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Speaker 6: The price of Brent crude has climbed back above $100 a barrel, in response to rising concerns that the ongoing conflict in the Middle East is starting to spread. Meanwhile, here in Australia, the Coalition is touting a new fuel excise proposal, as the price of diesel climbs closer to spikes not seen since the beginning of the conflict. And analysts are saying a September rate hike from the Reserve Bank is looking increasingly likely. And what do the latest auction clearance rates tell us about this latest chapter of the Australian property story, and just how deep a downturn is on the horizon? Welcome to ABC Business Daily. I'm Carrington Clark.

Speaker 7: And I'm the ABC's Business Editor, Michael Janda.

Speaker 6: Michael, thank you for joining me. There's a lot on this week. But let's start with the kind of big macro picture of what's happening in the global economy. We have, once again, seen oil prices spiking, and it's mainly about what's actually happening into the southeast of Saudi Arabia, further away from Iran, but this is about the Houthis in Yemen, taking on the government backed by Saudi Arabia. Now there has been a long time tension.

Speaker 7: And it's a lengthy conflict there.

Speaker 6: It's a long-term conflict, Saudi Arabia backing what it recognizes as the government of Yemen. The Houthis don't recognize that, that government. And they have now, the Houthis have basically taken control of the entire Red Sea coastline of Yemen. That means they're able to exert power over the strait there that connects the Red Sea out into the Indian Ocean.

Speaker 7: You've got a couple of problems. You've got the Bab el-Mandeb strait that you were referring to for all the shipping going south from Saudi out into the Indian Ocean and from there across to Asia, which is, of course, the big demand area for Middle Eastern oil and refined product. And then also you've got the ability of the Houthis to attack Saudi oil infrastructure on that west coast to actually prevent the export in the first place. And of course, we've heard those reports about attacks coming even from Iraq, potentially to the east-west pipeline, which was causing another disruption.

Speaker 6: And it looks like the Houthis are also hitting other targets within Saudi Arabia proper. We're not sure exactly what they're targeting, except we believe that they are so-called sensitive sites. It's hard to kind of differentiate between the conflicts in the Middle East. This is not in many ways directly about what's happening in Iran and the ongoing war between the US and Iran and also Israel is obviously involved in that. But the Houthis are backed by Iran. Obviously, there's a long-standing regional rivalry between Saudi Arabia and Iran. And it remains unclear exactly how much help Saudi Arabia potentially needs to deal with the Houthis' threat. But what this means from an economic perspective is that we not only now have a curtailing of the energy flows going through the Strait of Hormuz, now we're seeing the interruption through the Red Sea out into the world, both up through the Suez, but also down into the Indian Ocean. And this is part of the reason why people are now so scared that oil ain't coming down below $100 anytime soon, potentially. Is that right?

Speaker 7: Yeah. Look, huge fears and huge uncertainty. And the greater the uncertainty, the higher those futures prices, because the Brent oil price we tend to talk about, that $103 a barrel price, that is a one-month futures contract for Brent oil, one month's delivery. So, people are pricing in the prospect, and we have seen gaps between some of the different futures pricing. And when you actually look at oil for delivery now, often that's been higher during the conflict because there have been actual shortages. And then we can even move beyond that to refined fuel prices because we've seen further action from the Ukrainians in Russia, with a big refinery in Moscow, again hit in this massive drone attack. Huge disruptions to diesel supplies. So, not getting diesel coming out of Russia for the rest of the world because they're having to ration the supplies that they've still been able to refine for Russian use. And of course, they've got the war in Ukraine going on that they need to supply diesel to their forces there, as well as domestic demands. And, you know, with political pressure as such as it is building, potentially, and that's what the Ukrainians are trying to do, build up that pressure in Russia, bring the war home to Russians through rising cost of living, shortages in fuel. And, you know, we've seen other countries limit their diesel exports. There was talk about the US perhaps doing it and pressure from some quarters as the diesel price there passed $6 a gallon. We're now looking at diesel prices in Australia approaching $3 a litre. You know, it's all coming to a head. And we are, an interesting report in the AFR's Chanticleer today, talking about Costco in the US now limiting oil, like not crude oil, but this is the oil you put in your motor engine, limiting purchases to one quart. So, actually rationing starting to happen in some refined products because there are physical shortages now occurring in global supply chains.

Speaker 6: And the difficulty here, the psychology of this gets interesting because as soon as you start hearing talk of shortages, that incentivises people to potentially go and grab what they can. We saw that early on in the conflict here in Australia. And so the governments around the world have to be very careful about how they talk about what's going on in energy markets. You're right to point out price of diesel should signpost this. We're speaking about a quarter to 12 here in Sydney, quarter to midday. The price of diesel at the moment, it's up around $2.90. That's getting up towards the kind of $3.20 that we saw early on in the conflict before we saw the excise cuts go into effect. And it is that the line is starting to look a bit scary for a lot of people. Earlier in the year, we were talking about will we hit a crunch point? We knew that reserves had been tapped into. We saw a coordinated response internationally where different countries were tapping into their reserves in order to keep the supply up. But there was always a live question about how long that could be sustained. And I think the real concern, as you point out, is the refined level, particularly around diesel, which is will we just have the refining capacity in order to feed all the people who want the diesel flowing into their businesses or into their farms?

Speaker 7: And it's so much, you know, just to bring it home, it's so much more important that that same fuel tracker, you know, has the unleaded 91 price at about $2.38. Now, obviously, that's painful for households, particularly if they have to commute for work or to get kids to school or other essential activities that they can't cut back on. But it doesn't have the same flow through as diesel because diesel is transport and trucking companies and other businesses that rely on diesel, farmers, the mining sector, they have to try and pass that cost increase on, otherwise it eats into their profit margins. And in trucking, those margins are already so thin, as the industry keeps telling us, they just can't afford to wear the cost. So they are going to have to try and shift that cost onto the grocery stores, the clothing retailers, you know, trucking the fuel itself is becoming more expensive, all of these costs that pass through the economy.

Speaker 6: So into this environment, the opposition came out with its policy suggesting what they wanted to do is kind of have a set mechanism for when the price of crude oil is expensive, that there is a cut to the excise level. So this is kind of taking it out of the hands of what is happening currently where the government decides really on a case-by-case basis at the moment, they have a discussion about whether or not they need to cut it. What did you make of this? Does it make economic sense? Is it problematic for the budget? Or is it better to actually take this out of the hands of politicians to decide on a case-by-case basis? Is it better to have something that's formalized? Or is it actually kind of risky to do that when it's formalized because the price of diesel in particular kind of has broken away from just the price of Brent crude, hasn't it? It's actually moving at a much higher rate than actually what the price of Brent crude is moving.

Speaker 7: We're talking there about what's known as the crack spreads and my colleague, our colleague, Daniel Ziffer, looked into this last week about how high those spreads are. So, you know, if you look at the price of diesel, it's as if the price of crude oil pre-war is $200 a barrel, not $100, because the spreads have risen that much. They've risen by about $100 a barrel for diesel refining because of that loss of refining capacity in Russia, Turkey, other countries limiting exports, China having cut back on fuel exports earlier in the year. So, in some ways, you're locking in the mechanism tied to a crude oil price which doesn't reflect the change in those refining spreads. And it's not just diesel, aviation fuel's been subject to a similar increase in that crack spread. The interesting thing around the Coalition's proposal is it's sort of semi-automated. So, it's automated at the beginning when this first kicks in with that two-week average above $100 a barrel for the crude oil price. And it will come off automatically if the eight-week average falls below $100 a barrel, but it will also come off automatically three months after the fuel shield is triggered unless the government chooses and it retains the power just to decide to extend it. So, the initial triggering in the first three months is kind of automatic, but any extension then becomes a policy decision of a government.

Speaker 6: You would think they've done this because they are scared about it having... If there is a prolonged interruption to supply, that this will eventually be too damaging to the budget. And so, this is only supposed to be a short-term measure.

Speaker 7: The Coalition's own figures put the cost at around $950 million per month that this measure is activated, which would be based on what the government's fuel excise cut of the same magnitude cost earlier in the year. So, it's almost a billion dollars a month coming out of federal revenues to pay for this. So, you can see why they might want to limit it.

Speaker 6: Is there merit though in having a system in place where people know that the price is never going to go too high or is less likely to go too high? Obviously, if we see prices elevate to an extraordinary level, then it still wouldn't matter if you're cutting the excise. But is there any merit in that logic?

Speaker 7: I think the greater merit and something that neither party has looked at, neither the government nor the Coalition as far as I know, is maybe limiting this to diesel or maybe diesel and aviation fuel, things that are used by industry and have greater flow-on effects to inflation across the economy. Because by extending this to all motorists, a lot of economists are really concerned that you're just basically pumping a billion dollars a month of what would have been Commonwealth tax revenue back into the economy and making the inflation problem worse. If you targeted this to just say diesel, and the Coalition to be fair is trying to do this through the road user charge, so they also, part of this policy is cutting the road user charge to zero for heavy vehicles. So, it does have an extra impact on the heavy trucking industry. But if you just limited all of this to targeting the transport industry rather than spreading it across everyone, it would be a bit cheaper, would have the same impact and Luci Ellis has pointed this out, the Westpac's chief economist, that there is a beneficial effect on inflation from having these kind of cuts because it does short-circuit the scale of the cost increase and maybe stop trucking companies passing on those price increases, which then pass on into retail prices, which then you get second and third round inflation effects. So, if you can short-circuit that, as we saw with the electricity rebates too, they're not necessarily as inflationary as some economists fear because they are short-circuiting some of those second and third round effects.

Speaker 6: Well, let's turn to kind of what's happening in the broader economy because of those inflation, those outbreaks of inflation that we're seeing. We had another couple of the big banks today coming out and moving forward their forecast for what would happen with interest rates. So, ANZ and CBA both now predicting that the Reserve Bank will hike interest rates this month, next week in fact. Yep, we've now got the full set. The full set of four, that's right. Now, what is interesting, I thought, was reading their explanation about why it is that they've come to this conclusion and one of the reasons CBA said they've done it is basically because that's what the money market's forecasting is going to occur, 90% prediction based on the flow of money that there will be a Reserve Bank hike next week. Now, they also point out in their explanation that this sometimes, the RBA does ignore or goes against what the money market's predicting, including last year where it was being predicted that they would cut in July and there was 95% chance of that happening. According to money markets, they didn't, but they did cut at the next meeting. But they also, as ANZ pointed out, there's been a lot of opportunities for the Reserve Bank to talk to people over the last couple of weeks, particularly last week, and the Reserve Bank could have come out and kind of downplayed the chances of that being cut.

Speaker 7: And they've done exactly the opposite. Exactly. And the clincher, and this was the clincher for Luci Ellis at Westpac on Friday and for ANZ and CBA's economists this morning, was that appearance before the House Economics Committee. It's a regular twice annual appearance the Reserve Bank makes where we had all four of the Reserve Bank's most senior officials, Michelle Bullock, the Governor, Andrew Hauser, the Deputy, Sarah Hunter, the Assistant Governor, who's the Chief Economist, and also Brad Jones, Assistant Governor of Financial Markets, less relevant for monetary policy. But all three of the people who are responsible for the bank's direction on monetary policy were singing off the same song sheet. And that came after Sarah Hunter had made two appearances, Andrew Hauser had been on 7.30, but this appearance on Friday, they didn't back down at all. Michelle Bullock said risks are, quote, materialising in the upside case for the bank's inflation outlook. Here she's referring to what we've just discussed about the Middle East, that conflict is not resolving. If anything, it's getting worse. The oil price is back above $100 a barrel. That will have flow-through consequences for inflation. It does sound increasingly like the Reserve Bank wants to stay on top and ahead of those rather than risk falling behind. She actually referred to the Middle East shock and said that it makes the country poorer, but that we can't respond to that by letting inflation get out of control. So, yes, it's making fuel more expensive, but just because that's the source of inflation doesn't mean we can ignore that inflation. And then Andrew Hauser doubled down with a longer-term view and said basically, if you think interest rates are abnormally high now, they're probably just back to normal. They were abnormally low before. And to quote him, he said, we're probably rather closer now to a more sensible level of long-term, global, real interest rates than we were a year or two ago. And remember where interest rates were a couple of years ago as they reached that post-COVID peak. That's where we're back to, and we look like we're going to go higher from there.

Speaker 6: Commonwealth Bank points out that when they had their previous forecast, Brent crude oil was sitting around $80 a barrel. Obviously, it's now up at around $100 a barrel. That's the same data the Reserve Bank will be getting. They'll get their files at the end of this week, their packets of information, and I'm sure that will inform that decision. It is still possible, and there are some people who still think maybe they will wait for November because they do get their updated forecast, but I think the language coming out last week very clearly indicated they're open to it this week.

Speaker 7: Both Luci Ellis, and I listen to her the most on this because until a couple of years ago, she was sitting in on these Reserve Bank board meetings as their chief economist, so she has fairly recent experience of the kind of discussions that take place. But ANZ has said the same thing, as have some other people, that they expect a split vote on the board for September, and like earlier this year, that it might not be a split vote around whether rates should rise, but a split vote about whether they should rise in September or whether the bank should wait for more information at that November meeting. I kind of think the same, that there will be at least maybe one or two dissenters, if not more. It was of course a 5-4 very close vote earlier this year about hiking rates. You know, I think there will be some dissent. It looks here clearly that the Reserve Bank officials, Michelle Bullock and Andrew Hauser, who get to vote at that meeting, will be pushing for a rate hike, but that maybe some of the board members might still think it would be better to wait, and there are compelling reasons to wait. This is why Luci Ellis only just changed her forecast to a September hike, mainly based on the language from the Reserve Bank officials, not because she thought it's a better thing to do, because tactically they get that quarterly inflation number. If they hike next week, there's an inflation number out the next day. If it surprises on the downside, they're going to look like right twits, to put it bluntly, for hiking rates in September. Gosh, harsh language there coming from Michael Janda. Well, when they could have waited till November, because the other thing is...

Speaker 6: But the risk of waiting is if you wait and inflation continues to build and you look like you've been slow to the party, that can also be highly problematic.

Speaker 7: I mean, look, the other argument for hiking in September is that they potentially want to back it up in November with another hike, which is what ANZ is now saying.

Speaker 6: Because they won't have another opportunity, what, until... December. 

Speaker 7: No, they get a December meeting. And that is the risk of going in September, though, because if it turns out there's not only that monthly figure, the day after the meeting, but then there's the key quarterly number that comes out in October, which is what originally CBA and Westpac and ANZ were thinking that the bank would wait for, to be sure that the trend in inflation was worrying. And then they would hike in November if that was confirmed. The problem is if you hike in September, then you get that quarterly figure in October and actually domestic inflation pressures look like they're coming down. It might be unlikely, but there is a risk, maybe because the housing downturn is bigger and having more effect than you thought. If that happens, you don't really have an opportunity to reverse course on interest rates until February the next year, because as a reserve bank, you can't really raise rates in September and then cut them again in November because you've realised the economy's much weaker than you thought.

Speaker 6: Let's quickly talk about property because you've just mentioned it. We had the latest numbers out over the weekend for what's happening with auction clearance rates. As close as we kind of get to real-time pulse checking on the property market, I think a long story relatively short, prices are still going down. Sellers are not getting the prices that they want to be receiving for their property. Some still remain pretty anchored in what they thought the house was worth a year ago or the apartment was worth a year ago. It also shows that people aren't as willing to take their properties to auction or to even try selling them at the moment. The issue for people looking ahead is that potentially we have one or two interest rate hikes on the way. How bad do you think this property downturn could get? I shouldn't use bad as a value judgment, but how low potentially can property prices go? Whether or not that's a good thing or a bad thing depends on your perspective.

Speaker 7: I won't offer a personal view, but I will relate what Paul Bloxham, who's the chief economist at HSBC, wrote last week in what I thought was a pretty comprehensive and good note on housing. Just again, to cut it short, he thinks that there will be a 13% peak to trough fall nationally in house prices. Some markets will be worse than that or lower than that and some slightly not as bad. Smaller falls? Yes, smaller falls. Good for people trying to buy if the falls are bigger, bad for people who already own potentially. He said this will become a consideration for the Reserve Bank. This is where that longer term view comes in. Just very briefly, there are four ways housing affects the economy more broadly. There's a negative wealth effect. So last time, from evidence we've seen, 5% decline in house prices equals 1% less GDP going forward. That's quite a big impact. If you're looking at a 13% fall, that's a couple percentage points wiped off GDP over several years. Less housing turnover, ownership transfer costs actually count towards GDP, so that's one of the channels that reduces growth. Just that mechanism alone, which we're already seeing, could take almost half a percentage point off annual GDP growth, because less agents' fees, less removalists, less new furniture for new homes. Falling state revenues, which might force state budget cuts. New South Wales has already booked a 30% fall in monthly state stamp duty revenues since the housing downturn really took off in March. And falling new home construction, which is not what Australia wants to see at the moment, and that could fall by as much as 20% as it did the last time we had a similarly large housing downturn in 2017 to 19. So a bit of food for thought for the Reserve Bank longer term, again, maybe having some caution about overreacting, given that over the next year, the rate-inspired housing downturn could seriously dent economic growth.

Speaker 6: Yeah, absolutely. That is it for today's episode of ABC Business Daily. We'll be back with another episode tomorrow. 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, Michael.