Higher for longer and rates might go up again: That’s the message we’ve got from the Reserve Bank of Australia on interest rates.
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz or at Banking Day.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 15 in our series for 2024 and today’s date is Friday May 10.
First, I’ll be talking to Future X Collective co-founder Angela Ferguson about the challenges of the hybrid workplace.
And I will talk to RMIT economist Sinclair Davidson about the challenges for Jim Chalmer’s next budget.
But first, let’s talk to Angela Ferguson.
So what’s happening in the news?
The Reserve Bank of Australia is “very alert” to the cost of stubbornly high inflation lingering in the economy, signalling interest rates will need to stay higher for longer and might have to go up to curb price rises. The RBA board kept the cash rate on hold at 4.35% on Tuesday, but added a hawkish tilt to its post-meeting statement, saying it would “remain vigilant to upside risks” following an acceleration in inflation. Central bank governor Michele Bullock said rate rises were discussed at the board’s May meeting along with the announced pause, but there was no mention of a rate cut, which reflected the bank’s updated economic forecasts. The key pressures are the strong jobs market and high petrol prices, which flow through the economy. The latest forecasts also assume the Albanese government’s energy rebates will come to an end in Treasurer Jim Chalmers’ third budget next week. Headline inflation is still expected to return to the mid-range of the bank’s 2% to 3% target band by mid-2026, but only because the RBA expects interest rates to follow market pricing. Ms Bullock cited sticky services inflation as a possible trigger for further rate rises, and in a clear sign of how the bank is thinking about the interest rate pathway, revealed what the bank sees as the biggest policy mistake. The decision to leave the cash rate steady was expected by most economists and investors, though the possibility of a surprise rise had been discussed given Australia’s stubborn services inflation. The RBA’s forecasts do not include any decisions that will be announced in next Tuesday’s federal budget, which will also include Treasury’s updated inflation outlook, factoring in any new spending decisions. Treasury’s figures will be closely compared with the RBA’s updated forecasts, and Labor will be held responsible for any gap that signals the budget will add to inflation and cause interest rates to stay higher for longer.
Rating agencies have put the Victorian government on notice after it revealed state debt would climb to $188 billion in a budget which paused the Melbourne Airport Rail project and delivered $400 handouts for families, but failed to drastically cut spending. Premier Jacinta Allan is counting on a growing economy and an interest rate cut later this year, which Treasurer Tim Pallas said he “fully expects to see”, to curb the state’s $26 million-a-day interest bill. The budget came on the same day the Reserve Bank warned rates may have to stay higher for longer because of sticky inflation. Mr Pallas delivered a $15.2 billion deficit on Tuesday, with net debt growing from $156 billion next year to $188 billion by 2028, but forecast an operating surplus of $1.5 billion by 2025-26. S&P Global Ratings analyst Anthony Walker said Victoria, which was downgraded two notches in 2020 from AAA to AA to become the worst rated state in Australia, could face another downgrade to AA- if state debt reached 240% of operating revenues, or interest payments reached 10% of those revenues. Tuesday’s budget had no new taxes or levies for the first time in several years, although waste and fire levies will increase. The Property Council of Australia slammed the government for “the complete absence of budget measures to alleviate the tax burden” to get more apartments and townhouses built. Residential landowners are already bracing for the extension of the Vacant Residential Land Tax, which will apply to all “vacant” properties from next year. The deficits are forecast to turn around through a combination of the economy expanding, from $609 billion to $748 billion by 2028, and a slowdown in the major project pipeline, including no new money for the $10 billion Melbourne Airport Rail Link. Also slowed would be the rollout of 30 government childcare centres, 35 mental health centres, and 29 school upgrades, and no money for three new hospitals, as previously promised. About 1400 jobs had been cut of a promised 10% reduction in public services numbers, equal to about 3000 roles. Victoria’s waste levy will increase to $170 per tonne next year, from $129, and the fire levy will increase by an estimated average of $35. But there is no major hold-up to pet projects, including the $20 billion North East Link, the $14 billion Metro Tunnel, the $10.2 billion West Gate Tunnel and $125 billion suburban rail loop.
The scale of the Bonza collapse has been revealed in court with almost 60,000 customers affected and lawyers claiming they would need a stadium to hold the thousands of creditors. A lawyer for the administrators revealed that nearly 60,000 customers had been caught up in the company’s collapse. In a hearing in the Federal Court of Australia in Sydney, James Hutton SC told Justice Elizabeth Cheeseman up to 20,000 participants could attend the first creditors’ meeting on Friday. “It is very difficult to see how 20,000 people could ever be accommodated at a physical meeting — that would require a stadium,” Mr Hutton said. Mr Hutton said Hall Chadwick had sent emails to creditors advising them the meeting would be held virtually on Friday, May 10. The court heard creditors included 57,933 customers with forward bookings, 323 employees, and 120 trade creditors. The revelation comes as emails show Bonza’s backers in the United States were secretly plotting to “get the planes out” and “wind this up” more than a month before they abruptly seized the airline’s aircraft and sent the carrier into receivership on April 30, leaving thousands of travellers stranded and out of pocket. Emails sent between the airline’s Miami-headquartered private equity owner, 777 Partners, its financier A-Cap, and an aircraft lessor known as AIP Capital suggest the companies were co-ordinating decision-making about Bonza, a low-cost carrier which only began flying early last year. In an email sent on March 22, AIP Capital co-founder Jared Ailstock wrote to A-Cap executive chairman Kenneth King and A-Cap’s special situations portfolio manager Carson McGuffin detailing plans to “get the planes out” and “wind [Bonza] up”. This email was subsequently shared with 777’s Kevin Burgos, one of Bonza’s points of contact with its owner. When the airline collapsed last week, Bonza’s chief executive Tim Jordan claimed in an internal note that 777 had been “surprised” that “all our aircraft have had repossession proceedings commenced by AIP, the aircraft lessor”.
Perpetual will be broken up and its 138-year-old name sold to private equity giant KKR as part of the biggest overhaul in its history. The transaction will give KKR the Perpetual name, along with its valuable corporate trust and wealth management businesses, in a deal worth more than $1.5 billion. ASX-listed Perpetual will continue as a pure-play funds management business in need of a new moniker once a transition agreement with KKR expires. Perpetual is expected to use the proceeds from the sale to pay debt and tax, and will likely have some capital left over to return to shareholders. The fund manager has been saddled with a hefty capital gains tax bill. Its board has tried to manage how much it owed the Australian Taxation Office once it inked an agreement to sell Perpetual’s corporate trust business. The transaction with KKR comes after a six-month strategic review, during which Perpetual weighed options such as a demerger or sale of its corporate trust and wealth businesses. KKR has set up separate companies to own Perpetual’s corporate trust and wealth management businesses, filings with Australia’s corporate regulator showed. The private equity firm’s other Australian investments include accounting software group MYOB and cosmetics group Laser Clinics Australia. KKR also bought a majority stake in Colonial First State from Commonwealth Bank almost four years ago. A deal with KKR would spell an end to Perpetual chief executive Rob Adams’ three-legged strategy, which boasted of the benefits of owning a suite of financial services businesses beyond asset management. It comes after Perpetual expanded its asset management arm aggressively, most notably acquiring long-time rival Pendal, a funds management firm also based in Sydney.
Craig Garvin, the sacked chief executive of McGuigan winemaker Australian Vintage, is considering a defamation case against his former boardroom colleagues and a possible wrongful dismissal case after the company terminated his tenure last Friday. Mr Garvin, who ran Australian Vintage for five years, has held discussions with his lawyers and there is a growing sense he is pursuing possible legal action over his shock dismissal, with his lawyers combing over the ASX statement which revealed his sacking, as well as the terms of his employment contract and relevant workplace law. In the statement were allegations of a workplace issue which, in the public words of the board, “displayed a lack of judgment”. The looming court case could involve defamation, with Mr Garvin having a high profile in the business community, especially in the agribusiness and food sectors. On Friday, Australian Vintage — which has a market capitalisation of just under $90m and whose share price has collapsed by more than 90% against its peaks two decades ago — announced the sudden and shock sacking of its CEO, citing workplace behaviour issues but not detailing those claims any further.
The Tax Office is ramping up action against company directors as it chases $2.5 billion in unpaid taxes from businesses that have failed to pay superannuation, pass on GST or pass on income tax of employees. Directors who have amassed large assets, such as trophy homes and flash boats, while not passing on collected taxes to the Australian government are some of the first in the firing line, according to sources familiar with the Australian Taxation Office’s operations. Over the past eight months, the ATO has issued 18,334 director penalty notices (DPNs) – a 320% increase on the 4362 DPNs issued in the 2021-22 financial year. The increase in the numbers is mostly due to the lifting of a grace period the ATO put in place during the pandemic when it sharply reduced its enforcement activities. DPNs are a government instrument that make directors personally liable for a company’s tax debts. If ignored, the notices can lead to serious outcomes for directors, including the seizure of assets, bankruptcy or the garnishing of wages by the ATO. In some cases, a director can fend off a notice if they can show they had not been involved in managing the business, had made every effort to ensure the business was keeping up with its tax issues, or if the business was in administration or had started the process of winding down. Directors who don’t do this and allow their business to trade and ignore the notice will receive a “lockdown DPN”. The ATO has a stated policy of not compromising on lockdown DPNs, and there is no legislative basis to waive such debts.
The big four accounting firms could be forced to slash partner numbers and incorporate their consulting businesses under a crackdown on governance standards flagged as a possible response to the PwC tax leaks scandal. In a consultation paper released late last Friday, Treasury also raised concerns about audit and consulting partners sharing profits, which it said risked auditors being incentivised to prioritise client satisfaction over audit quality, potentially undermining market confidence. Forcing accounting firms to deal with a much lower partnership cap or even registering as corporations would be the biggest shake-up in the history of the big four and potentially world leading in bringing the firms to heel. Treasury questioned whether the big four were capable of governing themselves, and said existing methods of self-regulation of auditors and accountants, which rely on professional bodies, might not be effective as they lack powers to compel information. The big four firms have reacted cautiously to the detailed paper and are likely to welcome any consolidation of the fragmented way they are regulated. However, they are also likely to challenge any forced changes to their partnership structures that affect partner profits. The Albanese government outlined 15 issues it wanted feedback on (the paper runs to 16 issues but number 8 is missing). These include whether the partnership structures of PwC, KPMG, EY and Deloitte render them incapable of adequately governing themselves. Central to that question is whether the current partnership limit of 1000 for accounting firms is too high, and whether the partnership model remains a proper structure for the “economic significance” of the big four firms.
Fresh from his defamation defeat, Bruce Lehrmann is facing legal action over the northern beaches pad he lived in rent-free under a deal with the Seven Network. Lady Gaenor Meakes, the owner of the Balgowlah property where the former federal Liberal staffer lived until recently, is pursuing Lehrmann in the NSW Civil and Administrative Tribunal. The matter is listed for a conciliation hearing on May 23 in Sydney. Meakes was the partner of champion sailor Mark Richards, a longtime skipper of Wild Oats XI. The precise nature of her action is not yet clear. Lehrmann, who lost a multimillion-dollar defamation case against Network Ten and Lisa Wilkinson last month, had his rent at the luxury property covered by Seven. During the defamation case, the Federal Court heard Seven spent about $100,000 paying Lehrmann’s rent for a year to April 2024 under an exclusive interview deal.
Stephen Rue will now officially take over the Optus CEO role in November, which has been overseen in the interim by Michael Venter. Optus chairman Paul O’Sullivan said Rue’s appointment followed a “rigorous process that involved a slate of high-quality candidates”. Rue’s appointment follows former CEO Kelly Bayer Rosemarin’s resignation in November after the November 8 outage and the 2022 cyber attack that led to the exposure of millions of customers’ personal data. Following her departure, Optus’ parent company Singtel announced that it has recruited Peter Kaliaropoulos to fill the newly-created role of chief operating officer (COO), reporting to Venter. Rue’s appointment coincides with the introduction of Singtel’s decentralisation restructure which was announced in 2022. The change means Rue will report to the telco’s Australian subsidiary board and chairman instead of Singtel itself. Speaking about the appointment, Rue said in a statement: “My job will be to take care of Optus’ customers, people and business and to provide strong competition and choice. “ NBN Co will appoint chief financial officer Philip Knox to the role of interim CEO “in due course, until a new CEO is appointed”. Optus will be Mr Rue’s first corporate CEO job in Australia. Although he has more experience working with governments than with consumers, people who have worked with the incoming Optus boss say that he is pragmatic and approachable. Mr Rue’s finance background will also stand Optus in good stead if parent Singtel decides to sell off part of the telco group. Singtel has remained tight-lipped on its future plans for its subsidiary following reports that Canada’s Brookfield was considering buying a stake but has not ruled out exploring “all options to maximise shareholder value”. Mr Rue will be under pressure from Singtel not only to improve Optus’ reputation with customers, but also turnaround underperforming businesses, including Optus’ enterprise operations, which are run by former NSW Premier Gladys Berejiklian. Singtel warned its investors last week that it expected a net loss for the second half of its financial year due to more than $S3 billion ($A3.3 billion) of writedowns including $540 million on Optus’ enterprise business.
And that’s it for this week. And next week, I’ll be talking to Nick Smith, Vice President and General Manager, Asia Pacific at Smart Communications on how to learn more about some benefits and potential issues of ChatGPT/AI in financial services
And I’ll be talking to AMP Capital chief economist Shane Oliver about Australia’s latest inflation figures.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week, And looking forward to bringing you Talking Business next week
