‘It’s going to hurt’ but NAB boss says we have to nail inflation

The way National Australia Bank boss Ross McEwan sees it, Reserve Bank governor Philip Lowe and his fellow board members have a dilemma on their hands.

Having recently returned from the US to press the flesh with investors, and after hearing from NAB’s local business clients, McEwan is convinced we’ve still got work to do in tackling inflation.

NAB chief Ross McEwan backs the cost-of-living measures in last week’s budget as ‘pretty balanced’.Credit: Elke Meitzel

While mortgage rates are clearly hurting some, the veteran banker says there’s still plenty of strength in big industries such as energy, resources, universities and agriculture. Business owners still grumble to the bank that labour shortages are their top concern.

It is a tough message, but McEwan maintains the economy needs to slow down – and the Reserve Bank’s only weapon in this fight is to jack up interest rates, even if it inflicts more pain on borrowers.

“The dilemma is how quickly do you slow it down? And what does it do to the most vulnerable people in Australia?” McEwan says.

He backs the cost-of-living measures in last week’s budget as “pretty balanced”, but says that “hard calls” are needed to fight inflation because although only 30 per cent of households have mortgages, everyone feels the sting of rising prices.

“You really do have to nail inflation, but it’s going to hurt, and it’s going feel like the country is slowing down because it is, and it has to.”

Inflation and rising costs are recurring themes in an interview with McEwan, in the cafe at NAB’s Sydney city office. He believes another one or two Reserve Bank rate rises lie ahead before we get to the peak – which will inevitably create stress for more mortgage customers.

Markets are less sure about the need for more rate rises: they are pricing in a slightly less than 50-50 chance of one more rate rise from the Reserve Bank in August. Thursday’s surprise rise in unemployment also suggested the labour market is loosening, which could weaken the case for higher rates (McEwan was speaking before jobs data were released).

However, few would argue with his prediction that economic conditions will feel softer and financial stress will only rise from here, as borrowers absorb 3.75 percentage points of interest rate rises since May last year.

This month’s bank profit results showed the number of customers falling behind on loan repayments is still low by past standards. But there’s no question bankers are gearing up for more customers in stress, especially as a wave of ultra-cheap fixed-rate loans expire. And while much of the attention has been on mortgage stress, it’s notable that McEwan – and his rival ANZ boss Shayne Elliott – have both suggested the financial stress could be worse for renters.

“I suspect we’ll see more stress in those who don’t have a mortgage. It’s more around those who are renting, that are having some more difficulty because rental prices are going up on them,” McEwan says.

As for hopeful home buyers, McEwan suggests housing affordability could get worse over the next year, citing a shortage of homes, the high costs of building homes and well-known difficulties in construction.

Like other business people, and many politicians, he argues the focus should be on boosting housing supply. He backs the federal government plan to build a million homes over the next five years, and says NAB is keen to work with state governments and developers on creating “affordable” housing for workers such as teachers, police, and nurses who are increasingly being priced out of suburbs near their workplaces.

Housing affordability could get worse over the next year.Credit: Istock

“How do you create the affordable housing that they can actually buy and own and be proud of, at an affordable price?” he says.

As is common for bank bosses after a profit result, McEwan recently visited US investors, giving him a closer look at the country’s troubled regional banking sector and the growing tensions over raising the debt ceiling. But he doesn’t appear overly worried about either risk.

He points to the much more lax regulation of US banks compared with Australia’s tight approach, and says the debt ceiling issue (which he thinks will be resolved) has a “second order” impact on NAB because it has a wide range of funding sources.

Like rival Commonwealth Bank chief Matt Comyn, McEwan also recently attended a CEO conference on artificial intelligence in Seattle, which was put on by ChatGPT’s part owner, Microsoft.

McEwan says there’s a “real opportunity” to use AI to make some bank processes more efficient, such as by using technology to create records when a customer rings up with a complaint, for example.

He plays down worries about AI robots taking jobs, saying people will need to “sense check” what the bots produce. Instead, he says the bigger concern would be if AI were used to do “the wrong thing” with bank customers’ data, and says we need to keep a close eye on how AI is used.

“I think we should use artificial intelligence inside our business, but it’s got to be for the benefit of our customers, not trying to use their data to give to other people.”

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