Latest / Best of Business / Paul Bloxham: HSBC Chief Economist on Australia's Reserve Bank lifting the OCR to 4.35 percent

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Paul Bloxham: HSBC Chief Economist on Australia's Reserve Bank lifting the OCR to 4.35 percent · Best of Business

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  Speaker 1: You're listening to a podcast from News Talk SEDB. Follow
• 0:12
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• 0:16
  Speaker 2: Now, the Reserve Bank over in Australia has delivered a
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  Speaker 2: third straight interest rate increases, up twenty five basis points.
• 0:22
  Speaker 2: It takes them now to four point three to five percent.
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  Speaker 2: It's obviously trying to head off the inflationary threat from
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  Speaker 2: the higher fuel prices that are coming as a result
• 0:28
  Speaker 2: of the US war on Iran. HSBC's chief economist Paul
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  Speaker 2: Bloxham is across the announcement and is with US high
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  Speaker 2: Paul Good aim, not at all a surprise, is it.
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  Speaker 3: No, it's not a surprise. And a big part of
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  Speaker 3: the reason why the RBA has been lifting rates is
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  Speaker 3: not even really necessarily that Middle East story, And as
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  Speaker 3: the RBA said today, a lot of it is to
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  Speaker 3: do with the fact that inflation was already too high.
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  Speaker 3: We had an economy that was already growing too quickly
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  Speaker 3: for its low speed limit, and we were operating beyond
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  Speaker 3: our full capacity. So you know, the rate rises we've seen.
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  Speaker 3: The RBA is now delivered three, you know, in February,
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  Speaker 3: in March, and now it may fully reversed the rate
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  Speaker 3: cuts that were delivered last year, and as the governor
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  Speaker 3: stated today, this puts the RBA in a spot where
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  Speaker 3: they feel, or the board feels now that they are
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  Speaker 3: a bit better placed or well placed, is the way
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  Speaker 3: they've phrased it to deal with the developments that are coming.
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  Speaker 3: So we think it really was largely about being sort
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  Speaker 3: of in the wrong spot for the domestic economy, even
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  Speaker 3: before we think about the impact of the Middle East
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  Speaker 3: conflict and what it's doing for energy costs and fertilizer
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  Speaker 3: costs and so on.
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  Speaker 2: How much trouble though, does Jim Chalmers cause them If
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  Speaker 2: they're trying to basically reduce spending in order to get
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  Speaker 2: on top of inflation, then he starts handing out money
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  Speaker 2: at the budget. That's just working against them, isn't it.
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  Speaker 3: Well, it's got it's a tricky balancing act because the
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  Speaker 3: fiscal policy side has got to not stimulate overall demand
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  Speaker 3: in the economy too much. If it does, then of
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  Speaker 3: course it will add to that inflation as you're saying,
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  Speaker 3: And the RBA, of course at the moment, has been
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  Speaker 3: lifting interest rates to try to slow to get inflation
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  Speaker 3: to come down. So you know, ideally we haven't got
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  Speaker 3: both policy arms pulling in different directions. And that's what
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  Speaker 3: would happen if there really is broad based spending measures
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  Speaker 3: announced in the budget that comes up next week. So
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  Speaker 3: we're hoping that it will be fairly targeted. There have
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  Speaker 3: been some broader based measures already announced, but will they
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  Speaker 3: be offset by other cuts that come through in the
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  Speaker 3: budget announcement. That's the thing to watch out for.
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  Speaker 1: It.
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  Speaker 3: It wouldn't be good, necessarily or helpful to have monetary
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  Speaker 3: and fiscal policy operating in different directions.
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  Speaker 2: That's a fair point that you make. Now, listen, do
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  Speaker 2: you think, I mean, how far can the RBA push
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  Speaker 2: this before they start creating a recession here?
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  Speaker 3: Well, they're pushing the economy into a downturn, and they
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  Speaker 3: themselves are forecasting a downturn. Growth slows down to one
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  Speaker 3: point three percent in their forecast, and our own forecast
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  Speaker 3: it slows down even more than that. So we are
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  Speaker 3: having a downswing. We think that GDP will probably contract
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  Speaker 3: in the second quarter. But would you call that a recession, Well,
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  Speaker 3: it depends on what you define as a recession. You know,
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  Speaker 3: most people think of two consecutive quarters of negative GDP.
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  Speaker 3: We haven't got that much weakness in there yet, but certainly,
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  Speaker 3: I mean Australia you know, almost certainly has to have
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  Speaker 3: an economic downturn to get the inflation to head back
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  Speaker 3: to target, and that's being delivered by the rate the
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  Speaker 3: rate hikes, but it's also likely to be delivered by
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  Speaker 3: the global shock that's coming through. That combination will push
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  Speaker 3: us into a downturn that will over time disinflate the
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  Speaker 3: economy back to inflation, gets back towards the RBA's target.
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  Speaker 1: Yeah.
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  Speaker 2: I mean they've released, as you do, a range of
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  Speaker 2: possible scenarios into the future, and then there's one that's
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  Speaker 2: the baseline, and then there's the more adverse ones. Where
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  Speaker 2: do you and of course the worse it gets, the
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  Speaker 2: more likely a recession gets. Where do you fall in
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  Speaker 2: what you think is most likely?
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  Speaker 3: We are more downbeat than the RBA, and mostly I
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  Speaker 3: think we're firstly, really what we're doing is putting more
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  Speaker 3: weight on the weak sentiment indicators that have already come out.
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  Speaker 3: We've seen a sharp fall in consumer sentiment, sharp fall
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  Speaker 3: in business sentiment, and we're putting more signal value into
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  Speaker 3: that and thinking that that will drive the economy to
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  Speaker 3: be weaker than the RBA central case, so we've got
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  Speaker 3: we're closer to one of their inside scenarios. I mean.
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  Speaker 3: The other thing about it, of course, is there's huge
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  Speaker 3: about how the Middle East story plays out still with
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  Speaker 3: the straight orform was still effectively closed. The RBA is
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  Speaker 3: assuming it reopens sometime soon, and that oil prices peak
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  Speaker 3: soon and then start to come down, and that's the
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  Speaker 3: big uncertainty I guess we're all grappling with.
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  Speaker 2: Yeah, Paul, thank you very much for talking us through it.
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  Speaker 2: To appreciate your time, mate. That's Paul Bloxham, ahsp's chief economist.
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