Latest / Best of Business / Paul Bloxham: HSBC chief economist on the RBA increasing the OCR to 3.85 percent

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Paul Bloxham: HSBC chief economist on the RBA increasing the OCR to 3.85 percent · Best of Business

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  Speaker 1: You're listening to a podcast from News Talks B Follow
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  Speaker 2: Now Australia, the cash rate has gone up for the
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  Speaker 2: first time in more than two years. There it's Reserve
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  Speaker 2: Bank has raised it by twenty five basis points is
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  Speaker 2: now sitting at three point eighty five percent. So ahbpc's
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  Speaker 2: chief economist Paul Bloxham is with us on this high Paul,
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  Speaker 2: do you think they've made the right call?
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  Speaker 3: I think they needed to lift interest rates today. I
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  Speaker 3: don't think there were any options. Really. Inflation is above
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  Speaker 3: where the Reserve Bank can handle it. It's well above
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  Speaker 3: their target. Growth is in an upswing. We're operating at
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  Speaker 3: full capacity. The only thing that was going to get
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  Speaker 3: inflation or is going to get inflation to head back
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  Speaker 3: towards the RBA's target is going to be is tied
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  Speaker 3: a monetary policy. So I don't think they really had
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  Speaker 3: any choice today. I think they had to lift the
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  Speaker 3: policy rate.
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  Speaker 2: There is I mean, I mean it seems to be
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  Speaker 2: a minority view, but there is a view amongst some
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  Speaker 2: economists that the inflation rises a blip and the forces
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  Speaker 2: that are driving that are unwinding all by themselves. You
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  Speaker 2: got the electricity prices going, get the dollars high, so
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  Speaker 2: the imported goods are cheaper and so on. Does that
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  Speaker 2: have any credibility? Will hold any water with you?
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  Speaker 3: I think we've had two consecutive quarters now of the
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  Speaker 3: key underlying measure, the trim mean which the RBA focuses on,
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  Speaker 3: that have been high prints. So we got a three
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  Speaker 3: thirty print that was at one percent in the quarter,
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  Speaker 3: and then a fourth quarter print that turned out to
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  Speaker 3: zero point nine. And the year year eight is run
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  Speaker 3: year on year rate is running at three point four.
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  Speaker 3: The RBA targets two to three percent. So we've had
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  Speaker 3: six months, two consecutive quarters of you know, well above
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  Speaker 3: target inflation. I think the RBA didn't have any choice,
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  Speaker 3: and I think it's not just the only story. As
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  Speaker 3: I said, it's that the labor market, the jobs market's
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  Speaker 3: actually quite tight, the uneployment rate's quite low, and growth
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  Speaker 3: in and up swing as well. I think the RBA
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  Speaker 3: needed to lift rates today and they have. They've lifted
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  Speaker 3: the policy rate with the intention of slowing the economy
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  Speaker 3: down to get inflation to head back to target.
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  Speaker 2: Okay, let me read this line to you that the
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  Speaker 2: Reserve Bank Australia has been forced to lift rates to
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  Speaker 2: try to tame inflation in an economy growing only modestly
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  Speaker 2: should worry households, politicians and investors. What do you think
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  Speaker 2: of that?
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  Speaker 3: I absolutely agree with that that we are in a
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  Speaker 3: situation where we haven't we've only had a modest growth
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  Speaker 3: up swing and it's delivered to pick up an inflation
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  Speaker 3: that's excessive. And what that means is demand in the
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  Speaker 3: economy is already racing ahead of supply. Not because demand
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  Speaker 3: is strong. It's not the economy is in a strong upswing.
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  Speaker 3: It's that the supply side of the economy is weak.
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  Speaker 3: It's that productivity growth has been persistently weak and that's
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  Speaker 3: left us with an economy which has got a lower
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  Speaker 3: speed limit than it's had in the past. You know,
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  Speaker 3: the RBA's assessment is that the speed limit for growing
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  Speaker 3: the Australian economy now is two percent. We think it's
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  Speaker 3: probably a little bit below two percent, and that's not
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  Speaker 3: a great outcome. That that's the pace of growth, that's
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  Speaker 3: the maximum pace of growth in the economy before that
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  Speaker 3: we can have before it starts to deliver excessive inflation,
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  Speaker 3: So it doesn't change the fact that the RBA has
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  Speaker 3: to try to sort of manage demand to grow in
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  Speaker 3: line with that sort of weaker supply side. What it
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  Speaker 3: should do is remind us all that actually the imperative,
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  Speaker 3: the focus, the policy focus needs to be on doing
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  Speaker 3: things reform that can lift productivity. So all of the
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  Speaker 3: sort of pro growth reforms we talk about all the time,
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  Speaker 3: tax reform, deregulation, looking at the competition in the economy,
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  Speaker 3: looking at the industry relation system, these are all the
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  Speaker 3: things that we can do to try to get the
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  Speaker 3: economy to be able to grow a bit faster so
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  Speaker 3: the pie can grow a bit faster. But the RBA
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  Speaker 3: didn't have any option today because, as I said, even
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  Speaker 3: a modest upswinging growth has generated excessive inflation, and so
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  Speaker 3: the RBA has got to get that inflation heading back
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  Speaker 3: to target.
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  Speaker 2: Okay, so Michelle Bullock was talking today about consecutive rate rises,
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  Speaker 2: what are you picking.
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  Speaker 3: I think the RBA is going to have to deliver
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  Speaker 3: another tightening. Yet I don't think it's going to happen
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  Speaker 3: necessarily at the next meeting. I think the RBA is
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  Speaker 3: going to be quite cautious. And she did talk about
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  Speaker 3: that as well, about the fact that the board's going
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  Speaker 3: to want to be quite cautious. I think they're going
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  Speaker 3: to want to have a bit of time to judge
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  Speaker 3: how much impact this tightening has delivered, because in some ways,
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  Speaker 3: the whole story's turned around really quickly. I mean, you know,
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  Speaker 3: back in October last year, we were all thinking all
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  Speaker 3: the market was expecting rate cuts and we were in
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  Speaker 3: an easing phase, and of course now we're in February
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  Speaker 3: and we've lifted rates. So I think it's going to
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  Speaker 3: take a bit of time to see how much impact
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  Speaker 3: this tightening delivers into the economy, and I think they're
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  Speaker 3: going to want to be cautious, so I think they'll
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  Speaker 3: draw it out. But I do think we'll get to
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  Speaker 3: sort of later in the year and they'll probably have
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  Speaker 3: to deliver a bit more tightening to get inflation to
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  Speaker 3: come back to target.
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  Speaker 2: Paul I saw somebody was writing in one of the
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  Speaker 2: New Zealand media I think about to be a business
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  Speaker 2: desk over here saying, well, you know, this does Colan's
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  Speaker 2: question now whether our Reserve Bank is going to think, geez,
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  Speaker 2: we better start doing it as well and potentially look
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  Speaker 2: at lifting in a couple of weeks time. Are they
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  Speaker 2: on the money or getting ahead of their skis on that.
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  Speaker 3: I think that the story is very different in New Zealand.
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  Speaker 3: You've had a much bigger cycle. You've had a much
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  Speaker 3: bigger downturn in the face of the interest rate rises
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  Speaker 3: that we larger earlier on and that's been sustained and
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  Speaker 3: now you're in this upswing. Inflation is starting to rise
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  Speaker 3: as well. I think the core measures are starting to rise,
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  Speaker 3: and I do think the RBNZ is going to have
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  Speaker 3: to lift interest rates, but I don't think it's going
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  Speaker 3: to come quite as soon as that. Now we've got
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  Speaker 3: a mind that we'll see the rban Z starting to
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  Speaker 3: lift interest rates in the second half of this year.
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  Speaker 3: We think that the rate hikes will start in the
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  Speaker 3: third quarter. But if you take a global perspective, that
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  Speaker 3: means that both Australia and New Zealand will be pretty early.
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  Speaker 3: Were the first two G ten central banks to be
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  Speaker 3: lifting rates aside from Japan, which is a very sort
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  Speaker 3: of different story.
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  Speaker 2: Yeah, that's actually a very good point. And Paul as
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  Speaker 2: always lovely to chat you. Thank you so much mate,
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  Speaker 2: look after yourself. Paul Bloxham HSBC's chief economist.
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