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Paul Bloxham: HSBC chief economist speculates about future increases to Australia's OCR · Best of Business

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  Speaker 1: You're listening to a podcast from Newstalk ZB. Follow this
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  Speaker 1: and our wide range of podcasts now on iHeartRadio. Paul Bloxham,
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  Speaker 1: HSBC's Chief Economist. Hey, Paul.
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  Speaker 2: G'day.
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  Speaker 1: Now, Paul, did I see you've changed your view on
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  Speaker 1: what the RBA is going to do? We have.
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  Speaker 2: The RBA, we think, has a bit more work ahead
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  Speaker 2: of it. And so we changed that on the back.
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  Speaker 1: Of a couple of things.
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  Speaker 2: The first thing is a couple of weeks ago, we
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  Speaker 2: got an upside surprise on inflation, the monthly reading for July,
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  Speaker 2: and it was a reasonably decent upside surprise. And then
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  Speaker 2: last week, we got GDP figures, growth figures, that show
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  Speaker 2: that the economy is both growing a bit faster than
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  Speaker 2: was expected, but also that the supply side, the ability
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  Speaker 2: of the economy to actually meet that demand, productivity has
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  Speaker 2: been very weak. In fact, it's been going backwards. Over
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  Speaker 2: the last year, labour productivity has been falling. And so
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  Speaker 2: the combination of having higher inflation and having an economy
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  Speaker 2: that is growing faster than is sustainable, faster than its
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  Speaker 2: speed limit. And we think the RBA is going to
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  Speaker 2: have to lift interest rates further. So we've got in
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  Speaker 2: mind that the RBA will have to come back and
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  Speaker 2: lift interest rates. We think they'll probably lift interest rates
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  Speaker 2: at their next meeting in September and then may very
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  Speaker 2: well have to do another hike beyond that.
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  Speaker 1: What does that do, do you think, to house prices?
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  Speaker 1: Does it have a direct impact on what's going on
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  Speaker 1: with your property market?
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  Speaker 2: It does. And that's one of the consequences of this
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  Speaker 2: is that the housing market is already cooling. So house
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  Speaker 2: prices have already declined significantly. There's a daily index in
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  Speaker 2: Australia and it's already down almost 5% since its peak nationally.
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  Speaker 2: And we think that given we're going to get, we
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  Speaker 2: expect more interest rate rises yet that the housing market
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  Speaker 2: will probably cool further. So we've revised down our expectation
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  Speaker 2: for house prices and we think a bigger decline is likely.
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  Speaker 2: So you might say, well, if house prices are falling,
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  Speaker 2: is the RBA really going to come and lift interest
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  Speaker 2: rates any further? And that's a valid question. But the
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  Speaker 2: answer really is the RBA is focuses on inflation. They
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  Speaker 2: target inflation. Inflation is already too high. They don't focus
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  Speaker 2: on the housing market. The two are linked together to
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  Speaker 2: some degree, but we think they're going to have to
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  Speaker 2: lift interest rates because of the inflation problem, even though
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  Speaker 2: it will cool the housing market further.
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  Speaker 1: Yeah. On the cooling housing market, I mean, there's a
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  Speaker 1: bit of a correlation with what's going on in New Zealand.
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  Speaker 1: I haven't had a chance to talk to you about
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  Speaker 1: the RBNZ yet. They attribute what is going on with
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  Speaker 1: cautious spending to the wealth effect and the fact that
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  Speaker 1: our property prices have come backwards significantly. Would you agree
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  Speaker 1: with them? I do.
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  Speaker 2: I think the difference between this cycle for New Zealand
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  Speaker 2: and previous ones is that when the RBNZ has already
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  Speaker 2: lowered rates as they had done a few years ago,
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  Speaker 2: And when you had an economic upswing of the sort
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  Speaker 2: that you're getting, you know, normally what you've got is
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  Speaker 2: a housing market that's already picking up as well. And
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  Speaker 2: the difference this time around is even though the economy
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  Speaker 2: is in a recovery, the housing market is still very weak.
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  Speaker 2: You know, you came off the back of the really
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  Speaker 2: large surge in prices through the pandemic and then the
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  Speaker 2: decline in prices that came after it, and you just
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  Speaker 2: haven't had any recovery. So, I think the really big
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  Speaker 2: difference between this cycle and previous cycles and the thing
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  Speaker 2: that's keeping it more gradual than we've seen in the
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  Speaker 2: past is the housing market and the fact that it's
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  Speaker 2: still quite subdued, still quite weak.
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  Speaker 1: So do you think that if I was to look
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  Speaker 1: at what Anna Bremen is saying and say it's a
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  Speaker 1: pause in October, am I reading that about right?
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  Speaker 2: Well, we think so. We think that having lifted rates
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  Speaker 2: twice now, they will pause at the next meeting. We think,
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  Speaker 2: you know, what they've been looking to do is get
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  Speaker 2: the policy rate a bit closer to neutral because inflation
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  Speaker 2: is above target. They're still below neutral. They're still providing
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  Speaker 2: support for the economy, but they needed to move a
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  Speaker 2: little bit closer to be comfortable. But we think that
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  Speaker 2: where they are now, they'll be comfortable with when they
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  Speaker 2: get to that October meeting. And the trade-off now or
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  Speaker 2: the judgment now to be made is how worried are
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  Speaker 2: they about inflation being a squashing what is only a
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  Speaker 2: very gradual economic recovery that's underway at this point in time.
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  Speaker 1: Yeah. Hey, it's good to talk to you as always, Paul.
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  Speaker 1: You look after yourself. We'll talk to you again soon.
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  Speaker 1: That's Paul Bloxham, HSBC's Chief Economist. It's 20 away from seven.