Latest / Best of Business / Paul Bloxham: HSBC Chief Economist on Australia and New Zealand looking to lift rates amid ongoing fuel crisis

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Paul Bloxham: HSBC Chief Economist on Australia and New Zealand looking to lift rates amid ongoing fuel crisis · Best of Business

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  Speaker 1: You're listening to a podcast from News Talk zed B.
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  Speaker 2: As you probably realize by now, if you keep an
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  Speaker 2: eye on interest rates, Australia and New Zealand are outliers.
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  Speaker 2: Most of the world will hold their interest rates and
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  Speaker 2: try to weight out this energy shock, but both Ozzie
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  Speaker 2: and New Zealand a tip to start raising soon. Paul
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  Speaker 2: Bloxham ishb's chief HSBC's chief economist and is.
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  Speaker 1: With us right now.
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  Speaker 2: Hi, Paul, good Ay, Why is it that we are
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  Speaker 2: so out of step with the rest of the world.
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  Speaker 3: Well, for we are out of step, we are outliers,
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  Speaker 3: and I think for Australia and for New Zealand the
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  Speaker 3: stories are both a little bit different to each other
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  Speaker 3: as well. So for Australia, the story is that we've
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  Speaker 3: started this. You started out at the starting point where
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  Speaker 3: we are right now is one where inflation is already
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  Speaker 3: too high, even before we think about the impact of
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  Speaker 3: the Middle East crisis and the energy shock that it's delivery,
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  Speaker 3: which is obviously set to drive inflation even higher. So
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  Speaker 3: we've started out with inflation that's already too high. An
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  Speaker 3: economy that's been operating beyond its spare capacity, and a
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  Speaker 3: labor market that's been tight. The unemployment rate's been low,
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  Speaker 3: and that means that we're really in the least good
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  Speaker 3: position really to deal with the shop. Inflation is already
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  Speaker 3: too high. We're going to get another step up in inflation.
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  Speaker 3: And the risk here is that that step up in
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  Speaker 3: inflation that comes from the energy shock starts to get
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  Speaker 3: itself into inflation expectations, that workers demand higher wages on
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  Speaker 3: the back of the higher inflation, and because the labor
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  Speaker 3: market's tight, they might get it. And because the economy
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  Speaker 3: has been operating beyond its capacity, businesses will try and
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  Speaker 3: pass on their higher cost to prices as well, and
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  Speaker 3: so it might start to affect medium term inflation and
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  Speaker 3: it might be more difficult to get inflation down. So
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  Speaker 3: this is why we think the RBA, having hiked already
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  Speaker 3: twice February and March, probably lifts rates again next week.
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  Speaker 3: For New Zealand, the story is simply the economy isn't
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  Speaker 3: that strong. I mean, you've had three weeks three years
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  Speaker 3: of weakness. There's a modest recovery underway, and the labor
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  Speaker 3: market's still quite loose. But and here's the big difference.
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  Speaker 3: The policy rate. Cash rate in New Zealand is well
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  Speaker 3: below neutral, so does the central bank? Does the board
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  Speaker 3: want to have a below neutral cash rate when it
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  Speaker 3: knows when it's going to get another rise in inflation
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  Speaker 3: that could get into inflation expectations, and we think that's
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  Speaker 3: going to be the reason why the ARBY and Z
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  Speaker 3: will want to be cautious and start to lift its
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  Speaker 3: policy rate as well. So this makes us very different.
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  Speaker 3: All the other central banks, all the big ones this week,
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  Speaker 3: the FED, the Bank of England, the UCB, we saw
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  Speaker 3: the back of Japan today, all of the major central
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  Speaker 3: banks around the world, the Bank of England, I said,
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  Speaker 3: you know, they're all expected to be on hold. But
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  Speaker 3: Australia and New Zealand, well, we're not going to be
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  Speaker 3: able to wait and see. I think we're going to
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  Speaker 3: be lifting rates.
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  Speaker 2: So last week the Finance min is to publish the
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  Speaker 2: scenarios for what might happen depending on how long the
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  Speaker 2: Iran war drags out. And obviously the worst case scenario
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  Speaker 2: is that this thing goes on all the way through
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  Speaker 2: the year into next year, and we're looking at seven
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  Speaker 2: point four percent again, which is exactly where we were
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  Speaker 2: post COVID with inflation. Can New Zealand cope with that again, Paul,
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  Speaker 2: if it came to that.
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  Speaker 3: Look, I think these could be quite challenging times if
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  Speaker 3: it plays out poorly. You know, the scenario is that
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  Speaker 3: the straight up fumus remains closed for an extended even
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  Speaker 3: extended period from here, and we get some sort of
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  Speaker 3: bigger step up in energy costs from here, and that
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  Speaker 3: drives even more inflation. I guess the difference this time around,
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  Speaker 3: and this is what's worth keeping in mind. There is
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  Speaker 3: a big difference between now and twenty twenty two, and
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  Speaker 3: the fundamental difference is this is just a negative supply shop.
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  Speaker 3: This is the price of energy going up, the price
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  Speaker 3: of imported goods going out, and that's bad for growth.
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  Speaker 3: There is no sort of positive demand shock. In twenty
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  Speaker 3: twenty two. One of the reasons why we've got all
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  Speaker 3: that inflation was because we'd reopened our economy after the pandemic,
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  Speaker 3: after two years of being told we couldn't do the
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  Speaker 3: things we wanted to do and being given cash, and
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  Speaker 3: we'd saved a lot of it. Of course, everyone in
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  Speaker 3: twenty twenty two wanted to go back to doing things.
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  Speaker 3: So we went out and there's a huge surgeon demand
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  Speaker 3: people that went spending on restaurants and cafes and travel
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  Speaker 3: and theater and the sporting events and so on. So
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  Speaker 3: back then we had this surgeon demand and a negative
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  Speaker 3: supply shock. This time around, it is just a negative
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  Speaker 3: supply shock. So I think the way I think about
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  Speaker 3: it is it could very well leave to higher inflation,
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  Speaker 3: but it's also going to weaken growth and quite quickly,
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  Speaker 3: I think if this plays out poorly, Yeah, and you.
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  Speaker 2: Just have to wonder how much resilience there is in households. Right,
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  Speaker 2: because we were coming off the back of COVID, we
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  Speaker 2: all had lots of money because we'd been given so much,
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  Speaker 2: But now that must have been whittled away.
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  Speaker 3: Yeah, that's exactly right. So with that, you would I
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  Speaker 3: would say the likely response then from the central Bank
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  Speaker 3: in terms of interest rates will be that they won't
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  Speaker 3: lift interest rates nearly as much as they did back then.
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  Speaker 3: I mean, back then you were lifting interest rates because well, firstly,
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  Speaker 3: interest rates started off at zero. Secondly, you had this
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  Speaker 3: big surgeon demand that you're describing, we're describing, and you
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  Speaker 3: had the Russia Ukraine event that forced energy prices up
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  Speaker 3: this time around. You don't have that stock of saving
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  Speaker 3: sitting there. Uh and so and you have, you are
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  Speaker 3: going to see a higher cost of living. So I
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  Speaker 3: think it's going to weaken growth, and that's going to
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  Speaker 3: mean central banks don't have to do as much. They
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  Speaker 3: don't lift interest rates nearly as much as they did
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  Speaker 3: last time.
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  Speaker 2: Yeah, Paul, thank you for talking Sroy. It always appreciate
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  Speaker 2: it talking to you. Paul Block, some agspecies Chief Economists.
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