Latest / Best of Business / Paul Bloxham: HSBC chief economist on the RBA increasing the OCR for the second month in a row

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Paul Bloxham: HSBC chief economist on the RBA increasing the OCR for the second month in a row · 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: Now. Australia's Reserve Bank announced a twenty five basis point
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  Speaker 2: increase in its official cash rate today to four point
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  Speaker 2: one percent as a couple of hours ago.
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  Speaker 1: Now.
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  Speaker 2: HSBC Chief Economist Paul Bloxham has of course been watching
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  Speaker 2: at high.
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  Speaker 3: Pool a right.
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  Speaker 2: So not unexpected the RBA lifting the rates, but pretty
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  Speaker 2: unusual globally, isn't it.
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  Speaker 3: It is is very unusual if you look across what's
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  Speaker 3: happening this week. We've got a whole range of central
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  Speaker 3: banks meeting. We've got the US Central Bank, the Federal Reserve,
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  Speaker 3: that the Bank of England, the ECB, the Bank of
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  Speaker 3: Japan and a few others, and they're not expected to
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  Speaker 3: do anything with their policy rate. That's the market expectation,
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  Speaker 3: that's our view as well. But the RBA is the
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  Speaker 3: odd man out, the odd one out, having lifted its
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  Speaker 3: policy rate today. In fact, you know, not just lifted it.
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  Speaker 3: It lifted it in February and it's lifted it again
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  Speaker 3: in March. Australia is in a different spot to all
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  Speaker 3: of these other places, right, now, and a lot of
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  Speaker 3: it is domestic. A lot of it is a unique story.
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  Speaker 3: Australia has got an economy that is growing too quickly
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  Speaker 3: for its supply capacity, so it's running well ahead of
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  Speaker 3: its speed limit, and that has delivered domestic inflation that
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  Speaker 3: is too high, and the RBA has needed to take
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  Speaker 3: action to seek to slow the economy down. That's what
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  Speaker 3: they've done, and that's what they did again today with
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  Speaker 3: their rate rise.
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  Speaker 2: Yeah, but obviously what this is going to do is
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  Speaker 2: and we as you well know, is going to put
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  Speaker 2: a dampner on GDP. And I hear that there's already
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  Speaker 2: talk about recession. Is that a realistic possibility for Australia.
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  Speaker 3: Well, I think what we can say right now is
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  Speaker 3: Australia needs to have an economic downturn. You have to
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  Speaker 3: have a slow down. There's really it would be very
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  Speaker 3: hard to get inflation down without having a slow down
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  Speaker 3: in the economy at this point. So I think that
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  Speaker 3: we can be confident of the RBA's lifted interest rates.
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  Speaker 3: That's going to slow the economy down. That's the mechanism
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  Speaker 3: for getting inflation to come down. The question is how
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  Speaker 3: big a slow down is it, How bigger downturn is
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  Speaker 3: it Will it actually turn out to be a recession
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  Speaker 3: or not? And I think that's a much more difficult
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  Speaker 3: question to answer. I think the risk of it has risen,
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  Speaker 3: but it's more difficult to answer because not only does
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  Speaker 3: it depend obviously on the domestic story, but it depends
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  Speaker 3: on the global story, and what's going on right now,
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  Speaker 3: I'm sure is highly uncertain. Sharp rise and oil prices
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  Speaker 3: is a key feature of that, and the longer it
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  Speaker 3: goes on, the more it creates a risk that that
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  Speaker 3: could deliver a bigger downturn from the rest of the
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  Speaker 3: world that then feeds through to Australia and in fact
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  Speaker 3: feeds through to New Zealand as well. I mean, that's
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  Speaker 3: why it's tricky to really have a definitive answer. Our
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  Speaker 3: central case is no for the moment, but I think
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  Speaker 3: the risks are tilted to the downside.
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  Speaker 2: Is that no recession for Australia or no recession for
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  Speaker 2: Australia and New Zealand.
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  Speaker 3: We're not forecasting at the moment a recession in either
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  Speaker 3: of those countries. But I think what we need to
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  Speaker 3: be aware of is that there's a lot of uncertainty
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  Speaker 3: in the overall global story right now, and that could
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  Speaker 3: possibly deliver weaker conditions. And in Australia's case, if we
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  Speaker 3: go back to Australia, what we can say with some
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  Speaker 3: confidence is Australia has to have a downturn because otherwise
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  Speaker 3: it's hard to see how inflation's going to come down.
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  Speaker 3: And the RBA is in the process of making that
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  Speaker 3: happen by lifting interest rates twice already to sleep to
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  Speaker 3: slow the economy down to deliver a downturn. So once
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  Speaker 3: you're in a downturn, if it gets big enough, that
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  Speaker 3: of course is what you start to call a recession.
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  Speaker 3: I mean, if it gets deep enough you have an
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  Speaker 3: actual contraction and you have a sharp enough rise in
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  Speaker 3: the uneployment rate. That's not our central case at the moment,
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  Speaker 3: but I think the chance of it is rising. I
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  Speaker 3: think in a New Zealand's case, actually you're in a
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  Speaker 3: little bit better shape for dealing with the shop that's
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  Speaker 3: currently arriving. And that's partly because you've brought inflation already
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  Speaker 3: back down into the Reserve Banks target band. Australia has
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  Speaker 3: got starts off with inflation that's too high, and so
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  Speaker 3: it's dealing with the domestic problem as well as what's
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  Speaker 3: happening globally, and there is spare capacity in the New
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  Speaker 3: Zealand economy, so there's still scope to go either way
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  Speaker 3: with interest rates. It's harder, I think in Australia to
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  Speaker 3: think that the RBA can do that. They've got an
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  Speaker 3: economy that's already at its limits, beyond its limits in
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  Speaker 3: terms of where it's how it's growing.
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  Speaker 2: This is a political question for you because we have
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  Speaker 2: an election coming up in November, and given what you're
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  Speaker 2: seeing happen over in Iran and the lag effect, should
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  Speaker 2: we expect that this is all washed out and through
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  Speaker 2: the system in eight months or are we still dealing
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  Speaker 2: in November with the stuff that's going on over there
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  Speaker 2: right now?
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  Speaker 1: Oh?
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  Speaker 3: I think that's an extraordinarily hard question to answer. I
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  Speaker 3: wouldn't know where to start. We need to What we
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  Speaker 3: need to do is think about the things we know
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  Speaker 3: the answer to, so we know we don't know the
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  Speaker 3: answer to that, so we have to sort of work
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  Speaker 3: out what the right questions are. I mean, how long
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  Speaker 3: it goes on for is going to be the fundamental
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  Speaker 3: deciding factor as to how much it continues to deliver
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  Speaker 3: upward pressure on oil prices, and that's the big feature
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  Speaker 3: of how this has an impact and feeds through to
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  Speaker 3: the Australian and New Zealand economies. And I think the
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  Speaker 3: risk that it goes oil prices stay higher for longer
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  Speaker 3: and so we need to be just aware of that.
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  Speaker 3: And then the question would be, well, how would you
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  Speaker 3: respond to it if you were a policy maker, and
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  Speaker 3: I would say, in Australia's case, we've already got an
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  Speaker 3: inflation problem even before this arrived, and so that's why
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  Speaker 3: the RBA is lifting interest rates at the moment, and
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  Speaker 3: that means that we have to have a downturn. In
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  Speaker 3: New Zealand's case, I think inflation is already back in
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  Speaker 3: the target band, or has been very on a core basis,
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  Speaker 3: it's in the target band. So there's a bit more
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  Speaker 3: room to move in terms of being able to support
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  Speaker 3: the economy if needed at some point. And the same
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  Speaker 3: with fiscal policy in terms of Australia. We have to
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  Speaker 3: when we head towards the May Budget, which is going
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  Speaker 3: to be a big focus in Australia, the May Budget
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  Speaker 3: has to be careful not to boost the economy too
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  Speaker 3: much and drive more inflation at a time when we're
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  Speaker 3: already operating beyond capacity. New Zealand's got a bit more scope.
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  Speaker 3: There's a there's spare capacity in the economy, so there's
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  Speaker 3: a bit more riggle room perhaps on the fiscal side.
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  Speaker 2: Yeah, I'm pleased to hear it. Hey, Paul, thank you
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  Speaker 2: was always appreciated. Paul Block some hspc's chief economist.
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