Latest / Best of Business / Paul Bloxham: HSBC Chief Economist on Australia holding their OCR in place at 4.35 percent

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Paul Bloxham: HSBC Chief Economist on Australia holding their OCR in place at 4.35 percent · Best of Business

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  Speaker 2: Australia's official cash rate has been kept at four point
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  Speaker 2: three five percent. It's Reserve Bank helped the rate steady
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  Speaker 2: despite the inflation hovering well above the target of two
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  Speaker 2: to three percent. HSBC's chief economist Paul Bloxham is with.
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  Speaker 3: Us HI Paul Gooday.
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  Speaker 2: So what is this down to is this inflation is high,
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  Speaker 2: too high, but not as high as expected.
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  Speaker 3: That's part of the story.
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  Speaker 4: So inflation is above the target, but it was a
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  Speaker 4: little lower than the Reserve Bank had been expecting back
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  Speaker 4: in the second quarter numbers.
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  Speaker 3: That's part of it. I think.
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  Speaker 4: Also part of it is that the Australian economy is
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  Speaker 4: slowing down. There is evidence that growth is weakening, and
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  Speaker 4: so that's going to help to put down with pressure
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  Speaker 4: on inflation going forward. And I think the third part
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  Speaker 4: of it is they've already lifted interest rates three times.
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  Speaker 4: They lifted them in February, they lifted them in March,
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  Speaker 4: and they lifted them in May, and so they've already
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  Speaker 4: you know, taken quite a swipe at the economy to
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  Speaker 4: try and slow growth down and disinflate. They and that
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  Speaker 4: last move, the one in may Well, that was only
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  Speaker 4: just a few months ago, so it's still a little
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  Speaker 4: early to see the full impact of the rate hikes
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  Speaker 4: that have already been delivered.
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  Speaker 3: So I think this is the RBA at the moment
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  Speaker 3: in still weight and ce mode.
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  Speaker 4: They're still watching and waiting to see whether they've already
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  Speaker 4: tightened enough to get inflation to head back to their
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  Speaker 4: target over time, or whether they're going.
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  Speaker 3: To have to do just that little bit more.
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  Speaker 4: And the Governor today was quite clear that, look, they
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  Speaker 4: may have to do a bit more. It's possible they'll
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  Speaker 4: be back at some point in time lifting rates again.
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  Speaker 3: But for the moment they're happy to sit still.
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  Speaker 2: And are they also expecting that the drop off and
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  Speaker 2: the housing value will do some of the work for them.
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  Speaker 3: I think so.
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  Speaker 4: And look, our own view is that that is going
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  Speaker 4: to be part of the story. So there's a couple
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  Speaker 4: of things here. I mean, part of the reason why
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  Speaker 4: house prices are falling, and they are falling across the
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  Speaker 4: capital cities and across the nation in Australia now, a
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  Speaker 4: part of the reason is because of.
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  Speaker 3: The three rate rises the RBA is already delivered.
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  Speaker 4: But a part of it is also that there were
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  Speaker 4: quite substantial changes to the tax system that were delivered
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  Speaker 4: back in the May budget. They removed negative gearing and
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  Speaker 4: they adjusted the capital gains tax system. And these were
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  Speaker 4: intentionally designed, these policy shifts to we can investor demand
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  Speaker 4: to discourage investors from getting as heavily involved in the
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  Speaker 4: housing market.
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  Speaker 3: And they've done exactly that.
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  Speaker 4: They've weakened investor demand, and of course a part of
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  Speaker 4: that is to therefore put down with pressure on house prices.
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  Speaker 3: So that is the two things.
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  Speaker 4: The higher interest rates, the shifts and tax policy are
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  Speaker 4: weakening the housing market. We think house prices will continue
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  Speaker 4: to decline for quite some time yet, and that of
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  Speaker 4: course is then set to likely weaken the economy as well.
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  Speaker 3: And help to get inflation down.
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  Speaker 2: Now, what are you expecting, Paul? Are you expecting Australia's
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  Speaker 2: housing market to do what we've done over here?
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  Speaker 3: Not of the scale?
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  Speaker 4: No, I think you know, we've got expecting house prices
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  Speaker 4: to fall we think of up to about eight percent.
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  Speaker 4: We're down about two already, and that would be a
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  Speaker 4: much smaller decline than the house price decline.
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  Speaker 3: You got in New Zealand a few years back.
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  Speaker 4: But you've got to keep in mind your house price decline,
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  Speaker 4: which I think on sort of the metrics that I've seen,
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  Speaker 4: and it fell by about eighteen percent. That house price
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  Speaker 4: decline followed a forty five percent rise through the pandemic.
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  Speaker 4: You saw an enormous rally then followed by a correction.
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  Speaker 4: Australia's story is a little bit different, and I think
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  Speaker 4: that the primary thing that's going to weaken the housing
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  Speaker 4: market here, as I say, is tax changes and interest
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  Speaker 4: rates having gone up three times. It's not you know,
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  Speaker 4: it's not the same scale of the rate hikes that
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  Speaker 4: came out of the pandemic that delivered the big correction
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  Speaker 4: you saw in New Zealand.
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  Speaker 2: Yeah, interesting stuff it is. It seems to have come
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  Speaker 2: as a little bit of a surprise though to Australia,
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  Speaker 2: even to economists, the extent of the fall that is
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  Speaker 2: now predicted.
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  Speaker 4: Right well, I think once the tax changes were announced
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  Speaker 4: in the May budget, look, our own view was we
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  Speaker 4: were going to get house price declines. But I think
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  Speaker 4: that particular tax policy shift was not anticipated well in advance.
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  Speaker 3: I mean, that was that was.
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  Speaker 4: Quite a That was the bit that was sort of
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  Speaker 4: surprising that there were such hefty changes in the tax
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  Speaker 4: system all that once in the budget. Once that arrived,
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  Speaker 4: I think it was easier to see that there were
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  Speaker 4: going to be house priced to clients, but that, yes,
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  Speaker 4: that because that the tax change wasn't necessarily wholly anticipated,
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  Speaker 4: that that was a feature.
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  Speaker 2: Yeah, thank you very much, Paul. It's always good talk
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  Speaker 2: to you mate. This Paul Bloxhom, hsb's chief Economist HSBC.
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