Paul Bloxham: HSBC chief economist on the RBA increasing the OCR to 3.85 percent

The Reserve Bank of Australia started the year off with an increase set to impact mortgage holders.

The RBA increased the official cash rate by 25 basis points to 3.85 percent, citing increased concerns about inflation.

HSBC chief economist Paul Bloxham explained the increase further.

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Episode Transcript

Speaker 1 (00:09):
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Speaker 2 (00:16):
Now Australia, the cash rate has gone up for the
first time in more than two years. There it's Reserve
Bank has raised it by twenty five basis points is
now sitting at three point eighty five percent. So ahbpc's
chief economist Paul Bloxham is with us on this high Paul,
do you think they've made the right call?

Speaker 3 (00:34):
I think they needed to lift interest rates today. I
don't think there were any options. Really. Inflation is above
where the Reserve Bank can handle it. It's well above
their target. Growth is in an upswing. We're operating at
full capacity. The only thing that was going to get
inflation or is going to get inflation to head back
towards the RBA's target is going to be is tied

(00:55):
a monetary policy. So I don't think they really had
any choice today. I think they had to lift the
policy rate.

Speaker 2 (01:01):
There is I mean, I mean it seems to be
a minority view, but there is a view amongst some
economists that the inflation rises a blip and the forces
that are driving that are unwinding all by themselves. You
got the electricity prices going, get the dollars high, so
the imported goods are cheaper and so on. Does that
have any credibility? Will hold any water with you?

Speaker 3 (01:19):
I think we've had two consecutive quarters now of the
key underlying measure, the trim mean which the RBA focuses on,
that have been high prints. So we got a three
thirty print that was at one percent in the quarter,
and then a fourth quarter print that turned out to
zero point nine. And the year year eight is run
year on year rate is running at three point four.
The RBA targets two to three percent. So we've had

(01:41):
six months, two consecutive quarters of you know, well above
target inflation. I think the RBA didn't have any choice,
and I think it's not just the only story. As
I said, it's that the labor market, the jobs market's
actually quite tight, the uneployment rate's quite low, and growth
in and up swing as well. I think the RBA
needed to lift rates today and they have. They've lifted
the policy rate with the intention of slowing the economy

(02:04):
down to get inflation to head back to target.

Speaker 2 (02:06):
Okay, let me read this line to you that the
Reserve Bank Australia has been forced to lift rates to
try to tame inflation in an economy growing only modestly
should worry households, politicians and investors. What do you think
of that?

Speaker 3 (02:18):
I absolutely agree with that that we are in a
situation where we haven't we've only had a modest growth
up swing and it's delivered to pick up an inflation
that's excessive. And what that means is demand in the
economy is already racing ahead of supply. Not because demand
is strong. It's not the economy is in a strong upswing.
It's that the supply side of the economy is weak.

(02:40):
It's that productivity growth has been persistently weak and that's
left us with an economy which has got a lower
speed limit than it's had in the past. You know,
the RBA's assessment is that the speed limit for growing
the Australian economy now is two percent. We think it's
probably a little bit below two percent, and that's not
a great outcome. That that's the pace of growth, that's
the maximum pace of growth in the economy before that

(03:02):
we can have before it starts to deliver excessive inflation,
So it doesn't change the fact that the RBA has
to try to sort of manage demand to grow in
line with that sort of weaker supply side. What it
should do is remind us all that actually the imperative,
the focus, the policy focus needs to be on doing
things reform that can lift productivity. So all of the

(03:24):
sort of pro growth reforms we talk about all the time,
tax reform, deregulation, looking at the competition in the economy,
looking at the industry relation system, these are all the
things that we can do to try to get the
economy to be able to grow a bit faster so
the pie can grow a bit faster. But the RBA
didn't have any option today because, as I said, even
a modest upswinging growth has generated excessive inflation, and so

(03:46):
the RBA has got to get that inflation heading back
to target.

Speaker 2 (03:49):
Okay, so Michelle Bullock was talking today about consecutive rate rises,
what are you picking.

Speaker 3 (03:54):
I think the RBA is going to have to deliver
another tightening. Yet I don't think it's going to happen
necessarily at the next meeting. I think the RBA is
going to be quite cautious. And she did talk about
that as well, about the fact that the board's going
to want to be quite cautious. I think they're going
to want to have a bit of time to judge
how much impact this tightening has delivered, because in some ways,
the whole story's turned around really quickly. I mean, you know,

(04:16):
back in October last year, we were all thinking all
the market was expecting rate cuts and we were in
an easing phase, and of course now we're in February
and we've lifted rates. So I think it's going to
take a bit of time to see how much impact
this tightening delivers into the economy, and I think they're
going to want to be cautious, so I think they'll
draw it out. But I do think we'll get to
sort of later in the year and they'll probably have

(04:36):
to deliver a bit more tightening to get inflation to
come back to target.

Speaker 2 (04:40):
Paul I saw somebody was writing in one of the
New Zealand media I think about to be a business
desk over here saying, well, you know, this does Colan's
question now whether our Reserve Bank is going to think, geez,
we better start doing it as well and potentially look
at lifting in a couple of weeks time. Are they
on the money or getting ahead of their skis on that.

Speaker 3 (04:59):
I think that the story is very different in New Zealand.
You've had a much bigger cycle. You've had a much
bigger downturn in the face of the interest rate rises
that we larger earlier on and that's been sustained and
now you're in this upswing. Inflation is starting to rise
as well. I think the core measures are starting to rise,
and I do think the RBNZ is going to have

(05:19):
to lift interest rates, but I don't think it's going
to come quite as soon as that. Now we've got
a mind that we'll see the rban Z starting to
lift interest rates in the second half of this year.
We think that the rate hikes will start in the
third quarter. But if you take a global perspective, that
means that both Australia and New Zealand will be pretty early.
Were the first two G ten central banks to be
lifting rates aside from Japan, which is a very sort

(05:41):
of different story.

Speaker 2 (05:42):
Yeah, that's actually a very good point. And Paul as
always lovely to chat you. Thank you so much mate,
look after yourself. Paul Bloxham HSBC's chief economist.

Speaker 1 (05:49):
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