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

Over in Australia, the Reserve Bank has moved to keep the official cash rate in place at 4.35 percent.

The result was widely expected by economists and money markets, despite inflation remaining above the RBA’s 2-3 percent target range in the June quarter.

HSBC Chief Economist Paul Bloxham says there's evidence that the Australian economy is slowing down, which is helping put downward pressure on inflation. 

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Episode Transcript

Speaker 1 (00:00):
And now Australia's official cash rate has been kept at
four point three five percent. It's Reserve Bank helped the
rate steady despite the inflation hovering well above the target
of two to three percent. HSBC's chief economist Paul Bloxham
is with US high Paul good Ay. So what is
this down to is this inflation is high, too high,
but not as high as expected.

Speaker 2 (00:19):
That's part of the story. So inflation is above the target,
but it was a little lower than the Reserve Bank
had been expecting back in the second quarter numbers. That's
part of it. I think. Also part of it is
that the Australian economy is slowing down. There is evidence
that growth is weakening, and so that's going to help
to put down with pressure on inflation going forward. And
I think the third part of it is they've already

(00:39):
lifted interest rates three times. They lifted them in February,
they lifted them in March, and they lifted them in May,
and so they've already, you know, taken quite a swipe
at the economy to try and slow growth down and
disinflate the economy. And that last move, the one in Mate,
well that was only just a few months ago, so
it's still a little early to see the full impact
of the rates that have already been delivered. So I

(01:02):
think this is the RBA at the moment in still
weight and ce mode. They're still watching and waiting to
see whether they've already tightened enough to get inflation to
head back to their target over time, or whether they're
going to have to do just that little bit more.
And the Governor today was quite clear that, look, they
may have to do a bit more. It's possible they'll
be back at some point in time lifting rates again.

(01:23):
But for the moment they're happy to sit still.

Speaker 1 (01:25):
And are they also expecting that the drop off and
the housing value will do some of the work for them.

Speaker 2 (01:31):
I think so, And look, our own view is that
that is going to be part of the story. So
there's a couple of things here. I mean, part of
the reason why house prices are falling, and they are
falling across the capital cities and across the nation in
Australia now, a part of the reason is because of
the three rate rises the RBA is already delivered. But
a part of it is also that there were quite
substantial changes to the tax system that were delivered back

(01:53):
in the May budget. They removed negative gearing and they
adjusted the capital gains tax system. And these were intentionally
just these policy shifts to we can investor demand to
discourage investors from getting as heavily involved in the housing market.
And they've done exactly that. They've weakened investor demand, and
of course a part of that is to therefore put
down with pressure on house prices. So that is the

(02:15):
two things. The higher interest rates, the shifts and tax
policy are weakening the housing market. We think house prices
will continue to decline for quite some time yet, and
that of course is then set to likely weaken the
economy as well and help to get inflation down.

Speaker 1 (02:29):
Now, what are you expecting, Paul, Are you expecting Australia's
housing market to do what we've done over here?

Speaker 2 (02:35):
Not of the scale, no, I think you know, we've
got expecting house prices to fall we think of up
to about eight percent. We're down about two already, and
that would be a much smaller decline than the house
price decline you got in New Zealand a few years back.
But you've got to keep in mind that your house
price decline, which I think on sort of the metrics
that I've seen, it fell by about eighteen percent. That

(03:00):
rice decline followed a forty five percent rise through the pandemic.
You saw an enormous rally then followed by a correction.
Australia's story is a little bit different, and I think
that the primary thing that's going to weaken the housing
market here, as I say, is tax changes and interest
rates having gone up three times. It's not you know,

(03:20):
it's not the same scale of the rate hikes that
came out of the pandemic that delivered the big correction
you saw in New Zealand.

Speaker 1 (03:26):
Yeah, interesting stuff. It seems to have come as a
little bit of a surprise though to Australia, even to economists,
the extent of the fall that is now predicted.

Speaker 2 (03:32):
Right well, I think once the tax changes were announced
in the May budget, look, our own view was we
were going to get house price declines. But I think
that particular tax policy shift was not anticipated well in advance.
I mean, that was that was quite a That was
the bit that was sort of surprising that there were
such hefty changes in the tax system all that once

(03:53):
in the budget. Once that arrived, I think it was
easier to see that there were going to be house
price declines, but that, yes, that because that tax change
wasn't necessarily wholly anticipated, that that was a feature.

Speaker 1 (04:04):
Yeah, thank you very much, Paul. It's always good to
talk to you, mate. This is Paul Bloxhom, hsb's chief economist, HSBC.

Speaker 2 (04:10):
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