Paul Bloxham: HSBC chief economist speculates about future increases to Australia's OCR

Growing inflation and a changing economy could inspire Australia's Reserve Bank to start putting the OCR up again, according to one expert.

Australia's current official cash rate is currently at 4.35 percent, but the central bank is due to make an announcement later this month.

HSBC chief economist Paul Bloxham outlined when the next increase could come - and whether there's more in the pipeline.

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Episode Transcript

Speaker 1 (00:00):
Paul Bloxham, HSBC's Chief Economist. Hey, Paul.

Speaker 2 (00:03):
G'day.

Speaker 1 (00:04):
Now, Paul, did I see you've changed your view on
what the RBA is going to do?

Speaker 2 (00:08):
We have. The RBA, we think, has a bit more
work ahead of it. And so we changed that on
the back of a couple of things. The first thing
is a couple of weeks ago, we got an upside
surprise on inflation, the monthly reading for July, and it
was a reasonably decent upside surprise. And then last week,
we got GDP figures, growth figures, that show that the
economy is both growing a bit faster than was expected,

(00:30):
but also that the supply side, the ability of the
economy to actually meet that demand, productivity has been very weak.
In fact, it's been going backwards. Over the last year,
labour productivity has been falling. And so the combination of
having higher inflation and having an economy that is growing
faster than is sustainable, faster than its speed limit, and
we think the RBA is going to have to lift

(00:51):
interest rates further. So we've got in mind that the
RBA will have to come back and lift interest rates.
We think they'll probably lift interest rates at their next
meeting in September, and then may very well have to
do another hike beyond that.

Speaker 1 (01:02):
What does that do, do you think, to house prices?
Does it have a direct impact on what's going on
with your property market? It does.

Speaker 2 (01:08):
And that's one of the consequences of this is that
the housing market is already cooling. So house prices have
already declined as a daily index in Australia, and it's
already down almost 5% since its peak nationally. And we
think that given we're going to get, we expect more
interest rate rises yet that the housing market will probably
cool further. So we've revised down our expectation for house

(01:30):
prices and we think a bigger decline is likely. So
you might say, well, if house prices are falling, is
the RBA really going to come and lift interest rates
any further? And that's a valid question. But the answer
really is the RBA focuses on inflation. They target inflation.
Inflation is already too high. They don't focus on the
housing market. The two are linked together to some degree.

(01:50):
But we think they're going to have to lift interest
rates because of the inflation problem, even though it will
cool the housing market further. Yeah.

Speaker 1 (01:56):
On the cooling housing market, I mean, there's a bit
of a correlation with what's going on in New Zealand.
I haven't had a chance to talk to you about
the RBNZ yet. They attribute what is going on with
cautious spending to the wealth effect and the fact that
our property prices have come backwards significantly. Would you agree
with them?

Speaker 2 (02:13):
I do. I think the difference between this cycle for
New Zealand and previous ones is that when the RBNZ
has already lowered rates as they had done a few
years ago, and when you had an economic upswing of
the sort that you're getting, normally what you've got is
a housing market that's already picking up as well. And
the difference this time around is even though the economy

(02:34):
is in a recovery, the housing market is still very weak.
You came off the back of the really large surge
in prices through the pandemic and then the decline in
prices that came after it, and you just haven't had
any recovery. So I think the really big difference between
this cycle and previous cycles and the thing that's keeping
it more gradual than we've seen in the past is

(02:54):
the housing market and the fact that it's still quite subdued,
still quite weak.

Speaker 1 (02:58):
So do you think that if I was to look
at what Anna Bremen is saying and say it's a
pause in October, am I reading that about right?

Speaker 2 (03:05):
Well, we think so. We think that having lifted rates
twice now, they will pause at the next meeting. We think,
you know, what they've been looking to do is get
the policy rate a bit closer to neutral because inflation
is above target. They're still below neutral. They're still providing
support for the economy, but they needed to move a
little bit closer to be comfortable. But we think that
where they are now, they'll be comfortable with when they

(03:27):
get to that October meeting. And the trade-off now or
the judgment now to be made is how worried are
they about inflation being a squashing what is only a
very gradual economic recovery that's underway at this point in time. Yeah.

Speaker 1 (03:44):
Hey, it's good to talk to you as always, Paul.
You look after yourself. We'll talk to you again soon.
That's Paul Bloxham, HSBC's Chief Economist. It's 20 away from seven.