Paul Bloxham: HSBC chief economist on the Reserve Bank cutting the OCR by 25 basis points

Homeowners have been able to breathe a sigh of relief following the Reserve Bank's decision to cut the OCR.

The cash rate was cut by 25 basis points after their August meeting, down to 5.25 percent. 

HSBC chief economist Paul Bloxham explains that the RBNZ had to meet expectations to keep the economy in check.

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Episode Transcript

Speaker 1 (00:00):
Ever, dup Clans Paul Blosom, hspc's chief economists in Sydney's
with us a Paul mate, we haven't spoken to you
since the big ocr call last week. What did you
make of that?

Speaker 2 (00:11):
Well, it was a big change, wasn't it. You know
what we had in mind that the ARB and Z
would likely be cutting this year. In fact, we thought
they might cut in October, but we didn't quite think
it would be quite so soon. And most of that
came down to us listening to what they'd been saying.
They told us in May they were really worried about
domestic inflation, but the time we got to the August meeting,
of course they were cutting because they are more worried

(00:33):
about other things. So look, the story is a good
news story though in the end, you know, inflation is
coming down, and so the RB and z's got an
opportunity to start taking their foot off the break and
obviously there are other central banks around the world that
are doing that as well, and so that's a good
thing that there's going to be a bit more support
coming through the economy with loser monetary policy.

Speaker 1 (00:53):
What do you reckon? They go, what was going on there?
Were they misreading the economy or were they bluffing?

Speaker 2 (00:59):
Oh look, I Forard guidance has got lots of different functions,
you know, And that's what they were doing, right. They
were telling us what they thought they were going to
do with their policy rate. And one of the functions
is to manage expectations and sort of set the sort
of groundwork for what they want people to think they're
going to be doing and how that and that can
deliver tighter financial conditions. So there could be an element

(01:20):
of using that tool to tighten up and ensure that
inflation came down. The other thing that it's supposed to do, though,
is it supposed to give guidance to market as to
how the central bank responds to data when it comes out.
And so that's the challenge. The challenge is that it doesn't.
It didn't necessarily know most of the economists in the
consensus we're thinking that they wouldn't cut because they were

(01:42):
listening to what was said back in May. So there
are trade offs with using Ford guidance, and I think
that's a question that's still yet to be answered that
I think the main story here, as I say, is
a good one. Inflation's coming down, interest rates are coming
down as well, and that means that you know, that's
going to give a bit more support to the economy.

Speaker 1 (01:58):
And so how low do you think this goes in
the But I don't know. A couple of the next
couple of years.

Speaker 2 (02:03):
Well, we now think that, well, we think that the
RB and Z will probably deliver a couple of more
cuts because twenty five basis point isn't very much this year.
So we've got two more cuts this year, and then
we've got another four penciled in for next year. So
that would take the cash rate all the way back
down to somewhere that's sort of closer to neutral, maybe
a roundabout or a little bit below their neutral setting.
So we haven't got in mind that we're going all

(02:24):
the way back down to the levels we were pre pandemic,
or the levels we were even through the pandemic. The
world is a different place now where interest rates are
a bit higher and inflation is a bit stickier. But
we do think there's a fair bit of relief that's
going to come through fairly quickly, and that's going to
happen in New Zealand. But you know, today we got
reminded again by the RBA in their minutes that the
RBA is still quite some time away from thinking that

(02:45):
they can deliver rate cuts here in Australia.

Speaker 1 (02:47):
Yeah, so those minutes that were released showed that they
had considered right hiking, but they decided instead that the
best option was just keep it steady and higher for longer.
Is this then trying to avoid a full on recession?

Speaker 2 (03:00):
Well, I think this has been the plan all the
way along. They wanted to. They didn't lift interest rates
quite as much as everyone else. They did less, for
example than the arby Inzad and the FED and the
Bank of England. The need that strategy was to bring
inflation down. Of course they need to bring inflation down
it was very high, but try to maintain as close
to full employment as possible along the way, not not

(03:21):
deliver a hard landing. Well they've gotten both those that
the economy has slowed, but it's not had a hard landing.
We haven't had a recession in Australia. And inflation, well
it's not coming down quite very quickly. It's still taking
time to fall. So that leaves them without the option
of being able to cut rates and as you say,
really quite something that they were talking about possibly lifting
rates early in August, where of course other central banks

(03:45):
are busy cutting them at the moment. So look, we've
held this few all years. You know a bit. You
know that we don't think the RBA is cutting this year,
that rate cuts are more proposition to twenty twenty five,
and a lot of that is to do with the
strategy that the RBA has taken. They've tightened less slow
the economy, less inflation's coming down more slowly.

Speaker 1 (04:03):
Good stuff, Paul, It's good to talk to you, and
we'll talk to you again very shortly. Look after yourself.
That's Paul bloxsome the ages SPC chief economists in Sydney.

Speaker 2 (04:10):
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