Rates will go up, but not this time around: HSBC's Bloxham

HSBC economist Paul Bloxham says the case for the RBA raising interest rates is “solid”, but they won’t go up in August.

Instead, borrowers should expect a rate hike in the fourth quarter of 2011 due to an expectation of inflation continuing to rise.

This follows ANZ chief economist Warren Hogan going out on a limb by suggesting rates will rise at the next RBA monetary policy meeting on August 2 following higher-than-forecast June quarter inflation data.

In a note titled “The RBA Observer” Bloxham writes that in a normal state of the world, two quarters of the inflation measure being outside the target band (2% to 3%) would be enough to motivate a hike. 

However, Bloxham says the world is currently “full of tail risks”. 

“And, as the RBA governor is fond of saying, monetary policy is set with the principle of ‘least regret’ in mind. 

“We think the ‘least regret’ approach implies steady policy next week to let the smoke clear. 

“What smoke? Two main things: to determine if recent weaker domestic business and consumer sentiment are temporary or something that genuinely impacts economic activity and to allow some of the global risks to resolve.” 

Uncertainty about whether the US can resolve the debt ceiling crisis may also way on the RBA’s decision. 

Unfortunately for the RBA, as Bloxham notes, the deadline to lift the debt ceiling is only “a few hours after the RBA makes its cash rate announcement, but a few hours before a policy change would be implemented the next morning. 

“Lifting rates in that window may be risky if things don’t go so well in the US,” he says. 

Bloxham says a weakness in the supply side of the economy combined with weak productivity growth “mean the economy cannot grow as fast as previously, without generating inflation”. 

“We expect the supply side will remain weak when demand will be rising. Indeed, much of the demand in the economy is already set in train, in the form of a large number of massive mining investment projects,” he says. 

“Over the coming year or two, these inexorable forces are expected to collide and drive up inflation. We think that the pick-up in inflation in the first half of the year is the beginning of this trend and expect the RBA to see it the same way.”