The Reserve Bank took the cash rate to 4.60% this week, the highest in 15 years. HSBC’s Paul Bloxham argues the conditions that made money cheap have gone, and are not coming back.
While rates aren’t at record levels by any stretch right now, the real question Australians are asking is whether the ‘cheap decade’ is coming back. Between 2009 to the pandemic in 2019, the cash rate hovered at an average of 2.66% compared to the average of 5.57% in the previous decade up to the GFC.
Paul Bloxham, HSBC’s chief economist for Australia, New Zealand and global commodities, told the Switzer Show on Monday night that the current levels are what we need to now get used to.
“There are lots of reasons to think interest rates don’t come back down again, certainly not to the lows we saw pre-pandemic,” he said. “There are quite a lot of reasons now stacking up to tell you interest rates are going to be more elevated.”
“Prior to the pandemic, we were in this situation where interest rates were phenomenally low. And we were all talking about lower for longer.”
Bloxham’s says demand has put an end to low rates. He said that four factors are drawing on the world’s savings at once: the energy transition, the infrastructure needed to run AI, defence spending, and ageing populations pulling on government budgets.
“None of those things look like they’re about to change anytime soon. They all look like they’re drawing on what is a similar pool of saving to back then.”
More competition for the same savings means a higher price for them.
“So we’re now in a world where interest rates look like they’re going to stay more elevated for a period rather than be low for longer.”
But surely, Peter Switzer asked, if we’re able to increase our productivity rates thanks to AI to grow the economy, rates could fall again, right?
Bloxham says that gets the direction backwards.
“If you get productivity gains off the back of AI, you get substantial ones, then what you’re saying is actually the trend rate of growth for the economy is higher than it used to be. In principle, that actually doesn’t mean lower interest rates, it means more elevated interest rates.”
Regardless of the AI productivity argument in the long-term, nobody expects the RBA to stand still on rates in the short term.
Bloxham expects one more rise, in November, and no cut until the second half of next year. The next Reserve Bank decision is on 3 November.
This article does not take into account the investment objectives, financial situation or particular needs of any individual. It does not constitute formal advice. Past performance is not a reliable indicator of future performance.
