The Reserve Bank meets today with a third rate hike for 2026 widely expected, and HSBC Chief Economist Paul Bloxham believes the central bank has effectively no other option.
Speaking to Peter Switzer on our new-look Switzer TV last night, Bloxham laid out the case that Australia’s starting point on inflation, its low productivity ceiling, and the supply shock from the Iran conflict combine to leave the RBA with one viable path forward.
“I don’t think they have a lot of options tomorrow,” Bloxham said. “I think that the problem we’ve got at the moment is inflation is too high and the economy is operating beyond its full capacity. In part, that’s because the speed limit for the economy is so low at the moment. Productivity’s been so weak for so long that we can’t really grow this economy particularly quickly.”
That structural ceiling is what makes the current cycle different, in his view, from comparable economies. Where the Fed, ECB, Bank of England, Bank of Japan and Bank of Canada all chose to sit still at their meetings last week, the RBA has been forced into action by the conditions it inherited.
“They all chose to say, look, we can afford to wait and just see how this plays out, because inflation will go up in the short run, but growth will weaken because it’s a negative supply shock. And so maybe inflation doesn’t rise in the medium term. And therefore we don’t have to do anything with interest rates,” Bloxham said. “The reason we are different and we are the outlier or an outlier is because we had a starting point where inflation was already too high.”
Watch the interview:
The Iran conflict, in his framing, is not the primary driver of today’s expected hike. It is the accelerant on a fire that was already burning.
“The Middle East story I don’t think is the primary driver as to why the RBA is going to be likely to be lifting rates this week,” he said. “The main challenge is the economy had inflation that was too high to start with. And the economy needs to slow down because it’s been running ahead of its speed limit. And then the shock that we’re seeing in the form of the Middle East conflict and the blockage of the Strait of Hormuz — well, it does two things. It lifts inflation further, but it also weakens growth and probably by a similar sort of amount.”
That is the orthodox case for hiking. But Bloxham went further. Asked whether the RBA’s actions would create a recession, he was direct.
Get ready for the downturn we have to have
“I think they will create a downturn,” he said. “We are going to see the economy down into a downswing. In fact, I would say with confidence that we have to have a downturn. You can debate how far the RBA is going to tighten and you can debate how big that downturn is going to be and how it’s going to come about. But I don’t think you can debate that we have to have one. The economy has to go into a downswing, because that’s the only way you’re really going to get inflation down.”
HSBC’s working assumption is that GDP will contract in the second quarter, a position Bloxham acknowledged is out of consensus among Australian economists. Whether that single quarter becomes a technical recession depends, in his view, on how long the Strait of Hormuz disruption persists.
“I think we’re now at a point where it doesn’t have to go on for too much longer before you start to see some asymmetric effects, some non-linearities where prices spike,” he said. “We come into genuine shortages of certain things. And that starts to have a bigger effect on the global economy.”
Pressed on whether the rate hikes already delivered in February and March, combined with the petrol price spike, may have already started to do the disinflationary work for the RBA, Bloxham agreed the capacity picture is shifting.
“In fact, I think it is, Peter. I mean, that’s my view. My view is that the economy is tipping into a downturn. And that’s a downturn we have to have. But when the RBA meets tomorrow, I don’t think they can be as confident at this stage that that downturn will be big enough to deliver the disinflation we need, especially in an environment where inflation is already picking up and inflation is already too high.”
The good news for the rate path beyond today is that Bloxham sees the May hike as effectively the last for the cycle.
“So I think we are going to get this rate rise. But I do think after that we’re going to get the RBA on hold in the coming meetings.”
The sledgehammer and the scalpel
Whether the RBA stays on hold after today depends, in Bloxham’s framing, on what Treasurer Jim Chalmers delivers in the federal budget on 12 May. He set out the dynamic in a metaphor that he has been working on in published commentary this week.
“I wrote a piece this morning and I described it — I called it the sledgehammer and the scalpel,” Bloxham said. “And so the argument is the RBA has a sledgehammer and that’s all it can do. It really doesn’t have that many options in my view. It has to lift interest rates to get inflation down.”
The Treasurer, by contrast, has a more precise instrument.
“But the government, the Treasurer, with the budget as its policy tool, has a scalpel,” he said. “They can do all sorts of targeted things if they cut back on spending, but find a way to do very targeted support in the right areas for the economy in the face of the cost of living challenges. And at the same time, look at reforming the economy, reforming the tax system and so on. If you do these things in a certain way, it’ll help the supply side and it won’t add more to demand and therefore to the RBA’s inflation challenge.”
The implication is that the budget delivered next Monday will, in effect, decide whether the RBA needs to act again at its next meeting. A budget that adds to demand — through broad cost-of-living handouts or untargeted spending — would force the central bank back into the market with another hike. A budget that takes a scalpel to spending while delivering targeted support to the households and sectors hit hardest would give the RBA the room to hold.
“The bottom line, of course, is if they don’t kind of get it right, then the RBA might have to bring its sledgehammer out again,” Bloxham said. “Let’s hope not.”
Watch the full interview with Paul Bloxham on Switzer Investing TV.
This article does not take into account the investment objectives, financial situation or particular needs of any individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Before acting on anything we discuss, we strongly recommend you seek the appropriate professional advice.
