Only one more rate cut left as RBA wary of overstimulating housing market: HSBC’s Paul Bloxham

The rise in the unemployment to a 30-month high of 5.4% in September should cause the Reserve Bank to cut the cash rate again in either November or December but then hold firm over the first six months of 2013, according to HSBC Australia chief economist Paul Bloxham.

Bloxham says the jump in unemployment combined with weak growth in employment (+0.5% year-on-year) and aggregate hours worked (+0.3% year-on-year) means it is becoming clearer that labour demand has eased more than expected.

“A looser labour market should see less pressure on locally produced inflation and leave the RBA with a bit more room to move on monetary policy.

“We now expect the RBA will cut rates by a further 25 basis points before year-end,” Bloxham says.

However, a pick-up in the housing market off the back of previous rate cuts and China reaching the bottom of its current cyclical slowdown are two factors that would encourage the RBA end its current monetary policy easing cycle, says Bloxham.

“There are also signs that previous rate cuts are starting to support the economy," says Bloxham.

“Housing prices have lifted in the past few months and business credit has started to grow.

“Concerns that low interest rates may overly stimulate the housing market and see an excessive pick up in already high Australian housing prices may constrain the RBA’s willingness of cut rates too much further.

“We still think too much is priced in over the next year (85 basis points in rate cuts).

“Globally, we expect China’s cyclical slowdown to bottom in coming months and for growth to pick up in early 2013. The recent bounce in the iron spot price from lows of $86 a tonne in early September to $117 a tonne today may be a precursor to a further recovery in Chinese economic activity,” he says.