HSBC’s Paul Bloxham the lone rider tipping interest rates to rise 2013

HSBC Australia chief economist Paul Bloxham has taken a lonely stand against the economists' cabal by tipping the cash rate to rise to 3.25% by year-end.

Just as Westpac’s Bill Evans went out on his own in July 2011 tipping the RBA to start cutting rates when all other economists thought the opposite, Bloxham is the only bank economist who expects a higher cash rate (and hence higher mortgage rates) by the end of the year.

Evans' bold mid-2011 forecast was spot on the money (the RBA began cutting rates in November 2011) – only time will tell if Bloxham’s more bullish economic outlook is as accurate.

Bloxham’s view stands in stark contrast to his distinctly bearish rivals – led by the University of Western Sydney's Steve Keen - who says the cash rate could fall to as low as 2% by the end of the year and who last year was spot on with his forecast that the cash rate would fall to 3% by the end of 2013.

Keen is not the only economist tipping a series of rate cuts in 2013, with both Macquarie’s Richard Gibbs and ANZ's Ivan Colhoun also tipping a year-end cash rate of 2%, alongside Stephen Anthony of consultants Macroeconomics.

Just last week NAB chief economist Alan Oster announced the bank had readjusted its rates outlook to tip three rate cuts over 2013 (in February or March, May and then August), having previously only forecast one rate cut this year.

Oster said the main reason for this change was the weaker economic outlook, with NAB now forecasting GDP growth of just 2%  (compared with earlier forecasts of 2.5%) and unemployment forecast to rise to 5.75%.

Bloxham, who joined HSBC in September 2010 after 12 years as an economic analyst at the RBA, tells Property Observer his expectation of the cash rate rising to 3.25% (most likely in the fourth quarter of the year) is made “with a recovery in Chinese growth in mind in 2013”.

“[The Chinese economy] has already lifting from 7.8% to 8.6% growth, which should be supportive to the international environment and for the commodities sector in Australia,” says Bloxham.

Bloxham also says earlier cash rate cuts are starting to come through and “provide support” to sectors like the housing market (he forecasts single-digit growth in house prices in 2013) and retailing.

And while he expects the Australian economy to grow close to trend this year, he is says the “mining story” is not yet over.

Bloxham acknowledges that other economists have a very different outlook and that it is “very hard to call rates in advance”.

“We are probably more bullish on the China story and in terms of monetary policy, still believe that interest rates still have an effect on the economy,” he says.

"At this stage there are only modest signs that loosened monetary policy is supporting the Australian economy. But with the RBA's cash rate already at a record low (3%) and mortgage rates around 100 basis points below average, we expect that there is more support from the current policy settings yet to flow through to the economy," he says in his latest economic note.

"Keep in mind that the last 50 basis points of cuts has only occurred in the past three months and that monetary policy acts with a lag."

While Bloxham is the only economist tipping a rate rise, he is not the only one with an optimistic outlook with ANZ senior economist Justin Fabo telling the Australian Financial Review his gut feeling is that "things might be better this time".

However, this has caused ANZ to only push back its next rate cut from February to March – the bank still its expects the cash rate to fall.

Property bear Steve Keen expects demand conditions to remain subdued in Australia this year, sticking to his “heretical” argument that Australian mortgage debt has remained in excess of 85% of GDP while in the US, mortgage debt has fallen from 85% to about 65%.

“So they copped pain whereas we didn't; but the catch now is that, for our households to start borrowing again and stimulating demand, they'd need to take on even more debt than they ever have before.

“Since I don't see that happening, I expect demand conditions to remain subdued in Australia this year- whereas in the USA (if it weren't for the government's insane focus on reducing its own debt (a repeat of the debacle of 1937) households could borrow without pushing into utterly new debt-level territory.

“This subdued growth will mean that inflation remains below the RBA's target band, and the economy is more sluggish than they expect.

Keen says the RBA will respond by cutting rates to try to revive the economy, which he says will stop households deleveraging, but “won't inspire them to take on more debt”. 

“So our rates will slowly deflate towards parity with the rest of the developed world.”

Keen expects the average standard variable mortgage rate to fall to about 5.5% - 5.75% with banks continuing to “claw back some of the margin they gave away in the mad scramble for market share when the mortgage boom was on”.

“But not quite back to the 4% that used to rule when lending was less bubble driven,” he says.

As for Bill Evans, he is currently tipping just one rate cut in 2013.

According to comparison website ratecity.com.au, the average standard variable rate as of January 7 2013 was 5.98% compared with 7.31% in October 2011, before the RBA began cutting the cash rate.