Paul Bloxham expects RBA to keep rates on hold next week

There are mixed signals coming from the market, with some facts in isolation perhaps suggesting that there could be a rise from the Reserve Bank in coming months.

However the overall picture is one that demands a stable rate, according to HSBC Australia and New Zealand chief economist Paul Bloxham.

Bloxham’s latest market report The RBA Observer, discussed a mixed bag of indicators. On the one hand, local activity indicators showing growth, such as GDP picking up pace in the last quarter of 2013, strong consumption and exports, retail sales at their fastest rate since 2010, are suggesting that rates could see a lift.

This is further supported by a strong housing market that Bloxham notes “continues to boom” and strong forward-indicators of residential construction.

Looked at in isolation, many would be suspecting an increase on Tuesday.

“These facts alone might suggest that the current very low cash rate may not be the appropriate monetary policy setting and that rates should be lifted soon. But two key caveats remain,” Bloxham explained.

Looked at in isolation, many would be suspecting an increase on Tuesday.

The labour market still struggles – unemployment is currently at its highest rate in 10 and a half years – and mining investment is set to fall further.

While Bloxham avoids doomsdaying about the labour market, noting that they are “more sanguine than many other commentators” on both these issues, they still do not expect the RBA to move due to the factors.

“We see the labour market as merely lagging the pick-up in activity that has already begun,” he said.

“We have long been arguing that as the economy shifts to being more driven by the non-mining sectors, employment growth should lift. After all, that is where most of the jobs are! The mining sector employs only a small number of people. This month brought support for our view with strong employment numbers in February.”

He noted that he believes the next RBA move will be as a result of two key focuses – inflation and jobs.

“We expect the RBA to be on hold for the next few months, but for rates to rise before year-end,” he said.