HSBC Australia chief economist Paul Bloxham has staked out a lonely post as one of the only economists predicting the cash rate to rise to 3.25% by the end of 2013.
In an HSBC Global Research report, Bloxham says he disagrees with most big bank economists who predict the cash rate to drop as low as 2% by the end of the year.
Bloxham says his expectation of a cash rate rise is based largely on the fact that the Chinese economy has picked up.
“An improving global economy - particularly one led by Chinese growth - should be positive for commodity prices which in turn will support Australian income growth.
He says that, domestically, the Australian government's pre-Christmas announcement that it will no longer pursue a fiscal surplus this financial year removes another downside risk for Australian growth in 2013.
“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 (3.0%) and mortgage rates around 100bp below average, we expect that there is more support from the current policy settings yet to flow through to the economy.”
He also notes that the last 50bp of cuts has only occurred in the past three months and that monetary policy ‘acts with a lag’.
“We expect the support from lower interest rates to see a rebalancing of Australia's growth in 2013 as mining investment contributes less than it did in 2012 (though it is still expected to contribute to growth). Growth should be supported by a pickup in the housing and retail sectors, with the tourism industry also expected to recover. We expect that the RBA is now probably done with the easing phase of this interest rate cycle and that the next move may, in fact, be up, in Q4 2013.”