Why the RBA has 'no choice' but to raise rates today

Added: 2026-05-11

[00:00:00]Without any further ado, let's go and talk to Paul Bloxham. Paul, thanks for joining us. Great to be here, Peter. Um tomorrow's decision, RBA. Now, before I ask you what you think they'll do, I'm going to ask this question.

[00:00:14]Do you think economists like you have been forced into a situation where you have to guess what the RBA is going to do before What would more importantly, do people like me ask you what should they do? Cuz I I I feel as though we get answers from your colleagues and your rivals that they are is Well, they've worked out what the RBA will do and they say this is what they're going to do.

[00:00:36]But I also mean I'm going to ask you what should they do and why? I don't think they have a lot of options tomorrow. 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 has been so weak for so long that we can't really grow this economy particularly quickly. So, we've got an economy that's operating beyond its capacity, inflation that's already too high, and now we face another shock in the form of what's happening in the Middle East that's going to lift inflation further. So, I think the RBA is likely to lift interest rates. Yeah.

[00:01:10]I think they don't I think they should lift interest rates because I think at the this point they have to prioritize getting inflation back to target and keeping inflation expectations anchored.

[00:01:20]Will they create a recession?

[00:01:22]Well, that's a big question and I think they will create a Yeah.

[00:01:26]>> I think they will create a downturn. I mean, I think, you know, we we are going to see the economy down into a downswing. In fact, I would say with confidence that we we have to have a downturn. I mean, I think that's, you know, when you can debate how far the RBA is going to tighten and you can debate how big that downturn's 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. That actually the economy has to go into a downswing because that's the only way you're really going to get inflation inflation down. So, look, we're working on an assumption that GDP contracts in the second quarter, Yeah. which I think is out of consensus. I mean, most of the economists are not there.

[00:01:57]And then the the question's going to be do you get two consecutive quarters? Do you How much does the unemployment rate rise? And a lot of that is going to hang on what happens to the Strait of Hormuz.

[00:02:08]Your you know, in your introductory remarks, how quickly this returns to some semblance of looking like normal.

[00:02:14]If this goes on for longer, and 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 and nonlinearities where prices spike.

[00:02:23]Yeah. We won't we we come into genuine shortages of certain things and that starts to have a bigger effect on the on the global economy. And And that's a very hard thing to answer, right? That's a known unknown. That's right. But also, it's a bit like lockdowns and pandemics.

[00:02:38]You know, we haven't been trained as an economist and me as the ghost, we haven't been trained for this kind of Strait of Hormuz imp- implication, but we've seen it I guess OPEC in 1972 is probably the only parallel and we we did get a recession in '72. Well, I think that you have the the training tells us that we we think about both demand and we think about supply when we think about economies.

[00:03:05]And I think yes, that's true that in the last few decades in the first part of the century, mostly we watched cycles in demand and now in the last little while we've had this sequence, you know, the pandemic and then the Russia-Ukraine war and now the and and now the now this war in in the Middle East and and these are all negative supply shocks. We we know how to think about them.

[00:03:24]They're very difficult to forecast.

[00:03:25]They're very difficult to >> my next question to you. You know, we've had a a rate rise in Feb, a rate rise in March, and we've had petrol prices giving us what? A one or two interest rate effect on household budgets? What would you say? Well, so so let's think about it this way.

[00:03:44]The Middle East story I don't think is the primary driver why the as to why the RBA isn't going to be likely to be lifting rates this week. 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 ahead of its speed limit. And then the shock that we're seeing in the form of the Middle East conflict in the 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. I mean, you're just lifting the cost of the things you need to grow your economy.

[00:04:15]>> you canceling the impact really by in that discussion?

[00:04:18]>> In in some ways, yes. So, so when we look around the world, in fact, this is an interesting time to be talking about this cuz we saw central banks across the world meeting last week, the Fed, the ECB, the Bank of England, the Bank of Japan, Bank of Canada. And what did they all choose to do? They all chose to sit still. 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 interest anything with interest rates. The reason we are different and and we are the outlier or an an outlier is because we had a starting point where inflation was already too high. But could it be that your the capacity issue could be changing as you and I are speaking right now because we've had a rate rise in Feb, we've had one in March. You've seen business and consumer confidence really fall to levels like we saw around pandemic. These are are quite significant moves. I know you can't trust confidence figures in the short term, but the capacity thing could be changing as we speak. In fact, I think it is, Peter.

[00:05:22]I mean, that's my view. My view is that the economy is tipping is tipping into a downturn and that's a downturn we have to have. But when the RBA meets tomorrow, they 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's already picking up and inflation's already too high. 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 in the in the coming meetings. Will you think Treasurer Chalmers will help the the RBA's goal in bringing inflation down in the in the budget and future?

[00:05:57]>> let's hope so. This is what I'm looking for. I wrote a piece this morning and I described it as I called it the sledgehammer and the scalpel, right? And so the argument is the RBA has a sledgehammer and that's all it can do.

[00:06:07]It really doesn't have that many options in my view. It has to lift interest rates to get inflation down. But the government, the the Treasurer and the and within with the budget as its policy tool, has a scalpel. 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 the RBA's inflation challenge. 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.

[00:06:44]Let's hope not. Paul Bloxham, thanks for joining us. Thank you.