Speaking at a CEDA event, Bullock emphasised that Australia’s tight labour market and robust demand still require a restrictive monetary policy approach to keep inflation in check.
The economy’s demand for goods and services has consistently outstripped supply, driving inflationary pressures, she said, pointing to recent consumer price index data as evidence of the ongoing imbalance.
While many countries have loosened their policies, Bullock made it clear that Australia’s unique economic conditions require a different course.
“In Australia, interest rates did not reach the same levels of restrictiveness as many other countries, and consistent with this, inflation has been somewhat higher relative to target here than in most of those economies, and the labour market is also tighter,” Bullock said.
“This means that even with a similar approach to setting policy, the time to adjust domestic monetary policy settings can differ from peer central banks.”
Homing in on the labour market in particular, Bullock said Australia’s labour market conditions appear unusually tight, relative to those in other peer economies.
“Conditions in labour markets in those economies have eased significantly and unemployment has increased, such that labour markets are now assessed to be close to balance or have spare capacity,” the governor said.
“Given the tightness in Australia’s labour market, along with our assessment that the level of demand still exceeds supply in the broader economy, we expect it will take a little longer for inflation to settle at target in Australia.”
Looking ahead, Bullock reiterated that inflation should hit the 2.5 per cent target by late 2026, with ongoing restrictive measures gradually restoring balance to the economy and labour market.
Asked whether that meant no rate cuts until 2026, Bullock declined to speculate, but hinted that, like global counterparts, the RBA may cut rates before inflation hits its target, provided it’s confident the target is within reach.
“You don’t have to be there, but you have to have a high degree of confidence that you are heading there,” the governor said.
“Provided we continue on that [disinflationary] trajectory, then we will be in a position as some point to consider whether it is appropriate to cut rates,” she added.
Bullock also reflected on the global environment, noting that issues such as the imposition of additional tariffs on Australia’s biggest trading partner, China, by the new US administration won’t impact domestic inflation in the six-month term.
“Although we are thinking about the potential implications, we are still mainly focused on what we’re observing going on in Australia at the moment,” the governor said.
“Because if there are implications on inflation, they’re not happening next month, or even in six months, it’s going to be out a little bit. Our focus needs to remain staying the course on inflation,” she added.
Big four bank and AMP push out rate expectations
On Friday, ANZ followed its peers in shifting rate cut expectations from February to May.
In a statement, the big four bank said: “We have shifted our view on the start of the RBA’s easing cycle from February 2025 to May 2025. We now also only expect two 25 bp rate cuts in total.”
ANZ said it expects trimmed mean inflation for Q4 2024 to remain at 0.7 per cent quarter-on-quarter and 3.4 per cent year-on-year.
Regarding Q3 national accounts, the big four bank said it predicts it to show gross domestic product growth of 0.5 per cent quarter-on-quarter, the strongest pace since mid-2023, alongside a boost in household incomes from Stage 3 tax cuts and a rise in the saving ratio. Public spending is also set to contribute significantly, partly reflecting cost-of-living measures.
Similarly, AMP conceded May is a more realistic time frame for a rate cut than February.
“The RBA appears to be in no hurry to ease so we have shifted our expectation for the first rate cut from February to May,” said AMP’s chief economist, Shane Oliver.
“Ultimately, we think the RBA will remain flexible and so a February easing is still possible but the hurdle to cut then looks high and would require some combination of a very good December trimmed mean inflation reading and a sharp rise in unemployment in the next three monthly releases.”
While Oliver believes “this is possible”, he said it is “not probable”.
Moreover, the chief economist noted that the prospect of a new interest rate setting board at the RBA by March also adds to uncertainty around RBA rate decisions as new board members will potentially alter how the RBA reacts to data.
The money market has only a 30 per cent probability of a February cut but has one fully priced in by May.
