Governor stands by blunt tool approach in face of persistent inflation

Michele Bullock, the governor of the Reserve Bank, remained hawkish in her address to bankers on Wednesday evening, and stressed that although interest rate rises are “squeezing” the finances of households, the bank’s “statutory objectives” dictate a need to set policy that serves the welfare of Australians “collectively”.

“I receive letters from people who are finding it difficult to make ends meet and I speak with organisations that assist struggling households. Everyone is seeing prices for goods and services rise strongly but this has a particularly severe impact on low-income households. This emphasises the need to get inflation back down,” Ms Bullock said at the Australian Business Economists annual dinner.

X

Continue to Website

“I also know that interest rate rises are squeezing the finances of households with a mortgage. But while the board recognises there is a wide diversity of experience, the bank’s statutory objectives are economy-wide outcomes, and our key tool – the interest rate – is a blunt one.”

She highlighted that inflation is now homegrown and demand-driven, not solely the product of global supply disruptions, and noted that “getting inflation back to target will take time”.

“It took only three quarters for inflation to fall from 8 per cent to 5½ per cent as the supply-side issues eased, and there is some more to go there. But we expect it to take another two years for inflation to fall that much again and move below 3 per cent,” Ms Bullock said.

“That is what the board is aiming to do with monetary policy – to slow the growth of demand enough to bring inflation back to target while keeping employment growing.”

With the governor firmly focused on bringing aggregate demand and aggregate supply into closer alignment, some economists are confident that the central bank will lift interest rates again.

In his response to Ms Bullock’s speech, NAB’s senior economist, Taylor Nugent, said that the bank expects a hike in February.

“NAB’s expectation is that the board will assess the single 25 bp adjustment delivered in November is not enough to mitigate the risks on inflation inherent in that upward revision to the outlook,” said Mr Nugent.

The morning of Ms Bullock’s speech, Westpac’s Matthew Hassan assessed that “policy meetings next year will be very much ‘live’”.

His forecast was influenced by the central bank’s recently released minutes from its November meeting, wherein the board clarified that it continues to have a low tolerance for any further upside surprises or delays in the return of inflation to the target range.

Speaking to InvestorDaily, AMP’s Shane Oliver expressed a slightly different interpretation of Ms Bullock’s speech.

“Her speech was hawkish but lacked the urgency of her comments a month ago prior to the last hike,” Dr Oliver said.

In his view, the decision to either implement a hike or maintain the status quo will be contingent on the retail sales and inflation data set to be unveiled next week.

“The risk of another hike has gone up and we put it at 45 per cent, with the money market at around 40 per cent for early next year,” Dr Oliver said.

While he remains unconvinced that additional hikes are inevitable, Dr Oliver admitted that “any easing is a long way off”.

Similarly, GSFM investment strategist Stephen Miller branded Ms Bullock’s speech “well framed”. While he acknowledged the presence of a “moderate tightening bias”, Mr Miller believes that it’s clearly conditioned on key data and future risk assessments.

“The next window for a policy rate hike will not occur until the February RBA board meeting on 6 February, and then only if unit labour cost growth and inflation refuse to show indications of meaningful decline or prospects thereof,” Mr Miller said.

Regarding CPI expectations, Commonwealth Bank said on Thursday that it expects an easing in the annual rate to 5.2 per cent in October.

“We expect to see further signs of goods disinflation and some temporary disinflationary impacts from government policies on rents and energy. Offsetting this is likely ongoing strength in new housing costs, higher health insurance premiums, and a lift in domestic travel prices,” CBA said.

The uncertainty surrounding whether a potential CPI slowdown to 5.2 per cent from 5.6 per cent in September aligns with the RBA’s expectations persists. But for Dr Oliver, one thing is certain – an additional rate hike will wound the economy.

“I continue to worry that they are not allowing enough time for the lagged impact of past rate hikes so the risk of recession next year is already high and another hike will just add to it unnecessarily,” Dr Oliver concluded.

As at 22 of November, the ASX 30 Day Interbank Cash Rate Futures December 2023 contract was trading at 95.675, indicating a 2 per cent expectation of an interest rate increase to 4.60 per cent at the next RBA board meeting.