A day after Australia’s GDP growth data indicated an economy in trouble, the governor of the Reserve Bank of Australia said if high inflation was to become entrenched in the expectations of firms and households, “the best medicine would be putting more restrictions into the economy”.
“We know that if high inflation becomes entrenched in the expectations of firms and households it would be more difficult and costly to reduce. If businesses and workers come to expect that prices and wages will continue rising quickly, this adds to inflationary pressures, requiring even higher interest rates to bring inflation down,” said Michele Bullock at the Anika Foundation Fundraising Lunch.
“Ultimately, we would need to slow the economy down by more, which would result in a larger rise in unemployment and higher risk of recession,” she added.
On Wednesday, data from the Australian Bureau of Statistics (ABS) revealed Australia’s real GDP increased by an anaemic 0.2 per cent in the June quarter, taking the annual rate to just 1.0 per cent.
Outside of the pandemic, this is the slowest rate of annual growth in GDP in more than three decades.
Just days earlier, Treasurer Jim Chalmers set the stage for the GDP data by seemingly placing the blame on the RBA, suggesting that its high interest rates are “smashing the economy”.
On Wednesday, he praised the government’s economic management and reiterated that the primary causes of low economic growth are higher interest rates and global economic uncertainty.
“What we have shown is we can fight inflation, the economy can continue to grow, albeit weakly, we can keep the labour market in relatively good nick, and we can balance all of the risks in the economy, including in the labour market,” the Treasurer said.
His comments were heavily criticised by the opposition, which believes Labor’s expansionary budgets are to blame for Australia’s stubborn inflation.
Speaking to the media on Wednesday, shadow treasurer Angus Taylor accused the Treasurer of “fighting everybody and everything, except his homegrown inflation”.
“It’s very clear from the national accounts numbers that have just come out that the government’s failures are coming home to roost,” Taylor said.
When asked on Thursday if the opposition’s claim that she is at war with the Treasurer was accurate, Bullock replied: “I wouldn’t use those sorts of words”.
“He is doing his job and I am doing mine,” the governor added.
“I understand that people are hurting from high interest rates but I think it’s actually high inflation that is really causing trouble for people, and it’s causing trouble for the most vulnerable.”
Reflecting on the GDP data, which indicated ongoing growth in the government sector amid a household recession, Bullock acknowledged that while the GDP growth rate was as expected, the decline in household consumption warrants close attention from the bank.
On the topic of government spending and its effects on inflation, Bullock emphasised that this is “not the main game here”.
“As we saw in the national accounts, consumption is very weak. Now we are looking for a recovery in consumption, but if that doesn’t occur then that is actually going to be a really important piece of information and it is also going to be very important for the inflation outcomes,” the governor said.
“I think we should be focusing on the breadth of what is happening in the economy, demand as in total demand, and not focusing on individual components.”
Turning to inflation, Bullock said while it has fallen substantially since its peak, it is still some way above the midpoint of the 2–3 per cent target range, with underlying inflation – as measured by the trimmed mean – at 3.9 per cent in June.
“The board is trying to bring inflation back to target in a reasonable time frame while preserving as many of the gains in the labour market that we have seen in the past few years as possible. This is the so-called narrow path,” she said.
“If the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term.”
