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Bullock balances ‘noise’, inflation, and jobs tightrope at RBA

6 minute read

Michele Bullock has acknowledged the presence of “noise” in political circles and the general population in response to the RBA’s steepest rate cycle in history.

Speaking at an event in Hong Kong alongside other central bank governors, Reserve Bank of Australia (RBA) governor Michele Bullock said the rapid growth in interest rates from 0.1 per cent in April 2022 to 4.35 per cent in November 2023 created a lot of “political noise” alongside “a lot of noise from the general public”.

Ms Bullock acknowledged the source of that “noise”, sharing on the global stage that the Australian system, which is predominantly a variable mortgage system, has meant interest rate hikes quickly reach the 45 per cent of households that have mortgages.

“People are very unhappy,” Ms Bullock shared with her global counterparts.


“The cash flow channel works very quickly in Australia and it’s very prominent.”

However, despite the noise, Ms Bullock described the local environment as “pretty good” and said the same of the balance sheets of households and businesses.

“Through the pandemic, they built up large savings buffers, and they’re largely still intact.”

Ms Bullock also highlighted Australia’s rising house prices and “very prudent” lending standards that have been key in upholding a sound environment.

“From a financial stability perspective, this all looks rather good, and I’d have to say though that employment is the key here,” she said.

“Although the labour market has eased, it still is a pretty tight labour market. People are getting work and that’s really important for people being able to pay their mortgages.”

However, Ms Bullock had concerns regarding the labour market. Namely, she stressed that while inflation needs to be brought under control, it needs to be done in a manner that does not trigger an unemployment rate spike.

“We’re in a period now where we have to be a little bit careful,” Ms Bullock said.

“We want to make sure we keep inflation under control and we bring it back down to our band, but we also need to make sure we do that in the context of not imposing on the economy too much, and raising the unemployment rate so much.”

Ms Bullock assessed that, in some ways, Australia’s inflation path has mirrored that of its overseas counterparts. The headline consumer price index (CPI) peaked at 7.8 per cent in the December quarter of 2022 before falling to 5.4 per cent in the September quarter of this year.

“Like overseas, a lot of that’s been driven by declining goods price inflation and what we’re observing is that services price inflation is quite sticky,” she said.

“What we’re forecasting is that inflation will come down to about 3.5 per cent by the end of next year and then a bit under 3 per cent by the end of 2025.”

The RBA governor’s latest comments added to a wealth of communication from the central bank in recent weeks, following its decision to lift the cash rate again earlier this month.

Just last week, Ms Bullock remained hawkish in her address to bankers 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.

“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”.

A hike in February?

VanEck’s head of investments, Russel Chesler, believes a combination of above-target inflation, low unemployment, higher house prices, strong retail sales, and Ms Bullock’s recent comments suggest rates could rise in December.

“However, we maintain that the next increase of 0.25 per cent to 4.60 per cent won’t happen until February when the RBA has the benefit of additional data points including quarterly inflation and wage growth,” Mr Chesler said.

Even if the RBA does hike at its final meeting of 2023, Mr Chesler argued there is a high probability that this will not be enough to bring inflation completely under control.

“The RBA will be monitoring data releases very carefully over the next few months to see if this and the past rate increases have had the desired effect. There is still a real chance the RBA will need to push rates above 4.6 per cent,” he concluded.

NAB’s senior economist, Taylor Nugent, said last week that the bank also 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.

On the other hand, AMP’s Shane Oliver believes the risk of another hike has gone up to 45 per cent, but noted he remains unconvinced that additional hikes are necessary.

Dr Oliver’s main concern is that 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.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.