Powered by MOMENTUM MEDIA
investor daily logo

‘Challenge isn’t over’: Bullock holds steady on inflation outlook in Parliament

  •  
  •  
6 minute read

The RBA stands ready to reduce rates even before inflation reaches the 2.5 per cent mark, but a prerequisite for such a move is a clear assurance of a sustained downward trend in inflation.

At this stage, the Reserve Bank (RBA) board hasn’t ruled out a further increase in interest rates, but neither has it ruled it in, said governor Michele Bullock before a House of Representatives economics committee on Friday.

“Do we have to be absolutely in the inflation band before we start thinking about if we think monetary policy is restrictive now, which we think it is?”

“And do we have to be in the band at 2.5 per cent before we think about doing that? No, I don’t believe we do.

==
==

“But we do need to be very confident that we’re going to get there as we start to remove the restrictive nature of policy.”

Ms Bullock emphasised the need for confidence in decision making, highlighting the importance of a careful approach.

“It’s no good just to go in and then pop out again.”

The governor clarified that the existing inflation rate of 4.1 per cent is insufficient to warrant contemplating a rate cut.

“While there’s some encouraging signs, Australia’s inflation challenge isn’t over,” she said.

“An inflation rate with a four in front of it isn’t good enough, and it’s still some way from our midpoint of our target.”

‘No crystal ball’

Last week, the RBA announced its revised inflation forecast which points to a drop in inflation to 3.3 per cent (instead of the earlier predicted 3.9 per cent) by June.

From there, however, the RBA expects inflation to ease at a snail’s pace, reaching 3.2 in December and 3.1 per cent six months later. By the end of 2025, inflation is expected to finally hit the target band by reducing to 2.8 per cent, before dropping further to 2.6 in June 2026.

Economists, however, have characterised this forecast as “conservative”, with concerns emerging regarding the possibility that the RBA may leave rates too high for too long.

Looking back at recent history, both Deutsche Bank’s Phil O’Donaghoe and AMP’s Shane Oliver have proposed that inflation might decrease more rapidly than what the bank currently predicts.

Ms Bullock, on the other hand, advocates for a more cautious approach, warning that a rise in inflation expectations could have significant economic consequences.

“We don’t have a crystal ball,” the governor said. “It could be lower; it could be higher.”

“Our forecast we feel we’ve balanced the risks on either side, but that can change depending on the way the data comes out.

“At the moment, I’d say, yes we’ve got it balanced but we’re going to have to watch the data and see if our thinking is confirmed.”

Ms Bullock clarified that the RBA considers both the market trajectory and diverse predictions from economic forecasters, collating these factors to formulate its forecast.

“They’re based on those assumptions.”

Responding also to the International Monetary Fund’s (IMF) call for higher rates to stem persistent inflation, the governor noted the fund is “a little more hawkish”.

“Lots of people have opinions on where we should and shouldn’t have interest rates.”

Where the RBA and the IMF diverge is on inflation expectations, Ms Bullock said.

“People can differ in terms of risk. They’re not saying we should have interest rates one or two percentage points higher. They’re just suggesting, I think, maybe we could go a little bit further because we haven’t gone up as hard as some countries have.”

China the one to watch

Regarding the economic landscape, Ms Bullock said the Australian economy is broadly well placed to deal with external pressures.

“Aggregate demand is still a bit above aggregate supply, and that’s why we’re observing inflation. The aim is to slow growth, and to bring it back more towards supply. And if we can achieve that in our current central forecasts, without slowing the growth in the labour market too much, then I think we’ve got on the narrow path.

“At the moment, we’re reasonably comfortable, but we need to be very alert.”

Ms Bullock emphasised that keeping an eye on China is crucial in the global context, given its significant influence on Australia through its impact on commodity prices.

“Growth in China has been quite sluggish. So that’s something for us to watch,” she said.

“The main way through which that impacts Australia is through commodity prices and our exports to China. So far, the iron ore price, in particular, and coking coal prices have tended to hold up because even though the real estate industry in China is not doing so well, the manufacturing industry and public infrastructure is doing quite well.”

Overall, Ms Bullock described the global economy as demonstrating “great resilience”.

“I think probably it’s fair to say that a year ago, not only us, but many others were expecting much more slowing in the world economy than has actually occurred,” Ms Bullock said.

The RBA will, however, be watching the global situation closely.

“We are watching what is going on overseas closely because it does impact us. If conditions slow more quickly than we’re expecting overseas, that might very well have implications for us as well.

“But if we look back a year ago, things have generally held up better than many people thought and part of the evidence of that is the difficulty in getting services inflation down in many countries.”

Stage 3 changes ‘no impact’ on inflation

Questioned about what Labor’s change to stage three tax cuts would mean for inflation, Ms Bullock said: “They are staying within the same fiscal envelope, it’s just a redistribution.”

“So it will have no material impact at all on inflation or just on moving towards the band.”

The tax cut changes will see the 19 per cent tax rate reduced to 16 per cent (for incomes between $18,200 and $45,000), the 32.5 per cent tax rate reduced to 30 per cent (for incomes between $45,000 and $135,000), the threshold above which the 37 per cent tax rate applies increase from $120,000 to $135,000, and the threshold above which the 45 per cent tax rate applies increase from $180,000 to $190,000.

Ms Bullock confirmed discussing stage three tax cut amendments with Treasury secretary Steven Kennedy shortly before he presented the proposal to the cabinet.

“We confirmed that because the fiscal envelope was the same … it wasn’t going to have any implications on our inflation forecasts,” she said.

‘Challenge isn’t over’: Bullock holds steady on inflation outlook in Parliament

The RBA stands ready to reduce rates even before inflation reaches the 2.5 per cent mark, but a prerequisite for such a move is a clear assurance of a sustained downward trend in inflation.

ID logo

Comments powered by CComment