‘We might need to go again’: Bullock opens door to rate rise as RBA assesses inflation threats

Reserve Bank governor Michele Bullock has left the door open to lifting interest rates for the first time in five months and the country’s major banks now expect a quarter percentage point rise on Melbourne Cup day as price pressures ease more gradually than expected.

Bullock, facing her first Senate estimates hearing as governor, said on Thursday morning the latest inflation report showed price pressures were a “little higher” than had been expected, but were not a surprise.

Reserve Bank governor Michele Bullock has spoken about the possibility of a Melbourne Cup Day interest rate rise.Credit: Mick Tsikas

Inflation figures from the Australian Bureau of Statistics on Wednesday showed both underlying and headline inflation up by 1.2 per cent over the September quarter. The annual rate of inflation stepped down from 6 per cent to 5.4 per cent.

In a speech on Tuesday night, Bullock said the bank “would not hesitate” to raise interest rates again if there were a material increase in the inflation outlook.

But on Thursday, Bullock said the bank was still assessing the data to determine if the latest information would substantially change the Reserve’s forecasts for the economy.

“We have to look at whether or not it’s material enough to change our views on,” she said.

The RBA governor said it appeared inflation pressures in the services sector were persistent, but prices for goods were starting to ease.

“We’re looking at some of the more persistent parts of inflation [and] asking ourselves, ‘Are there signs that those might be coming down in the future?’” she said.

“We’ve made that very clear, even though we haven’t raised interest rates since our last interest rate rise in June, we’ve made it very clear that we might need to go again.”

The country’s big four banks - Commonwealth, ANZ, NAB and now Westpac - believe the change is sufficiently large enough to warrant a rate rise, but all have noted it would be a close call.

On Thursday morning Westpac’s chief economist Luci Ellis, who was recently assistant governor for the economic section of the Reserve Bank, said while a 0.1 per cent difference between inflation expectations and reality may not seem like much, the underlying detail was sobering.

Ellis pointed out that besides fuel inflation, there were strong inflation increases in vehicle prices, home building costs and a range of services including meals out, dental fees and transport costs.

While a decision to keep interest rates steady at 4.1 per cent for a fifth month cannot be ruled out, Ellis did not believe the RBA would wait until December to raise rates if the board thought it was necessary.

“So yes, I’ve seen enough to make my first-ever rate call to be a prediction of a hike,” she said.

Financial markets, which had put the chance of a rate rise at 20 per cent ahead of the inflation figures, now put the chance at 55 per cent.

Bullock’s senate estimates comments had an immediate impact on currency markets, with the Australian dollar falling slightly against the United States dollar, in a sign investors believe the bank may not lift rates next month.

The RBA governor also backed the federal government’s decision to save most of its record surplus.

Last month, Treasurer Jim Chalmers reported a record $22.1 billion surplus for the last financial year, as the government’s tax revenues were boosted by strong commodity prices and high inflation.

“At the moment, the decision has been made to basically bank the revenues, and I think that’s pretty positive,” Bullock said, adding government decisions are taken into account in the central bank’s forecasts.

The Treasurer said the RBA governor’s endorsement showed the government’s fiscal strategy was helping to make a difference in the fight against inflation.

“Fiscal responsibility and spending restraint are the hallmarks of our economic strategy and Governor Bullock has backed it in,” Chalmers said.

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