Inflation resurgence puts brakes on RBA’s interest rate race

Until last week, it seemed Michele Bullock the Reserve Bank of Australia board’s campaign of rate hikes was on track get inflation down. But costs like petrol have added fuel to the fire.

• Rates on hold for now

ANALYSIS

Michele Bullock ran a half marathon in Sydney last weekend in a very respectable two hours and four minutes, placing her 19th out of 50 female competitors aged 60 to 64.

The RBA governor has been in an even longer and more challenging race – to get inflation down before businesses and consumers begin to treat fast-rising costs as the norm rather than the exception.

Often in a half or full marathon, things can feel like they are going according to plan, only for a surprise to hit, such as cramp or injury.

Until last week, it appeared that Bullock and the Reserve Bank of Australia board’s campaign of rate hikes was on course to bring inflation down from nearly eight per cent in calendar 2022 to less than three per cent by next year at the latest.

Then came the unexpected – the Australian Bureau of Statistics revealed an acceleration in inflation in the first three months of 2024, driven by rising prices for services and costs such as petrol.

Reserve Bank of Australia Governor Michele Bullock. Picture: NCA NewsWire / Jeremy Piper

The result prompted economists to scrap forecasts of an interest rate cut, or cuts, this year.

Now a hike cannot be ruled out.

The question is whether monetary policy settings are sufficiently restrictive. If not, then rates may rise for a 14th time since May 2022.

Adding to Bullock’s difficulties will be the stage three tax cuts, that will leave millions of Australians’ with more cash each pay cycle from July, as well as the federal budget, which is likely to contain further energy bill subsidies that also give consumers with more money.

In a statement on Tuesday, the board noted “real incomes … are expected to grow later in the year.”

Jim Chalmers is a keen runner too.

For the Treasurer, it looked like the tax cuts were going to kick in like an energy gel to support economic growth at just the right time – once inflation was clearly under control.

But that is no longer the case.

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