RBA governor Michele Bullock says high interests rates will remain elevated, cuts ‘premature’

The RBA boss has acknowledged the harsh realities of high interest rates on Aussie households, however she said it was required to quell inflation.

Reserve Bank governor Michele Bullock has acknowledged the bleak reality of households struggling with high interest rates, and conceded some may “make the difficult decision to sell their homes”.

In a speech to the Anika Foundation fundraising lunch in Sydney on Thursday, Ms Bullock said the board was “very conscious” of how interest rates, currently at 13-year-high of 4.35 per cent, were affecting households and business.

She said about 5 per cent of borrowers were struggling with a “cash flow shortfall,” where essential spending and mortgage repayments were in excess of their income, with Ms Bullock admitting this group would need to make “quite painful adjustments”.

“This includes things like cutting back on their spending to the more essential items, trading down to lower quality goods and services, dipping into their savings or working extra hours.

Some may ultimately make the difficult decision to sell their homes,” she said.

“A really important point to note here, is that lower income borrowers are over-represented in the group of people who are really struggling.”

RBA governor Michele Bullock has acknowledged many are doing it tough under high interest rates but is staying firm against a cut before inflation moderates. Picture: NewsWire / Max Mason-Hubers

However, she said “inflation causes hardship too,” especially for vulnerable Australians.

“Our experience of how costly inflation can be is the reason that getting inflation back to the target range is our priority,” she said.

Inflation is currently 3.8 per cent, above the RBA’s target range of 2-3 per cent.

However Ms Bullock doubled down on her warning that Australians should not expect a rate cut in the near term, saying inflation is the number one risk to the household economy.

She said that was why the RBA expected the cash rate would remain elevated for some time and that it was “premature” to be talking about rate cuts.

At the earliest, most economists have tipped a February rate cut, with others saying it could be delayed until the second quarter of the year, after March.

“Circumstances may change, of course, and if economic conditions don’t evolve as expected, the Board will respond accordingly,” said Ms Bullock.

“But 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.”

RBA governor Michele Bullock says some people could lose their homes because of the sustained higher interest rates. Picture: NewsWire / Max Mason-Hubers

But she says it would be worse for the economy if inflation was not brought back to the target range of 2-3 per cent. Picture: NewsWire / Max Mason-Hubers

Ms Bullock warned that if high inflation became entrenched, the bank would have to enforce “even higher interest rates” which would lead to a “larger rise in unemployment and higher risk of recession”.

This, she said, would disproportionately affect “lower income households”.

“This experience is consistent across groups of workers. But job losses tend to be disproportionately borne by some members of the community – the young, those who are less educated, and people on lower incomes and with less wealth (including renters),” she said.

“A weak labour market also hurts those who keep their jobs, whether through a reduction in hours worked or lower wages growth.”

In her speech, Ms Bullock said the key drivers of inflation included housing costs and market services inflation, while discretionary spending was down.

She also acknowledged inflation had disproportionately put greater pressure on poorer and younger households, who were forced to allocate their funds towards essentials like “food, utility bills and rent”.

Whereas higher income households were able to spend more on “owner-occupied housing as well as discretionary items such as consumer durables”.

Ms Bullock also noted both groups were also more affected by the cost-of-living crunch.

“They are often budget-constrained and have less scope to reduce their spending on discretionary items to balance their budgets,” she said.

“They may also have less scope to reduce spending via trading down to cheaper items within the same category if they were already purchasing lower cost items.

“Moreover, they typically have smaller savings buffers and so less scope to use savings to maintain their current standard of living.”

BULLOCK LAUGHS OFF RIFT WITH CHALMERS

Ms Bullock dismissed reports of a rift with Treasurer Jim Chalmers, who on Sunday said a high degree of global uncertainty and “rate rises” were “smashing the economy”.

On Wednesday, updated GDP figures from the June quarter also revealed Australia’s economy had only grown a subdued 0.2 per cent since the May quarter, with seasonally adjusted year-on-year growth at just 1.0 per cent.

RBA governor Michele Bullock has denied a rift with federal Treasurer Jim Chalmers over the board’s handling of interest rates. Picture: NewsWire / Max Mason-Hubers

While Mr Chalmers was criticised for appearing to shift blame on to the RBA, claims which he denied, Ms Bullock also adamantly denied claims of “a war” between the pair.

“He’s doing his job and I’m doing mine. I wouldn’t use those sorts of words,” she said.

The governor said she believed the government was “focused” on lowering inflation.

“The federal government and the Treasurer said a number of times that he’s doing his bit to try and bring down inflation. My job is to focus on what I can do, which is only the interest rate,” he said.

“I think all the governments are conscious of it, because, quite frankly, all of their constituents are suffering from high inflation, so I think they are focused.”

The RBA board next meets in late September, where it is expected to again keep the official cash rate on hold at 4.35 per cent, where it has been since November last year.

“Over the last year, we haven’t seen much progress on disinflation,” she said.

“So we really need to be convinced that we’re going to see it in the actual numbers before we are going sustainably back to target before we think about reducing interest rates.

The next quarterly CPI figures will be released by the Australian Bureau of Statistics on October 30, after the September board meeting but days before the Melbourne Cup meeting in November.

“It’s one indicator and we will obviously be looking closely at it, but there’ll be other things that we’ll be taking into consideration as well,” she said.