Hates for rates: RBA governor Michele Bullock’s tough-talking first year

Her term started with a warning of the inflationary dangers of a haircut. Twelve months later, Michele Bullock turned her attention to those who may have to sell their homes due to high interest rates.

In between, the first woman to head the Reserve Bank became the lightning rod for an increasingly bitter political and community debate while overhauling the culture of the nation’s most important economic institution.

Bullock took over as head of the RBA on September 18 last year. Within seven weeks, she and the bank board had lifted the official cash rate to a then 12-year high of 4.35 per cent.

She has not raised rates since. But she has constantly warned that another hike is possible, focusing on the causes of inflation.

Michele Bullock a year ago. Her first 12 months leading the nation’s most important economic institution have been anything but easy.Credit: AAP

In November, she noted that prices were rising strongly in areas such as “hairdressers and dentists”. Three months later, at her first press conference, she revealed the trade-offs her own children had gone through to purchase highly prized – and extremely expensive – tickets to see Taylor Swift.

“Clearly, for a lot of people, Taylor Swift is very important,” she conceded.

Interest rates are the most obvious way the Reserve Bank manages the economy. But Bullock has also dipped into the central bankers’ bag of tricks, which includes “jawboning” – the practice of scaring consumers into shutting their pockets without the need to inflict direct financial pain.

Her jawboning has been accompanied by a “political” jawboning about the bank. Treasurer Jim Chalmers has for months argued the bank’s interest rate settings have either “hammered” or “smashed” the economy.

Others, such as former treasurer Wayne Swan, have been aggressively critical, accusing the bank of “punching itself in the face”.

Bullock hasn’t snapped back at Canberra’s free advice. But as the first RBA governor to regularly conduct press conferences, she has a soapbox she can deploy.

Inflation has fallen over Bullock’s first 12 months, but it is yet to reach the RBA’s 2-3 per cent target band. It has been either above or below for almost the entirety of the past decade.

While not in recession, the economy has slowed alarmingly. In per capita terms, the share of the economic pie is being sliced into smaller portions all the time.

Former RBA economist Peter Tulip, who is now chief economist at the libertarian Centre for Independent Studies, says Bullock has had a relatively easy transition into the bank’s top job.

“The big increases in interest rates preceded her ascension to the job,” he says. “But she’s done a pretty reasonable job overall.”

Tulip is critical of the way the bank communicates.

One of the biggest issues that hurt former governor Philip Lowe was the bank’s so-called “forward guidance” – giving public signals about future movement in interest rates.

In Lowe’s case, this was his repeated statements that interest rates were unlikely to increase until 2024.

Bullock has gone out of her way to say, explicitly, she is not providing forward guidance.

But Tulip says that’s one of the key jobs of the governor and the bank.

“Clearly, the bank and Michele were burnt by the forecast that interest rates would stay low. I think the bank has taken the wrong lesson from the issues around forward guidance,” he says.

Impact Economics’ lead economist, Angela Jackson, believes Bullock’s biggest successes have been internal ones, such as the appointments of Andrew Hauser as deputy governor and Sarah Hunter as chief economist.

What Bullock said

• “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.” - Statement on November 7 announcing an increase in the official cash rate to 4.35 per cent
• “Hairdressers and dentists, dining out, sporting and other recreational activities – the prices of all these services are rising strongly.” - November 22 speech
• “We’re not ruling in or out anything.” - February 6 press conference
• “Clearly, for a lot of people, Taylor Swift is very important.” - February 6 press conference
• “Some may ultimately make the difficult decision to sell their homes.” - September 5 speech
• “We’ve chosen, very deliberately, to try and bring inflation down while not turning the economy into a recession and spiking unemployment.” - August 8, question/answer in Armidale, NSW
• “I do understand this is not what households want to hear. Those with mortgages are feeling the squeeze on their cash flows from the increasing interest rates over the past couple of years. But the alternative of higher inflation for longer is much worse.” - House economics committee, August 16

“The biggest changes have been at the cultural level. These aren’t going to affect interest rates here and now, and so people aren’t noticing them, but they are setting the course for the bank for the future, which in terms of monetary policy should put it in a better position,” she says.

Jackson argues the press conferences are still a work in progress.

“If you’re trying something for the first time, then it’s going to take time to get it right,” she says.

Barrenjoey chief economist Jo Masters says Bullock’s personnel changes and sharing the workload have improved the bank’s operation.

“She’s really lifted the team,” she says.

“Remember, when she took over she didn’t have a deputy or a chief economist or a chief communications officer. So she really had to shape the whole organisation.”

While the bank’s changes to interest rates dominate public debates, the RBA is also pivotal to the supply and movement of money.

Bullock and her team have had to ensure cash is available across the country after the main mover of cash, Armaguard, almost collapsed.

The problems with Armaguard go to another issue on Bullock’s plate – the future of cash.

Electronic payments account for most transactions, prompting a debate about whether surcharges should be banned.

The bank is about to start a review of the payment system while releasing a discussion paper to map out the future of a central bank digital currency.

Masters notes that Bullock has let her personality shine through in her press conferences and says that will be important in the coming months.

“We’re in a different part of the [economic] cycle. The bank didn’t hike as far as other countries, but that’s also meant it is taking longer for inflation to come down, and so that sort of trade-off has to be explained,” she says.

Bullock’s first-year worries about higher interest rates and inflation could soon change.

Inflation could be under 3 per cent early next year, due in part to government subsidies. Bullock will have to explain why interest rates are not falling if inflation is back within the bank’s band.

Financial markets reckon Bullock will announce a rate cut just ahead of Christmas. Two rate cuts are expected by April next year.

If that comes to pass, it will mean the bank cuts interest rates in the run-up to a federal election that will be dominated by cost-of-living issues.

Bullock’s term as governor is not going to get any easier.

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