Know when to hold ’em, know when to hike ’em: peer pressure won’t move RBA’s Michele Bullock

RBA governor Michele Bullock. Picture: NewsWire / Max Mason-Hubers

Michele Bullock insists she won’t succumb to peer pressure.

Just because the US Federal Reserve and other central banks have cut their key interest rate doesn’t mean the Reserve Bank is going to follow suit any time soon.

The RBA governor said after last month’s board meeting she would continue to be flexible but do what was right for local ­conditions.

“So I would resist peer pressure,” Bullock replied when a reporter asked what she would do in the face of a global “wave of ­easing”.

For starters, the US, Canada, New Zealand and Britain all had their policy rates above 5 per cent, while our cash rate has been at 4.35 per cent since November.

Compared with a real interest rate of close to 3 per cent in the US, Australia’s real borrowing cost is around one-fifth that rate, meaning the monetary squeeze here has been far less constrictive.

It’s all about staying on the “narrow path”, as Bullock has often said, of fighting inflation and holding on to as many of the post-pandemic job gains as possible.

Since May 2022, when the RBA began raising rates from near zero and Labor won the federal election, employment has increased by 978,000 or 7.3 per cent.

More jobs have been created over the period than the rapid growth in the working-age population, driven by a record influx of foreign students and temporary workers.

“We’ve tried to raise interest rates to get them restrictive enough to bring inflation back down to target without overdoing it,” Bullock said a fortnight ago.

“We’ve been sometimes criticised for that. Some people have said you should have gone as far as the Fed’s gone. We haven’t. We tried to maintain an interest rate that is as high enough as it needs to be to bring inflation back down.”

Inflation is falling but still too high. On that score, even Jim Chalmers agrees.

So a cut in borrowing costs is not on the cards when the RBA board meets on Monday and Tuesday. The market pros say it’s either “hold or hike”.

One of the things the monetary deciders are watching closely on the home front is the labour market, which continues to surprise and confound.

How does an ailing economy, allegedly “smashed” by interest rates, with the barest growth pulse and highly stressed consumers, keep pumping out more jobs?

Governments are spending more on health, disability, social services and administration, while population growth of 615,300 in the 12 months to March, including a net inflow of 509,000 migrants, has added to both labour supply and demand.

Last week, RBA chief economist Sarah Hunter said “the labour market is operating above full employment”, meaning conditions are tight and likely to keep upward pressure on wages and prices.

The 4.2 per cent jobless rate recorded in July and August, the highest in almost three years, is but one measure its staff economists consider “to holistically assess the labour market”.

The labour market is resilient, but it is still getting a lot of help from taxpayers. Keeping rates steady here for the rest of the year, while other rich nations march on to more normal policy settings, will support the Australian dollar and perhaps even make imports a bit cheaper.

As an election nears, however, the pressure for rate cuts on the RBA board won’t be from their peers, but pesky politicians facing the people.