RBA governor Michele Bullock reinforces high-for-longer interest rate outlook

The Reserve Bank boss continues to argue monetary policy must stay restrictive because underlying inflation won’t sustainably fall — until the end of 2026.

Michele Bullock has stuck to the hawkish script, arguing monetary policy must stay restrictive until inflation is on track to return sustainably within the target range.

In her speech “Economic Conditions and the RBA’s Transformation” at the CEDA annual dinner, the governor highlighted the RBA’s forecasts that inflation won’t sustainably hit the middle of the 2-3 per cent target band until late 2026.

Underlying “trimmed mean” inflation has been above the middle of the band since late 2021.

Ms Bullock noted this forecast was conditioned on a forward path for the cash rate — implied by market pricing at the time of the November Statement on Monetary Policy — which had the cash rate remaining at its current level over the near term.

The Statement said market pricing underpinning the RBA’s economic forecasts implied the cash rate will stay at its current level of 4.35 per cent — the highest level in 15 years — until around mid-2025. The cash rate is assumed to fall to around 3.5 per cent by the end of 2026.

“We still think we are on the narrow path,” Ms Bullock said.

“I should be explicit here that this is not the board’s forecast for interest rates.

“It is a conditioning assumption but, along with other information available at the time, it is consistent with inflation returning sustainably to target within the board’s preferred time frame.

“That said, the central forecast for inflation has substantial bands of error around it so as more information comes to hand, we will be reconsidering those forecasts and hence the appropriate stance of policy.”

RBA minutes last week said there were scenarios in which inflation declined materially more quickly than currently forecast, perhaps in response to emerging signs rental housing markets were moving into better balance or because energy rebates have had a more pervasive effect than factored in.

The RBA has said it needs to see “more than one good quarterly inflation outcome” to believe inflationary declines were sustainable. Picture: Martin Ollman

But, while members noted this could warrant an easing in the cash rate target, they “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”.

Money market pricing implies the cash rate will be unchanged until May, when a cut of at least 25 basis points is expected. The market has priced it at least 50 basis points of cuts by September.

But, the precondition of two “good” quarterly inflation reports set by the RBA board has likely put pre-election rate cuts out of reach, barring a recession.

A Federal election must be held on or before May 17. However, the Australian Bureau of Statistics will not have released two more quarterly CPI reports until the end of April.

Barring an emergency, the next practical date after the March quarter CPI report on which the RBA could announce an interest rate cut would be after its May 29-20 board meeting.

In her speech, Ms Bullock reiterated the RBA must “look through temporary factors that influence the headline inflation rate from time to time”.

“Indeed, over the past year, part of the decline in headline inflation has been due to temporary factors such as electricity rebates and declining fuel prices,” she said.

“While these temporary factors have undoubtedly helped many Australians, our approach is to look through them, to some extent, to better understand where inflation will settle in the medium term,” she said. “The best way to do this is to look at underlying inflation.”

Underlying inflation “was still too high” at 3.5 per cent for the September quarter.

“While this is a welcome decline from 5.1 per cent a year earlier, it is consistent with a situation in which the overall level of demand for goods and services in the Australian economy has been outstripping its supply capacity for some time,” Ms Bullock said.

Moreover, while high interest rates have caused “very weak growth” in consumer spending and dwelling investment, “elevated inflation indicates that the level of demand in the economy is above the ability of the economy to supply the goods and services demanded”.

She said the evidence suggests this gap is narrowing, but the labour market is still “tighter than what would be consistent with low and stable inflation”.

“While some labour market indicators have shown signs of easing, the demand for workers remains robust, particularly in sectors like health care and education,” she added.

“Overall, the earlier period of high inflation has imposed large costs on families and businesses across Australia, and especially the most vulnerable.

“If we fail to bring inflation down in a sustainable way, cost-of-living pressures will only compound and monetary policy would need to remain restrictive for longer. This is why returning inflation sustainably to the target within a reasonable time frame remains the Board’s highest priority.”