RBA governor Michele Bullock’s underlying steel forged by resisting pressure

Reserve Bank governor Michele Bullock in Sydney on Tuesday. Picture: NewsWire / John Appleyard

The independence of the Reserve Bank is hanging by a thread. Jim Chalmers is extremely eager to see the cash rate reduced, which would then flow on to lower mortgage rates. Wishing is not the same thing as getting, however, particularly when the governor and the board of the bank are focusing on getting the rate of inflation sustainably into the target band of 2-3 per cent per annum.

The Treasurer was very unwise to talk about the economy being “smashed” by interest rates, especially given that our cash rate has been lower than most official rates overseas. Even now, the official rate in the US is above our cash rate of 4.35 per cent after the 50-point adjustment in the US.

To be sure, the pain caused by the increase in our interest rates is real, particularly for those with large mortgages.

And while government-­related employment continues to surge, private sector businesses and their workers are finding the going tough. Most of the savings households built up during Covid have now been used up.

The Greens are demanding that the independence of the bank be abolished by insisting that the government should instruct the bank to cut the cash rate, in exchange for agreeing to Chalmers’s preferred restructuring of the bank. Thankfully, Chalmers has decided that this is a bridge too far.

Jerome Powell, chair of the US Federal Reserve, has noted recently that countries where politicians interfere in the workings of central banks have higher rates of inflation and unemployment.

Michele Bullock, RBA governor, is showing remarkable resolve in dealing with the political pressures she is facing. She understands the pain associated with higher interest rates; she also understands the widespread pain of ongoing inflation. There can be criticism of the decisions made by the bank – putting up the cash rate sooner and higher would argu­ably have been a better option – but this does not offset her genuine endeavours to tame inflation while maintaining employment at high levels.

The decision by the bank to hold the cash rate was a surprise to no one. To clearly demonstrate its independence, arguably the bank had no choice. Yet the data continues to support the bank’s relatively hawkish stand, particularly the ongoing high rate of services sector inflation as well as the output gap. The ongoing slump in productivity is making the bank’s job much more difficult.

The governor emphasised in her post-decision press conference that the bank remained focused on achieving inflation within the target band, but progress towards achieving that goal had been slow.

For that reason, “policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

Reading between the lines, there is very little prospect of the cash rate being cut in the next six months.

Bullock also addressed the point about the release of monthly CPI figures this week that will likely show the headline figure has fallen to below 3 per cent per annum, reflecting energy sub­sidies as well as lower fuel prices.

However, the bank’s decision-making is driven by what is happening to the trimmed mean of the CPI, which factors out volatile factors.

She also made the point that the monthly CPI figures were inherently more volatile than the quarterly figures. The bank’s current thinking implies that one quarter of CPI growth within the target band might not be enough to persuade it to cut the cash rate.

Bullock continues to demonstrate underlying strength and courage in sticking to her lane, clearly explaining the reasons behind the decisions that bank has made – the cash rate has been held unchanged for six meetings in a row – and batting away essentially political questions.

A relatively small, open economy with a floating exchange rate such as Australia is best served by having a firmly independent central bank.

Without it, we would all ultimately suffer in terms of lower living standards. Present and past politicians should bear this mind before shooting off their mouth.