RBA hints of possible pause on interest rate hikes

After raising rates by a ‘substantial amount’ the Reserve Bank is getting to a level where ‘there might be an opportunity to sit and wait’.

RBA deputy governor Michele Bullock. Picture: John Feder

After raising rates by a “substantial amount” the Reserve Bank is getting to a level where “there might be an opportunity to sit and wait”, deputy governor Michele Bullock says.

Speaking at Senate estimates, Ms Bullock said she was aware the bank had hiked by a “substantial” 2.75 percentage points to 2.85 per cent this year, but that it wasn’t clear when higher borrowing costs would begin to meaningfully slow economic activity and put a break on 32-year highs in inflation.

“We think interest rates will probably have to go up a little bit further, but we’re not set on our timing and we’re not set on our amount,” she said.

Ms Bullock accepted that the bank’s failure to predict this year’s inflationary surge had given Australians a false sense of security that rates would remain low for the foreseeable future.

“What we were trying to do at the time was give our best guess where inflation was at, but unfortunately we were surprised,” she said.

She said she had “a lot of sympathy” for households that had made financial decisions based on the bank’s mistaken guidance as recently as late last year that rates would stay low for years.

Despite crashing consumer confidence, plunging real wages and soaring cost-of-living pressures, households have continued to shop and eat out in droves. But real, or after inflation, total retail sales growth has dropped from 1.4 per cent in the June quarter to an estimated 0.2 per cent over the three months to September.

Ms Bullock said this deceleration was “the first sign we have seen in the data that demand might be slowing”. “We’re hoping it (demand) might be slowing, but we need a bit more evidence to see if it is,” she said.

Ms Bullock said wages growth at current levels was not driving the high inflation outcomes, but that the bank was focused on not letting a temporary price shock become entrenched.

“There is a big supply element to this (high inflation outcome); there has been a big shock to the price level,” she said. “But if we can stop that winding its way into more permanent prices and wages, that is actually optimal, ­because that is what will generate a strong economy and strong ­employment growth.

“That’s the challenge at the moment and that’s why we are raising interest rates.”

Ms Bullock said that, for now, measures of inflation expectations suggested Australians ­believed price growth would be back around the RBA’s 2-3 per cent target bank in two years.

“That’s the important thing: if people understand it (high inflation) is temporary, then we can get back to low and stable ­inflation.”