RBA boss Michele Bullock’s rate call: It’s higher for longer

Reserve Bank of Australia Governor Michele Bullock has kept the cash rate on hold. Picture: Jeremy Piper

New Reserve Bank governor Michele Bullock is facing one of the most critical moments since taking charge of the central bank last year.

Inflation is starting to pull away again, but if she tries to control with the shock of a rate hike, she risks derailing the economy.

So now it's a game of patience after Bullock kept the cash rate on hold at 4.35 per cent on Tuesday, with two strong messages coming out of the latest interest rate call.

Inflation is coming in higher than what the central bank had been forecasting in March, but importantly there’s not enough of a case being made to hike rates.

Bullock needs to be confident inflation is going in the right direction. And, while the path may have become bumpier in the near term, she still believes it is moving back toward the target over the medium term.

This comment by Bullock is significant and should be enough — for now — to cool the interest rate hawks who have been tipping another hike.

The second message from Bullock to homeowners and businesses is the cash rate is going to stay at these levels for longer than many were expecting.

For some economists, this could push forecasts of an interest-rate cut into next year, possibly after March, when many had been tipping rate relief at the end of this year.

To be sure, Bullock says after two years of a rate hike cycle the situation remains finely balanced. While inflation is easing, it is doing so more slowly than previously expected and it remains unsustainably high. She can’t risk it getting away too much in the near term, making it harder to control over the medium term. Adding to the rates on hold longer argument, while the RBA board mulled a hold versus hike scenario in its latest meeting, a cut wasn’t part of the discussion.

Along with the interest rate decision, the RBA revised its economic forecasts. Here inflation is forecast to be at 3.8 per cent by the end of December. Previously the bank was tipping 3.2 per cent. The updated forecasts keep inflation returning to upper end of the RBA’s target band of 2-3 per cent by December next year.

Goods inflation is coming down, but services inflation, fuelled by wages and a tight jobs market, remains sticky.

This remains the experience around the world where inflation is persisting. Last week, US Federal Reserve boss Jerome Powell hosed-down expectations of a hike there, but indicated cash rates could remain higher for longer.

A consequence of a higher-for-longer interest rate outlook, Australia’s economic growth is likely to come in slower than previously expected. The good news is Australia continues to avoid a recession.

The RBA is tipping annualised growth of 1.6 per cent by the end of this year, compared to 1.8 per cent previously. The recovery in growth will begin next year, the RBA expects.

The plain-speaking Bullock kept her trademark warning: risks remain in trying to get inflation under control and the central bank is “not ruling anything in or out” when it comes to a possible hike in the cash rate.

Still, she is well aware underneath the surface of the economy there is real weakness among consumers and business.

The RBA has said consumers have pulled back spending sharply. Picture: Lisa Maree Williams

Bullock too is closely watching next week’s Budget to ensure it doesn’t add to inflation in the economy. She noted in her press conference Treasurer Jim Chalmers has said the impact on inflation was top of mind while preparing next week’s budget.

So too the state governments seem to be getting the message. Even big spending Victoria on Tuesday pulled back modestly on its infrastructure splurge to focus on debt repair.

“I think (governments) are all conscious that they want to help us beat inflation so they don’t want to try and outdo inflationary pressures”.

The central bank too will be waiting to see how households react to the looming Stage 3 tax cuts, whether the spare cash is spent or saved. This could be enough to spur inflation and this is what Bullock will be watching.