RBA won’t hesitate to raise rates if it’s needed, says RBA governor Michele Bullock

The Reserve Bank ‘will not hesitate’ to raise interest rates again to stop inflation from becoming persistently high, says the central bank’s governor, Michele Bullock.

RBA governor Michele Bullock has a stark warning about interest rates if inflation won’t budge. Picture: John Appleyard

The Reserve Bank “will not hesitate” to lift interest rates again if needed to stop inflation from becoming “persistently high”, governor Michele Bullock has warned.

In a speech at the Rotary Club of Armidale, in northern NSW, Ms Bullock sought to amplify the hawkish message of the RBA’s monetary policy board after at this week’s meeting it considered another interest rate rise.

“On balance, the board decided to keep interest rates on hold, judging that such an outcome would still meet the board’s mandate to balance its inflation and employment objectives,” she said.

“But the board remains vigilant with respect to upside risks on inflation and will not hesitate to raise rates if it needs to. I know this is not what people want to hear.

“But the alternative of persistently high inflation is worse. It hurts everyone.”

The RBA left its cash rate target at a more than 12-year high of 4.35 per cent after Tuesday’s meeting.

That followed a fall in underlying “trimmed mean” inflation to 3.9 per cent in the year to the June quarter, which was slightly above the RBA’s forecast of 3.8 per cent for the period.

In her speech titled Economic Conditions in Post-Pandemic Australia with a Regional Lens, Ms Bullock reiterated the message of the board’s post-meeting statement that inflation was “too high”.

“Inflation in many goods prices has declined but inflation in services prices is high and proving very sticky,” she said. “And the reason for this is that demand for goods and services in the economy is still higher than the ability of the economy to supply those goods and services.”

Demand for goods and services “recovered very strongly after the pandemic, to quite a high level”.

“So even though demand growth has been fairly weak recently, this slowing has not been enough to restore balance in the economy,” she said.

“The board has been trying to bring inflation down by slowing the growth of demand to bring it back into line with supply. And it has been trying to do this while preserving as many of the gains in the labour market as possible.

“We’ve described this as the ‘narrow path’.”

While acknowledging that economic growth has been “weak”, Ms Bullock said RBA forecasts suggested that the “gap between aggregate demand and aggregate supply in the economy is larger than previously thought and this is resulting in persistent inflation”.

And while noting “considerable uncertainty around the outlook”, she said the RBA expected the pace of demand in the economy to “pick up over the next year”.

“The effect of this is that the board’s expectations for when inflation will come back to target have been pushed out,” she said.

“We don’t expect to be back in the 2 to 3 per cent target range until the end of 2025 – over a year away.

“This is why the board explicitly considered whether another interest rate rise was required to ensure inflation continues to decline in a reasonable time frame.”

The RBA’s revised forecasts show underlying “trimmed mean” inflation falling to 2.9 per cent in the year to December 2025 and to 2.6 per cent in the year to December 2026.

In May, it forecast underlying inflation of 2.8 per cent for the year to December 2025 and to 2.6 per cent for the year to June 2026.

The revised inflation forecasts still have underlying inflation returning to the 2 to 3 per cent target band by the end of 2025 even while assuming the cash rate falls to 4.0 per cent by June 2024 versus a previous assumption of 4.3 per cent.

“On balance, the board decided to keep interest rates on hold, judging that such an outcome would still meet the board’s mandate to balance its inflation and employment objectives,” Ms Bullock said.

In a nod to the uneven effects of interest rates on the economy, Ms Bullock said the RBA was “conscious that the effect of monetary policy decisions is not felt evenly across all groups”.

However, the RBA “needs to set monetary policy based on aggregate conditions”.

“The RBA sets monetary policy for the Australian economy as a whole,” she said.

In her post-meeting press conference on Tuesday, Ms Bullock said the RBA “will increase interest rates” again if needed, and disagreed with market expectations of rate cuts within six months.

NAB head of market economics, Tapas Strickland, said the speech highlighted that the RBA Board is “becoming less comfortable with the slow return of inflation back to target.”

“That suggests if the data flow were to challenge the return of inflation to the 2-3 per cent target by the end of 2025, then the RBA board would again discuss the merits of hiking rates,” he said.

“And that it seems it is prepared to hike rates if needed to, despite having already discussed the merits of hiking rates at three consecutive meetings and deciding not to.”

When asked what the RBA would do if the unemployment rate was higher than their projections and inflation was still sticky, Bullock noted that the rise in unemployment may reflect a rise in structural unemployment which monetary policy can’t do anything about and that it may mean the non-accelerating inflation rate of unemployment (NAIRU) is rising.

“The biggest implication from that is a lift in the unemployment rate beyond the RBA’s 4.4 per cent forecast by June 2025, with still positive employment growth, does not necessarily greenlight interest rate cuts if inflation remains sticky,” Mr Strickland said.

“It could be that the RBA instead revises up their estimate of NAIRU.”

Ms Bullock also continued to push back on market pricing of interest rate cuts before year end. She said RBA didn’t lift rates as high as other countries and that if the Bank were to change its economic view, it would be based the totality of economic data.