Attention, Treasurer Jim Chalmers! Michele Bullock reads riot act on high inflation

RBA governor Michele Bullock has kept rate hikes on the agenda, despite Jim Chalmers’ claim that they were ­’smashing the economy’, saying a failure to get on top of inflation would plunge the nation into recession.

Tensions between Jim Chalmers and Michele Bullock over interest rates and inflation continued on Thursday.

Reserve Bank governor Michele Bullock has kept rate hikes on the agenda, despite Jim Chalmers’ claim that they were ­“smashing the economy”, saying a failure to get on top of inflation would plunge the nation into recession.

Staring down demands to ­deliver rate relief, Ms Bullock on Thursday dismissed discussion of rate cuts as “premature”, given underlying price pressures remained stubborn despite weak economic growth. The comments came after the Treasurer pointed the finger at the central bank for hammering growth ahead of weak GDP figures, which eked out a 1 per cent gain over the 12 months to June, despite record government spending.

Ms Bullock said inflation – not interest rates – was the key cause of the nation’s economic ­challenges.

“It’s actually high inflation that’s really causing trouble for people, and causing trouble for the most vulnerable,” Ms Bullock told a fundraising lunch hosted by ­Anika Foundation. “It’s affecting everyone.”

While only about 5 per cent of borrowers were at risk of falling behind on their mortgage repayments, Ms Bullock acknowledged that some people might have to sell their homes because of interest rate rises.

“Although this group is fairly small overall, those in it have had to make quite painful adjustments to avoid falling behind on their mortgage repayments,” she said.

After the GDP data released on Wednesday confirmed a further slump in Australia’s productivity performance, business leaders renewed their demands for the Albanese government to embrace an agenda to bolster the nation’s economic efficiency.

“If we don’t get productivity up, if we don’t get productivity moving, we won’t have sustained economic growth. And that is becoming clearer and clearer,” Ai Group chief Innes Willox said.

“The Treasurer is right to point to increased government spending keeping the economy afloat because the reality is that policy settings more broadly are pushing the economy underwater.”

The GDP figures also showed a collapse in private consumption, a continued rundown of household savings, and real disposable incomes heading in reverse, sparking concern that the RBA is waiting too long to cut rates and causing unnecessary economic pain.

Ms Bullock justified the RBA’s strategy to keep interest rates on hold at their 12-year high of 4.35 per cent given uncertainty over the economic outlook, arguing that the consequences of prolonged, elevated inflation would confer further pain.

“If we don’t get inflation down, it’s bad for everyone, absolutely everyone,” Ms Bullock said.

“So that’s the job I’m focusing on. If inflation doesn’t come down, then it might be that the best medicine is, in fact, that we have to end up putting more restriction into the economy.”

Should expectations of high inflation became entrenched across the economy, Ms Bullock warned of “a larger rise in unemployment and higher risk of recession”.

“If businesses and workers come to expect that prices and wages will continue rising quickly, this adds to inflationary pressures, requiring even higher interest rates to bring inflation down,” she said.

Reacting to the GDP figures released on Wednesday, Finance Minister Katy Gallagher pointed to the weakness in household consumption.

“That’s dramatically or significantly fallen in that quarter, that gives you a picture of how households are feeling,” she told ABC radio on Thursday.

Senator Gallagher would not be drawn as to whether RBA had underestimated the degree of stress in the economy after it had forecast household consumption was running at 1.1 per cent – outpacing the 0.5 per cent increase borne out in the GDP figures

“I’m not going to pass judgment on the RBA and their decisions,” she said.

Peter Dutton accused Dr Chalmers of frontrunning the GDP figures by laying blame on the RBA in a bid to distract from Labor’s management of the ­economy.

“He was trying to preposition to say, ‘Look, there’s bad news coming and we’re going to hang it around the neck of the RBA’, which is, I think, outrageous because the RBA can only respond to economic settings in the economy,” the Opposition Leader said.

Ms Bullock rejected any assertion that she was “at war” with the Albanese government.

“[Dr Chalmers is] doing his job and I’m doing mine,” she said.

“I wouldn’t use those sorts of words.”

After peaking at 8.4 per cent in December 2022, inflation has steadily retreated to just 3.5 per cent in July 2024 as the RBA’s ­aggressive run of 13 rate hikes cool the economy.

Yet even as headline inflation fell markedly, assisted by government energy rebates taking effect, Ms Bullock warned that the core price pressures – which registered at 3.9 per cent on their most ­recent measure – remained persistent.

“With underlying inflation having fallen very little over the past year in quarterly terms, the board is vigilant to upside risks … policy will need to be sufficiently restrictive until we are confident that inflation is moving sustain­ably towards the target range,” she said.

Ms Bullock reiterated the board’s guidance that talk of rate relief was premature, once again ruling out a pre-Christmas cut.

“Circumstances may change, of course … but if the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term,” she said.

While money markets predict a near 70 per cent chance of a cash rate cut at the RBA’s December meeting, most economists believe the central bank will not be in a position to cut rates then as its preferred underlying inflation marker was still too high at 3.8 per cent.

KPMG chief economist Brendan Rynne said that achieving the “narrow pathway” to a soft economic landing – that is, returning inflation to target without causing an economic downturn – was becoming much harder.

“Not only is it narrow,” Dr Rynne said.

“I think we are down to basically the Kokoda goat-track. It’s as bumpy as all hell.”