‘Shock after shock after shock’: RBA’s inflation challenge

Reserve Bank governor Michele Bullock has urged Australians to be ‘alert’ to the risk of further rate hikes.

RBA governor Michele Bullock says high inflation becomes harder to shift once it becomes part of Australians’ ‘day-to-day lives’. Picture: John Feder

Reserve Bank governor Michele Bullock says “shock, after shock, after shock” is making it harder to bring inflation back down, as she urged Australians to be “alert” to the risk of further rate hikes.

Confirming growing fears of a 13th interest rate rise on Melbourne Cup day, Ms Bullock on Wednesday morning told a conference in Sydney that “it’s a challenging economic environment”.

Ms Bullock said rate hikes were “starting to bite”, but suggested that in the wake of developments such as the Hamas terrorist attacks, it was becoming harder to balance the task of bringing inflation back under control without “tanking” the economy.

The bank would typically be prepared to look through one-off shocks, such as the rise in global oil prices that pushed inflation higher in August as the cost of petrol rose to $2.20 a litre in recent weeks.

“But the problem is we’ve had shock, after shock, after shock,” she said.

Ms Bullock warned of high inflation expectations becoming embedded in the community. “We have to be very alert to it, and we have to alert people to the fact that if inflation continues to be higher than expected – and the risks are on the upside – then we’re going to have to respond with monetary policy,” she said. “That’s what we need to make people understand.”

Ahead of jobs data on Thursday followed by a crucial consumer price report next Wednesday, Ms Bullock said “most people believe that central banks will do what it takes to get inflation back down to 2-3 per cent”.

“But the longer inflation stays above target, and the more people observe it happening in their day-to-day lives, the harder it will be.”

Ms Bullock said the price of services was continuing to grow at a rate of above 4 per cent. “So it‘s above our target and it’s pretty sticky. And that’s what we’re observing overseas as well,” she said.

As the new RBA governor backed in what analysts said was the surprisingly “hawkish” language in Tuesday’s board minutes, NAB head of market economics Tapas Strickland said traders were now pricing in more than a 40 per cent chance of a rate hike next month, and that they fully anticipated another increase by March.

“Markets are clearly toying with the idea that the RBA will hike more than once,” he said.

Central banks at overseas peers, such as the US, UK and Canada, have pushed policy rates to 5 per cent or above.

UNSW economics professor Richard Holden, speaking at the National Press Club in Canberra, questioned whether Australia would be able to tame inflation with a substantially lower cash rate of 4.1 per cent.

“So on that front, and to buy insurance against these shocks … I suspect we will need more tightening or should see some more tightening from the RBA in coming months,” Mr Holden said.

Ms Bullock pointed to the “slowdown in consumption”, saying “we know a lot of households are finding it difficult”.

“What is keeping aggregate consumption growing is population growth,” she said.

She said she had been surprised that house prices had defied higher borrowing costs to reach their pandemic peaks. “When interest rates started to rise, housing prices started to decline, and we thought that they would continue to decline,” she said. “But actually they bottomed sooner than we thought.”