The RBA is more hawkish under Bullock

Financial markets should be waking to the realisation that the RBA has ushered in a new era of hawkishness and potential rate hikes next year.

Reserve Bank of Australia governor Michele Bullock said the bank “will not hesitate” to raise interest rates further if there’s a material upgrade to its inflation outlook. Photographer: Lisa Maree Williams/Bloomberg

Australian financial markets should now be waking to the realisation that the Reserve Bank of Australia’s management change has ushered in a new era of hawkishness that could fuel a series of rate hikes next year.

RBA Governor Michele Bullock took the reins of the RBA in September replacing the outgoing Philip Lowe, and in the space of just over two months has moved to signal quite forcefully that the risks around inflation going forward are still considerable.

It’s a big shift from Lowe. He almost certainly left the RBA thinking the job of taming inflation was, within a small margin for error, pretty much done and dusted.

When the reins were handed to Bullock in September, inflation was retreating from its peak above 8.0 per cent in late 2022. That led RBA watchers to expect a continued pause for the rate hikes which began under Lowe in July.

But it hasn’t panned out that way.

The official cash rate has already been raised under Bullock to a twelve-year high of 4.35 per cent following news of a spike in third-quarter inflation.

The RBA is now indicating that policy decisions will be driven by the data flow, but increasingly it feels as if its intolerance for any persistence in the inflation data will see it hike further.

By any measure, a speech delivered by Bullock to market economists last week on Wednesday suggested she is far from satisfied that the central bank has got inflation cornered.

To be sure, Bullock said to the Australian Business Economists forum that the hardest part of the war on inflation is still in front of the RBA as policy makers prepare to battle stubborn “homegrown” price pressures.

Gone from the RBA’s narrative is any claim that global supply shocks are to blame. Inflation is very much a domestic problem, and the risks that it lingers longer than expected are real.

“As global supply shocks have faded, it is increasingly the case that the remaining inflation challenge relates to a homegrown demand problem,” she said in the speech.

Inflation pressures are broadbased and not just confined to surging prices for rents, electricity and fuel, Bullock added.

She also noted that core inflation remains too high and that two-thirds of items in the consumer price index basket have seen their prices rising more than 3.0 per cent annually, some well above.

And while Bullock said she understands that many households are already struggling to meet mortgage repayments after thirteen interest rate increases since May 2022, she made it clear that policy will be set with the broader needs of the economy in mind.

“Any objective observer of the speech would conclude that the RBA feels as though it has more work to do next year,” one senior investment manager said. “Financial markets are asleep at the wheel.”

With official interest rates in Australia still well below those of comparable economies like Canada, the US and New Zealand, there’s still scope to think that the RBA will need to close the gap in order to defeat the inflation threat.

There’s growing attention on the first policy meeting for next year in February, when the RBA will have seen fourth-quarter inflation data. Any hint of disappointment in the CPI will likely spur further tightening, leaving the central bank with little choice but retain its hawkish guidance.

Lowe may have done most of the heavy lifting in the fight to tame inflation, but it will still be seen as Bullock’s failure if stubborn wage and demand pressures bubble.

The policy theorist that was Lowe has been replaced by a pragmatist in Bullock, who won’t hesitate to tap the brakes a few more times if the data demands it.

Dow Jones newswires