RBA’s Bullock must defend communications strategy

Reserve Bank governor Michele Bullock must get on the front foot and head off growing critiques. Picture: Christian Gilles

After the review of the Reserve Bank and the flak it copped for Philip Lowe’s ill-fated guidance on monetary policy during the Covid-19 pandemic — which ultimately led to him exiting after just one term as governor — Michele Bullock can’t afford to let nascent criticism fester.

In her post-meeting press conference this month, the RBA governor did her best to smack down the attacks from the media after the board unexpectedly left interest rates on hold.

She rejected claims the RBA hadn’t “effectively communicated” with the public and markets before its “shock” decision. Suggestions the board should have pushed back on market pricing of a rate cut were dismissed and she denied mortgage holders had been “betrayed”.

An awkward question on how many board members had mortgages was batted away.

But, the criticism hasn’t stopped. Westpac chief economist, Luci Ellis — herself a former assistant governor at the RBA — told the ABC the board’s decision to wait until August before cutting, rather than “use the full information set available to them now”, “felt a little bit uncharitable”.

The Wall Street Journal saw the RBA’s decision to keep rates on hold as a “source of widespread consternation”. Calls for more transparency into the board’s decision-making process and the anonymity of its decisions were set to grow if it didn’t cut rates in August, the WSJ said.

Michele Bullock has undoubtedly had a better run in the role after taking over from Philip Lowe, who governed the RBA during the pandemic. Picture: Joel Carrett

After her press conference two weeks ago and the RBA minutes this week, the governor might not have much more to say about the monetary policy outlook per se.

The annual Anika Foundation speech for the RBA governor, however, is pretty much what the Jackson Hole central bankers symposium is to the Federal Reserve governor. The RBA governor typically says something big. The elephant in the room right now is the communications strategy.

To be sure, Ms Bullock has had a great run since she started her current role in September 2023.

The RBA was one of the last to start cutting interest rates and has cut more cautiously than most.

But, until now it didn’t cop much criticism from major bank economists.

Ms Bullock successfully articulated the fact the board walked a “narrow path” after the pandemic — lifting interest rates just enough to get inflation back to the target band over time and, in doing so, preserve as much of the post-Covid gains in employment as possible.

The upshot was the board didn’t need to lower rates more slowly than its peers.

The trouble is the board and governor Bullock sounded very dovish after their May meeting.

Not only did the board shift its priority from “sustainably returning inflation to target” to “maintaining low and stable inflation”, Ms Bullock said: “I think I’m going to retire the narrow path analogy” on interest rates.

The comment implied the RBA had succeeded in lowering inflation while preserving employment, and would be better able to cut nominal interest rates to “neutral” levels, which by the looks of its models is somewhere around 2.8 per cent.

Ms Bullock also confirmed the board considered cutting rates by 50 basis points, even though the US and China had reached an agreement a week earlier to slash their retaliatory tariffs.

With monthly inflation data for June subsequently coming in below expectations the market saw a July rate cut as a certainty. But, Ms Bullock said components of the monthly CPI hinted underlying inflation in the June quarter could be a little higher than its forecast. Growth in unit labour costs remained elevated alongside continued weak productivity growth, she noted.

She said by the time of its August meeting, the board will have seen the June quarter CPI, another labour market reading, international developments and an updated set of forecasts.

Several times she said the decision to keep rate on hold was “about timing” rather than direction. In others words, interest rates are probably still coming down.

Ultimately, the board decided to “wait a few weeks to confirm that we’re still on track to meet our inflation and employment objectives”, she added.

But, with the unemployment rate spiking last month, the market-implied chance of a rate cut in August has risen to a near certainty. The market expects governor Bullock to sound dovish.