Hawkish RBA governor should brace for storms to come

The governor of Australia’s central bank remains deeply worried about inflation.

Michele Bullock, governor of the Reserve Bank of Australia, spoke to a local community group in her hometown this week about the economic outlook, while sending out warnings to anybody that would listen that a further rate increase remains a possibility.

The hawkish position has attracted the ire of many in the financial markets who, prior to her remarks, were growing comfortable with the idea that the RBA was on a trajectory to cut the official cash rate before the end of this year, taking its foot off the neck of the Australian economy, which many fear is about to tip into a recession.

But Bullock remains deeply worried about inflation, highlighting that it has been some time since there has been any truly reassuring news on the topic, and added that there is still an excess of demand in the economy that will take time to be squeezed out.

“Given where inflation is, and given that employment is still growing quite well, and given what we are hearing from our liaison programs about tightness out there, we just can’t see what is going to allow us to lower interest rates,” she told a luncheon in Armidale, New South Wales.

The comments have forced those betting on a cut in the cash rate this year to look out into 2025, and that’s only if the RBA doesn’t raise the policy rate again in the interim.

Despite the disbelief in markets, it simply can’t be ruled out as a possibility.

The RBA is cognisant of the fact that it didn’t raise rates as aggressively as global peers in the wake of the pandemic, as it focused on protecting employment.

But that approach has also left it doubting about whether it has done enough.

“We didn’t go up as much as everyone else. We are arguably a little less restrictive than everyone else, so we need to be a little bit careful,” Bullock added.

Reserve Bank governor Michele Bullock. Picture: NewsWire / John Appleyard

With the final months of this year set to be marked by the migration of more of the world’s major central banks toward actively cutting interest rates, the RBA will instead be a nervous onlooker, uncertain about whether it should follow or remain its own central bank.

For Bullock, who is approaching the end of her first year as governor, it is going to be an extremely testing time as calls for a rate cut grow shrill, with pressure exerted on the RBA from all sides to join the party that is playing out in other major economies.

Then there’s the added complication that Australians will soon elect a new government.

If inflation stays high and the RBA continues to talk about the potential for higher interest rates, the entire economic strategy of the Labor government may be left in tatters.

At the very least, with Bullock pushing the prospect of rate cuts into next year, she has almost single-handedly crushed any hope Labor might have had of holding an election before Christmas.

It must hold elections by May next year.

Bullock may be about to experience the same flamethrower that directed heat onto her predecessor, Philip Lowe, who departed the RBA’s top job in September last year battle-weary and bruised.

Bullock is right to be worried that inflation isn’t dead and demand growth remains a problem for the economy. Her instincts are correct and her messaging is clear.

But her policy acumen will count for little as the pain of elevated interest rates continues to weigh on mortgage holders, the economy potentially dips into a shallow recession, and angered political bean counters in Canberra move to aggressively undermine her credibility in the hope of changing the narrative.

Given she’s at home in Armidale this week, Bullock should take some time to meet with allies and steel herself for the storm that is rapidly building around her and the hawkish RBA.

Dow Jones newswires