Second year in RBA role likely to be more testing for governor Michele Bullock

Reserve Bank governor Michele Bullock. Picture: Jane Dempster

With just two weeks to go before she completes her first anniversary as governor of the Reserve Bank, Michele Bullock can look back on a year in which she has neither bent the knee to those demanding much tougher action to quash inflation, nor those calling for immediate interest rate cuts to rescue the economy.

Bullock has instead navigated a middle road, raising the official cash rate just once since coming to the top job while keeping the key rate well below the aggressive highs other major central banks felt they needed to move towards to snuff out inflation.

She has also skilfully avoided the trap of giving overly optimistic guidance on the likely path of interest rates that global upheavals and sudden changes in the economic landscape might quickly scuttle, eroding the bank’s credibility.

Perhaps most importantly, with the economy still close to what most economists would define as full employment, Bullock might yet achieve a relatively soft landing for the economy that avoids a sharp rise in unemployment.

Such an outcome would be remarkable given that the RBA started raising rates under Bullock’s predecessor, Philip Lowe, who faced the biggest inflation threat in nearly half a century. The probability of a policy miscalculation by the RBA in that time has been high.

Bullock is also popular within the corridors of the RBA. She has introduced a more inclusive culture with senior managers and plugged key staff vacancies, often with capable outsiders.

But the future for Bullock is uncertain, and the potential potholes ahead are deep.

Her second year in the job is set to be far more testing, and it will probably define her success or failure.

The RBA’s problem is that, more than two years after starting to raise interest rates, inflation isn’t yet under control.

Inflation is forecast to remain high well into next year, and there is a lingering question about whether a further rate increase will be needed. Taken at face value, the RBA’s current narrative includes a continuing potential for tighter policy.

The RBA is “not ruling anything in or out,” and its latest messages are laced with continuing anxiety about stubborn inflation risks.

Public frustration over the RBA’s inability to lower interest rates will rise quickly in the coming months as more of the world’s major central banks cut deeply, including the Federal Reserve, which could reduce rates three times before the end of the year, according to some forecasters.

The RBA will appear a laggard as those with huge mortgages or small businesses scream for relief.

But an even bigger problem, which could affect Bullock personally, is emerging from Canberra. With a federal election expected early next year, Jim Chalmers is already using some aggressive language in reference to the RBA, charging it this week with “smashing the economy” with high interest rates.

The Treasurer claims that it is old language that only highlights an economic truth.

But it is almost certainly the first salvo directed at the RBA by Chalmers, who will ratchet up the pressure on the central bank, knowing that the coming election will be closely fought.

If the economy is floundering while interest rates remain high, Chalmers could well be blamed for helping to toss his centre-left Labor Party from power.

The comments from Canberra come amid rising concern that the economy might have contracted in the second quarter, with ­official data due on Wednesday.

But whether the economy contracts or not, the numbers will shine a light back on sluggish growth, with the potential for unemployment to rise quickly over the coming months if business confidence collapses.

Some economists caution that firms have been hoarding employees for some time despite the slowdown, fearing that if they reduce staff numbers, they will be letting go of hard-to-replace skilled workers.

If it becomes too difficult to retain workers, the jobless rate could rush toward 5 per cent, up from 4.2 per cent currently, some economists warn.

Bullock is set to face increasingly heated demands to cut interest rates over the final months of the year. But she can’t – and won’t – while the war on inflation continues.

Dow Jones newswires