Bullock doubles down on rates

Michele Bullock has owned the Reserve Bank’s part in the current cost-of-living shock and reminded the federal government that tackling it remains a joint enterprise.

In a keynote address to the Anika Foundation Fundraising Lunch in Sydney on Thursday, the RBA governor explained why defeating inflation was so important and that further interest rate rises were not yet out of the question. Given the state of relations publicly between the RBA and Jim Chalmers over recent days, it was a welcome and well-timed performance.

Along the way, Ms Bullock has left the door open for critics who argue the RBA should have acted sooner and gone harder in the fight against inflation. The RBA might have felt hamstrung by the erroneous public guidance issued by former RBA governor Philip Lowe during the pandemic that emergency low interest rates would persist.

Ms Bullock confirmed that when it did act, the RBA had taken a different approach to other central banks. “Unlike some other countries, where they now have a negative output gap … so their supply is higher than their demand, we’re trying to do something which means managing down the excess demand to a point where it’s just in line with supply,” Ms Bullock said.

This is a difficult job made harder by state and federal governments unable to curb spending that works against the RBA’s efforts. As a result, the nation risks repeating the mistakes of the 1970s, when stagflation saw inflation stay high despite a collapse in growth in the economy.

Business commentator Robert Gottliebsen correctly points out that today’s leaders – Anthony Albanese, Jim Chalmers, Chris Bowen and Tony Burke – are too young to remember the 1970s but they are guilty of repeating the same mistakes. The errors all involve big government and can be found in energy policy, industrial relations changes that lift wages and restrict workplace flexibility, subsidies, welfare and debt.

Ms Bullock has shown that institutional memory persists at the RBA, which explains why the bank is refusing to buckle to the political expectations of the government, which wants rates policy to follow the electoral timetable. The solution is for government to get the message and stop spending, the opposite to what Dr Chalmers says is needed. The Australian way of acting late and lite on the global inflation challenge is being put to the test. Ms Bullock is warning she is prepared to change tack and lift rates further if the government fails to understand what role it must play.