Cyclones are a feature of Australia’s summer months, but rarely do they venture so far south that they directly affect densely populated areas such as the Queensland capital.
While Cyclone Alfred is a significant threat, Bullock will also be gazing out of her office window to storms now brewing rapidly in the global economy.
The Trump administration’s rapid-fire approach to policy announcements has been difficult to keep pace with. The RBA is scrambling to keep pace, but it’s not yet ready to make a judgment call on how a developing trade war and a jump in geopolitical risk might affect the local economy.
With the US announcing tariffs on countries that are both major trading and strategic partners, and then removing the threat without notice, the degree of uncertainty around economic forecasting has risen exponentially. While uncertainty is a constant for the central bank, the RBA now finds itself confronted with a world that is almost totally unpredictable.
In a far riskier environment, the costs of getting the policy response wrong could be great.
It’s for that reason that Bullock isn’t rushing to prepare a new core narrative for the RBA around interest rates. There’s no rush at the central bank at the moment towards paving the way for a string of cuts in coming months.
It’s just too soon to rush to conclusions.
Bullock announced the RBA’s first reduction in the official cash rate since 2020 in mid-February, but quickly moved to signal that it was largely a finetuning cut that removed a lift announced in November 2023, and nothing more.
There are justified concerns at the RBA that inflation is still not quite beaten, while the labour market remains robust with unemployment around historic lows.
Firms continue to hire in large numbers and there’s uncertainty about whether the job market is tightening or not, especially as wages growth has slowed.
The RBA has been pretty explicit in sending a message that it wants to move slowly.
But with a trade war under way that will directly affect China, Australia’s biggest trading partner, an argument can be mounted that the economic environment is already radically changed, and the RBA should already be moving towards a narrative that widens its options for the immediate future.
It’s an unambiguous fact that a trade war that embroils the world’s biggest economies will roil markets and savage global economic growth. It’s not so clear, however, what it might mean for inflation. That’s the sticking point.
Higher tariffs and the collapse of global supply chains would probably push up prices for imported goods. But a contraction in global growth might also kill off demand so quickly, prices retreat.
Global markets are already adjusting to the new world order and the reaction among investors could be swift if coming data on US employment, growth and inflation indicate that confidence is crumbling.
It could well go that way.
Central bankers around the world are now dusting off textbooks that deal with stagflation, a scourge not really seen since the 1970s, where prices rise quickly even as economic growth slumps.
The RBA will be among the group of central banks weighing the risks, but how it would respond isn’t clear.
It would still be extremely hesitant to lower interest rates in response to rising unemployment, if it is accompanied by a renewed surge in inflation.
The good news is that with inflation largely tamed in Australia for the moment, and with the job market continuing to roar, the economy is well placed to meet the next great challenge coming from overseas.
There’s scope to cut interest rates again quickly should the storms escalate internationally.
Bullock will also be aware that the situation is highly fluid, while reminding herself that the RBA was slow to respond to the last great crisis, when inflation surged globally as the world emerged from the Covid-19 pandemic.
But for now, the central bank is in wait-and-see mode.
Dow Jones Newswires
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Reserve Bank governor Michele Bullock would have navigated her way to work this week through rain falling across Sydney courtesy of a cyclone menacing Brisbane.