RBA governor Michele Bullock opens door to possible rate hike

RBA governor Michele Bullock says she is ‘wary’ higher levels of inflation will prove more persistent than feared, as the central bank’s ex-top economist predicted a rate hike on Melbourne Cup day.

RBA governor Michele Bullock enters the Senate estimates hearing at Parliament House in Canberra on Thursday. Picture: NCA NewsWire / Martin Ollman

Reserve Bank governor Michele Bullock says she is “wary” higher levels of inflation will prove more persistent than feared, as the central bank’s ex-top economist predicted a rate hike on Melbourne Cup day.

In her first Senate Estimates appearance as RBA governor, Ms Bullock said the pace of consumer price growth in the three months to September had come in “a little higher” than the bank’s forecasts in August.

But she was “not prepared to say yet whether or not it’s a material change to our forecasts”.

“We don’t know if the job is done yet. We’ve made it very clear we might need to go again,” she said.

Official consumer price data on Wednesday showed that even as headline annual inflation eased from 6 per cent to 5.4 per cent between June and September, soaring petrol prices, rents, and electricity prices drove the quarterly pace from 0.8 per cent to 1.2 per cent.

“We got an important piece of information yesterday (Wednesday) and we will take it way and analyse it. ‘Wary’ is a good word,” Ms Bullock said.

“We are looking at some of the more persistent parts of inflation and asking ourselves, ‘are there signs they might be coming down in the future?’.”

While the goods price growth was falling briskly, Ms Bullock highlighted the area of concern was in the services sector, where inflation was declining, but was “still higher than we are comfortable with”.

“It’s also reasonably persistent,” she said, highlighting areas such as restaurants and takeaway, rents and hairdressing.

Former RBA assistant governor Luci Ellis expects the central bank to raise rates on Melbourne Cup day. Picture: Monique Harmer / NCA NewsWIRE

High input prices were driving these price rises, Ms Bullock said, including climbing electricity costs, rents and wages, as well as the big boost to minimum and award wages in the September quarter.

The governor was supportive of the government’s fiscal strategy, saying it was “very positive” that the huge tax revenue upgrades from booming commodity prices and powerful jobs growth had mostly been allowed to drop through to the budget bottom line.

“If it were being spent, that might be an issue, but that’s not being spent,” she said.

Economists now believe a Melbourne Cup day rate hike to 4.35 per cent is “all but guaranteed”, with financial markets pricing in a 70 per cent chance of a move next month, according to NAB.

Investors also see the risk of a further move in December or early next year.

Westpac chief economist Luci Ellis said the RBA’s forecasts for underlying inflation to reach 3.9 per cent by the end of this year “seems a long way out of reach now”, after this week’s official data showed core consumer price growth was 5.2 per cent in the year to September.

The trimmed mean measure of price growth excludes more volatile items to give a better indicator of underlying inflation pressures, which the RBA targets.

Ms Ellis, who started her new role this month following decades at the central bank, said there was enough evidence to suggest the resurgence of price pressures in the latest quarter was more than just a one-off from a jump in petrol prices.

“Fuel inflation was stronger in the quarter, but so were vehicle price inflation, home-building cost inflation and inflation in a range of services components such as meals out and takeaway, dental fees and transport fares,” she said.

“So yes, I’ve seen enough to make my first-ever rate call to be a prediction of a hike.”

Ms Ellis joined her peers at CBA and ANZ, who yesterday also switched from predicting another rate pause to a further increase in the cash rate at the RBA board meeting on November 7.

NAB had already forecast a move higher, meaning all four of the big banks are in lock-step in predicting more pain ahead for indebted homeowners, along with the great majority of analysts.