RBA governor Michele Bullock’s first big test

RBA governor Michele Bullock does not want to be known as the governor who let inflation get out of control. Picture: John Feder

Hold on to your hats and tighten your belts: the country is one bad inflation report away from an unlucky 13th rate hike.

The Reserve Bank board says it now has “significant concerns” about the outlook for inflation, and a “low tolerance” for a slower return to target.

The message is clear: mortgage holders will get hit with yet another rate hike on Melbourne Cup day if next Wednesday’s consumer price report comes in hotter than expected.

That is a dire prospect for many Australian families.

It seems crazy to be talking about higher interest rates when the RBA’s own analysis shows as many as one in eight indebted households can’t make ends meet.

Australians are dedicating more of their pay to the home loan than ever before.

That’s even more worrying when only two-thirds of the 4 percentage points in cash rate hikes since May last year have actually hit family budgets, according to investment bank Jarden.

The national economy appears resilient, but record population growth and high prices are masking a deep retail recession, and shrinking living standards.

If households pull back on spending even further, the ensuing collapse in consumption risks a recession.

RBA governor Michele Bullock and her board know all this, of course.

So why are they, apparently, now close to hiking again?

The Reserve Bank, under former governor Philip Lowe, crafted a shallow monetary policy path that doesn’t have consumer price growth back within the 2-3 per cent target until late 2025.

It is the trade-off between delaying the return to target without losing all the enormous employment gains made since the pandemic.

But based on these forecasts, inflation will be above 3 per cent for three-and-a-half years in total.

There is flexibility in the RBA’s mandate, which is to keep consumer price growth in that range “on average, over time”.

Still, that’s a very long time to leave consumer prices growing more strongly than your mandate allows.

It’s in this context that the language from the most recent minutes has to be understood.

It means everything has to go almost exactly right for Bullock. There’s no room for slippage. It’s Lowe’s “narrow path”.

Unfortunately, things aren’t going exactly right.

A weaker Aussie dollar, soaring petrol prices, a resurgent housing market and sticky service sector inflation are bumps in the road that risk derailing the path to lower inflation without further rate hikes.

There’s a war brewing in the Middle East and China’s property market teeters on the verge of a damaging collapse.

The stakes couldn’t be higher.

Next Wednesday’s inflation report could prove the tipping point.