Reserve Bank governor Michele Bullock’s red flag on inflation

The RBA governor has put rate hikes back on the agenda and challenged Jim Chalmers to ensure the budget will not add to the increasingly difficult task of bringing inflation under control.

RBA Governor Michele Bullock has warned inflation may go higher for longer.

Reserve Bank governor Michele Bullock has put rate hikes back on the agenda and challenged Jim Chalmers to hold the line and ­ensure next week’s budget will not add to the increasingly difficult task of bringing inflation back under control.

Following the board’s decision to hold the cash rate at 4.35 per cent, Ms Bullock warned that soaring petrol prices would stall recent progress on inflation, and that if services cost increases got “stuck” then “we’re going to have to act”.

While rates remained on hold and the board “was not ruling anything in or out”, Ms Bullock said she was “alert and vigilant” to the risk of inflation staying too high for too long after RBA economists predicted prices growth would climb from 3.6 per cent in the year to March, to 3.8 per cent in June – the first increase since the end of 2022.

In February, the RBA had predicted inflation would drop from 4.1 per cent at the end of 2023, to 3.3 per cent by mid-2024, and 3.2 per cent by December.

Adding to expectations that rates will be higher for longer, the RBA’s forecasts released on Tuesday were predicated on no rate cuts over the coming year, against the central bank’s assumption in February that rates would be cut three times in 2024.

The RBA’s latest forecast also produced a more pessimistic outlook for economic growth, wages and productivity.

“We believe we have rates at the right level to return inflation to the target range next year,” Ms Bullock said. “But as we said in the past, getting inflation back to target will take time. And I think the path will likely continue to be bumpy and we should all be prepared for that.”

When asked if she was concerned state and federal budgets would add to the inflation challenge, Ms Bullock said: “I’m ­conscious that there are budgets coming up. The point I would make is that the federal treasurer Jim Chalmers says publicly – and he says to me in private – that he does have inflation in his mind while he is thinking about the budget.

“And I think they are all ­conscious that they want to help us beat inflation so they don’t want to try and add to inflationary pressures. We’ll just have to see what the budget comes out like and then we can think about how that might impact our forecast. And as I said, the signs, at least by what’s being said, is that inflation is front of mind.”

AMP chief economist Shane Oliver said the pressure on Dr Chalmers over spending was ­“immense” and that the task was “to come up with a budget which sees fiscal policy take more out of the economy”.

Mr Oliver said Ms Bullock spoke a lot about the potential of “raising or holding but didn’t say anything about cutting”.

“She’s not ruling anything in or out, the language around that is quite hawkish,” he said.

“They’re not having a debate about whether to cut. They’re not saying ‘well, what does it take to cut?’ They’re talking about what does it take to hike?”

The RBA’s latest projections in the Statement on Monetary Policy showed that, after plateauing in the second half of this year, ­inflation would then resume falling through 2025 and reach the 2.5 per cent target by mid-2026.

“The near term increase in the inflation forecast … petrol prices are a really big part of that. And we know petrol prices can be up, they can be down. So to some extent, we want to try and look through that,” Ms Bullock said. “(But) if services inflation really, really gets stuck, at a level which is inconsistent with our target band, then we’re going to have to act.”

Resurgent cost of living pressures will heap pressure on the Treasurer to limit spending and avoid adding to inflationary pressures in next Tuesday’s budget, and raise further questions over Labor’s planned “pivot” towards a big-spending Future Made in Australia growth agenda.

KPMG chief economist Brendan Rynne said he still was hopeful the RBA would be able to deliver a rate cut later this year, but the actions of politicians “will be crucial in achieving this”.

“What we really need now is for the federal budget not to add to aggregate demand – it should be neutral, or if possible, even slightly contractionary,” Dr Rynne.

“A budget which lets loose the purse strings will simply see fiscal policy pressing even harder on the accelerator while monetary policy is pushing on the brakes.”

Dr Chalmers said increased federal subsidies on electricity bills, rents and child care slashed half a percentage point off inflation in the year to March. The Treasurer, who has signalled further cost-of-living relief in the budget, said: “Our main focus in the near term remains easing inflation and helping relieve cost-of-living pressures.

“The May budget will be carefully calibrated to the economic circumstances, striking the right balance between getting inflation under control, easing cost-of-­living pressures, supporting ­sustainable growth and building fiscal buffers in an uncertain global environment,” he said.

After Westpac chief executive Peter King this week warned ­unemployment would need to climb from 3.8 per cent to “the mid-4s” before the central bank could cut rates, the RBA board in its statement flagged that the jobs market needed to cool further.

“Conditions in the labour market have eased over the past year, but remain tighter than is consistent with sustained full employment and inflation at target,” the RBA board’s statement said.

Despite worse growth and higher inflation than previously anticipated, the RBA’s economists see unemployment rising from 3.8 per cent to 4.2 per cent by the end of this year – or 0.1 percentage points below the previous forecast.

The central bank’s economists expect the economy to grow by just 1.6 per cent in 2024, compared with previous projections of 1.8 per cent, as the end of the boom in foreign student arrivals dragged on consumption.

Amid growing calls for major reforms to improve Australia’s economic dynamism and secure future prosperity, the RBA’s economists have become substantially gloomier on the near term outlook for labour productivity, which they now expect to grow by only 0.8 per cent this year, against a previous estimate of 1.4 per cent.

The RBA is forecasting real wage growth – as measured by the wage price index against the consumer price increase – will flat line in 2024, rather than grow by 0.4 per cent as had been expected.

“Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth,” the RBA board statement said.

That said, the RBA noted further declines in inflation and the implementation of the stage three tax cuts were expected to result in real incomes growing strongly in the second half of 2024.

Additional reporting: Sarah Ison