Chilling sign rates are about to rise again

Homeowners are steeling themselves for potential interest rate hikes following an uneasy statement from the head of the Reserve Bank.

Homeowners are steeling themselves for potential interest rate hikes following a statement from the head of the Reserve Bank, who hinted that further increases might be on the horizon.

Despite already experiencing 13 rate hikes in the past 15 months, which has wreaked havoc on average-wage households, the bank boss indicated that more financial pain could be on the horizon.

RBA governor Michele Bullock emphasised that while slower-than-expected economic growth might prompt a rate cut, persistently high inflation could lead the central bank to raise rates again, as she appeared at the Senate Estimates Hearing on Wednesday

The annual inflation rate edged up from 3.5 per cent in March to 3.6 per cent in April. The Australian Bureau of Statistics reported that annual growth, at 1.1 per cent, was the slowest since 1992, excluding the pandemic period.

“If it turns out, for example, that inflation starts to go up again, or it’s much stickier than we think, and we’re not getting it down, then we won’t hesitate to move and raise interest rates again,” Bullock told the Senate economics committee this week.

“In contrast, if it turns out that the economy is much weaker than expected, and that puts more downward pressure on inflation, then we’ll be looking to ease.

“If we think we’re on the narrow path, we can stay basically, pretty much where we are: not ruling anything in, ruling anything out.”

Despite the financial strain on Australian households, Bullock maintained that the country is still on a “soft landing” trajectory, aiming to slow the economy enough to curb inflation while preserving gains in the labour market.

She also clarified that the current domestic situation does not meet the criteria for “stagflation,” a period of stagnant growth and high inflation experienced in the 1970s.

Ms Bullock dodged questioning from Liberal senator Jane Hume over whether Treasurer Jim Chalmers’ May budget was expansionary or contractionary, arguing that answer was not simple.

“That’s a very complex question to answer,” governor Bullock said.

“The reason it’s not simple is it’s not the only thing that is impacting whether or not we’re [in] an expansionary or contractionary phase.”

Domestic and international conditions would impact Australia’s inflation path, not just the federal budget, Ms Bullock added.

“I don’t think it’s helpful to think about the budget and say it’s expansionary or contractionary without thinking about what else is happening in the economy,” she said.

Despite the financial strain on Australian households, Bullock maintained that the country is still on a ‘soft landing’ trajectory.

Reserve Bank Governor Michele Bullock appears at the Senate, Economics Legislation Committee Estimates.

RBA officials have now kept the cash rate on hold since November, balancing the risks of overdoing interest rate increases and sparking an economic downturn or allowing price pressures to rebound and holding above its 2 to 3 per cent target band.

As the RBA’s 13 rate increases since May 2022 work to slow the economy, separate data released on Tuesday morning showed households remained deeply pessimistic about the economy even as Treasurer Jim Chalmers unveiled another round of cost of living support.

Speaking to reporters in Canberra this week, the Treasurer said the fresh GDP figures vindicated the fiscal strategy underpinning the May budget.

“This is a justification for the government’s approach to fighting inflation without smashing the economy, given growth was already soft and people were already under pressure,” Dr Chalmers said.

“We are striking exactly the right balance between addressing that inflation, providing that cost-of-living help, supporting sustainable economic growth and strengthening our public finances.”

- with Jack Quail

Originally published as Chilling sign rates are about to rise again