The three most revealing speeches of the new RBA governor Michele Bullock

There is a clear picture emerging around how the incoming Reserve Bank governor boss Michele Bullock is likely to approach interest rates changes.

On Friday Michele Bullock said a big part of her role as new governor of the Reserve Bank would be leading the central bank through a period of change. The comments were made in small talk in Anthony Albanese’s Parliament House office, moments after being named the ninth RBA governor.

Change and renewal inside the RBA is the big theme, explaining why Treasurer Jim Chalmers bucked the convention of this century and opted against extending the term of a sitting RBA governor. Outgoing RBA boss Philip Lowe has another two months before his term officially ends, including heading off this weekend to India to attend the G20 finance minister meeting with fellow central bank governors.

Outgoing governor of the Reserve Bank Philip Lowe leaving the RBA building on Friday. Picture: Monique Harmer

Later in her statements, Bullock, 60, said she intended to oversee an RBA that delivered on its operational and policy objectives for “the benefit of the Australian people”.

Communication counts for everything with central bankers. Former long-serving US Federal Reserve boss Alan Greenspan developed what was called “Fed speak” – the art of saying nothing and keeping public comments to a minimum for fear of setting off a violent reaction in markets, or even worse, politicians. This was the standard even in Australia under several RBA governors. Lowe, by comparison, has deli­vered a prolific flow of speeches covering policy and economics through his tenure, and it was this frankness that got him into strife.

Bullock is expected to continue with the open dialogue, and it was a positive step by Chalmers on Sunday to finally defend her right to do so. Her recent comments that the unemployment rate would need to rise to 4.5 per cent to reach a sustainable balance point were “relatively uncontroversial” given they were consistent with Treasury and RBA forecasts, Chalmers told ABC TV.

The bank that Bullock inherits and is about to undergo the biggest restructure in decades is also dealing with a new and more aggressive inflation problem that most developed countries thought they had not only tamed but finally killed off before the Covid pandemic hit.

Ultimately it’s the nine-member Reserve Bank board that sets interest rates, but the governor has the casting call and influences the future direction and expectations of rates. This will be a whole new test when the RBA’s new Monetary Policy Board is established in about two years.

Bullock’s appointment has been widely endorsed by business, markets and RBA watchers as delivering much-needed continuity. However, her relatively short apprenticeship for the top job as deputy governor leaves few clues to her approach to interest rates and taming inflation.

Household pain

A speech given this time last year to the Economic Society of Australia in Brisbane offered a key insight: there was an acknow­ledgment of pain in some households and that the change in interest rates had a varied distribution through the economy.

This was Bullock’s first major standalone engagement since being named deputy in April 2022 and it sought to drill down into how households were coping with interest rate increases to date. She concluded that Australian households were in a fairly good position to handle the rate rises that were likely to follow. However, she quickly added not all borrowers were alike and the round of hikes was set to highlight the “financial vulnerabilities” that have been building in the economy.

Michele Bullock. Picture: NCA NewsWire/Martin Ollman

Higher rates would impact borrowers’ cashflows and consumption, she said. And if house prices started to fall, it would affect people’s feelings of wealth.

However, in a response to a question, she strongly suggested there was an inevitability about higher interest rates in Australia.

“The point is, like every other country, we’re coming off emergency or extraordinarily low interest rates in this country. Much, much lower than you would have in a normal, strong economy,” she said.

A follow-up speech in November gave a revealing insight into how the RBA’s board arrived at its interest rate decisions. Here she outlined the wide sources of data and how these had evolved during the Covid pandemic. It included the use of more “real time” data such as card transactions, restaurant bookings, flight departures, Medicare benefits and other activity data. These data points allowed the RBA to get a more up-to-date reading on what households were spending beyond official data. She also endorsed the RBA’s business outreach program as critical in getting a read on inflation drivers.

Interestingly, Bullock defended the high frequency of RBA board meetings: 11 per year. She acknowledged it as “quite unusual” among global central banks. The review into the Reserve Bank released earlier this year recommended fewer meetings of the RBA’s interest rate setting board. And last week outgoing governor Lowe confirmed this recommendation would be adopted and the frequency would be reduced to eight per year.

But in her speech Bullock said the higher number of meetings meant the bank’s board was regularly discussing the evidence on the economy and “has more flexibility on the size and timing of rate increases”.

“This is a particular advantage in uncertain times, as it allows more frequent evaluation of the evidence and recalibration if necessary. It also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks. Or, alternatively, we can achieve a similar rise in interest rates with smaller increments.”

Jobs or inflation?

Finally, a speech in Newcastle last month was arguably her most important to date. Bullock attempted to tackle the mythical economics creature, NAIRU. The “non-accelerating inflation rate of unemployment” is the lowest level of unemployment that can be sustained without causing wage-linked inflation. It’s mythical because while central bankers often speak of it, it can’t be measured.

In Australia Bullock said this rate was closer to 4.5 per cent for the economy to be in balance. This is a full percentage point higher than what the RBA was prepared to accept for the jobs trade-off to curb inflation. Some seized on these comments as being hawkish, although others maintained this again was consistent with Lowe’s approach to have Australia hit its inflation target by mid-2025.

While this attracted all the attention, it was in other parts of the speech that Bullock came down strongly on the side of employment. Like Lowe had previously said, she indicated the RBA is willing to accept a more gradual approach to getting inflation back to target than in other countries. “A faster return to target would likely mean more job losses in the short term,” Bullock said.

Anthony Albanese with Michele Bullock at Parliament House in Canberra on Friday. Picture: NCA NewsWire / Martin Ollman

Elsewhere she argued that just because the inflation objective has been in focus recently, “it does not mean that the other part of our mandate – maintaining full employment – has become any less important”.

She also spoke about the notion of labour market “scarring” was front of mind among bank officials, particularly during Covid. This is the fallout from when people stay unemployed too long or their skills deteriorate. “The sobering experience from previous recessions has taught us that these episodes leave long-lasting marks on individuals, communities and the economy,” she said.

Westpac’s long-serving chief economist Bill Evans says in a very short time as deputy governor Bullock has established herself as perceptive, confident and prepared to address the key issues. However, it remains to be seen whether Bullock is more or less hawkish than Lowe, he adds. Her comments around NAIRU point to “a convincing determination” to achieve the inflation target by mid-2025, he adds.

As a senior official and then a key adviser to Lowe, Bullock is one of the key players in shaping today’s RBA and the rates strategy. Expect a smooth transition rather than a change agent.

[e-mail]

Originally published as The three most revealing speeches of the new RBA governor Michele Bullock