‘It would be worse’: RBA governor comes out in support of big spending budget

The RBA governor surprisingly came out in support of Australia’s big spending budget saying the economy “would be worse without it”.

Reserve Bank Governor Michele Bullock has surprisingly come out in support of Australia’s big spending budget saying the economy “would be worse without it”.

During her speech at the Committee for Economic Development of Australia annual dinner, RBA governor Michele Bullock said the bank needs to see a “sustained” return of inflation to within the 2 to 3 per cent target band but stopped short of blaming the government’s big spending budget.

“Government spending is helping to keep the economy, at least on an appeal at the moment, if it wasn’t there, if it wasn’t filling that gap, then things might well be much worse in terms of the employment market,” she said.

RBA Governor Michele Bullock is in no rush to cut the cash rate, for one key reason.

Ms Bullock supported the government on increasing the number of public sector jobs, saying these are roles Australia needs.

“I don’t buy into the idea that growth in non-market sector employment is not a good thing. It is a good thing. We need these people.”

”It’s teachers. It’s nurses. It’s aged care workers. These are all people that we need.

The call comes against the current opposition parties recent attack line on the government, after Treasurer Jim Chalmers said Australia has added in 1 million extra jobs in the last two years.

Opposition employment spokeswoman Michaelia Cash said the growth in public sector roles was “not sustainable”.

“In the 2.5 years under this ­government, you have seen an increase in the rate of jobs growth in the public sector,” Senator Cash said.

“That’s just the government increasing the size of the ­bureaucracy. The Albanese government is all about increasing the size of the public sector, while attacking the private sector with red tape and uncertainty.”

But Ms Bullock also said the unusually tight” jobs market is a factor pushing up prices.

“At present, we judge that conditions in the labour market remain tighter than what would be consistent with low and stable inflation,” she said.

The call comes as inflation has fallen to a three-year low but the Reserve Bank governor is in no rush to cut Australia’s cash rate.

Policy makers at Australia’s central bank have long argued that rates have needed to stay higher for longer to control entrenched inflation within the economy, but October’s ABS figures showed the headline consumer price index rose just 2.1 per cent.

While this is in the target range, Ms Bullock said it was more accurate to watch the trimmed mean inflation rate, as it strips out volatile assets. This figure came in at 3.5 per cent in the month to October, above the RBA’s target.

“The word sustainability is important, because it recognises that we look through temporary factors that influence headline inflation rates from time to time”, she said.

Ms Bullock said while headline inflation is falling due to helpful policies for many Australians, these electricity rebates are only a temporary measure, which the RBA is looking beyond.

Currently the Australian government is providing $3.5bn to extend and expand the Energy Bill Relief Fund and provide electricity bill rebates to Australian households and eligible small businesses by paying the first $75 of every electricity bill in the country.

Ms Bullock said Australia’s underlying inflation rate remains elevated and the bank needs to remain restrictive until this comes down.

“While this is a welcome decline from 5.1 per cent a year earlier, it is consistent with a situation in which the overall level of demand for goods and services in the Australian economy has been outstripping its supply capacity for some time”

Ms Bullock said the current cash rate of 4.35 per cent is “restrictive” and these rates will remain until the board is confident that inflation is on track to return sustainably within the target range and approach its midpoint of 2.5 per cent.

“Our forecasts published in the November Statement on Monetary Policy suggest that a sustainable return to target will occur in 2026,” Ms Bullock said.

“Elevated inflation indicates that the level of demand in the economy is above the ability of the economy to supply the goods and services demanded. But the evidence suggests that this gap is narrowing. One reason for this is that the rate of growth in demand has been quite subdued.”

Ms Bullock said Australia’s underlying inflation rate remains elevated and the bank needs to remain restrictive until this comes down.

The governor said this subdued reading reflects the notable weakness in household consumption but she expects a slight uptick in both GDP growth and household consumption, over the coming year but there are risks in both directions.

Ms Bullock also said Australia is on a unique path when it comes to rate cuts and won’t be following international pressures to change rates.

“Peer central banks have eased policy settings as they have become more confident that inflation is moving sustainably back towards their respective targets, but so far most have also stated that they are removing only some restrictiveness,” she said.

CBA’s head of economics Gareth Aird said last week the phrasing of Ms Bullock’s speech would be important, as the minutes from the RBA’s November meeting of monetary policy suggested the central bank believes more than one ‘good’ quarterly CPI is a necessary condition to consider cutting the cash rate.

“The policy setting process cannot be forward looking if the Board is on a predetermined path to wait for more than one ‘good’ quarterly CPI before being willing to commence the process of normalising the cash rate. Inflation is a lagging indicator, notwithstanding too the publication lag given the quarterly frequency,” Mr Aird said.

He said if the governor indeed needs to see more than one good quarter, due to the timing of the ABS announcements, mortgage holders can all but rule out a rate cut until May 2025.

“That would be very much at odds with the well‑trodden line from that Board that, “members agreed that it was not possible to rule anything in or out in relation to future changes in the cash rate target,” Mr Aird said.

Originally published as ‘It would be worse’: RBA governor comes out in support of big spending budget