Bullock dampens hopes of a pre-Christmas rate cut

Home buyers and businesses will wait beyond Christmas for any interest rate relief, Reserve Bank governor Michele Bullock has signalled while pushing back against suggestions government spending is fuelling inflation and revealing growing concern about the Chinese economy.

Even as financial markets continue to predict the central bank will have to slice the official cash rate at its December meeting, Bullock used an appearance before the House of Representatives’ economics committee on Friday to dampen hopes of an imminent rate cut.

Reserve Bank of Australia governor Michele Bullock says current interest rate settings should bring inflation down.Credit: Alex Ellinghausen

The bank has taken the cash rate to a 12-year high of 4.35 per cent in a bid to quell inflation pressures across the economy. Inflation, which peaked at 7.8 per cent in late 2022, has eased to 3.8 per cent but remains well above the RBA’s 2-3 per cent target.

Bullock said current rate settings, which were reaffirmed at the bank’s most recent meeting, were still the most likely to bring inflation down without causing major economic problems.

“We did not increase interest rates as much as some other central banks. And we have received some criticism for that. Indeed, some commentators continue to call for further tightening in monetary policy,” she said.

“We have been trying to balance bringing inflation back down over a reasonable timeframe, without inflicting unnecessary damage on the labour market. And the board’s judgment to date has been that policy is currently sufficiently restrictive to do that.

“Financial markets are still pricing in a rate cut by the end of the year. The board’s message, though, was that it is premature to be thinking about rate cuts.”

The bank has become embroiled in a political dispute after the Coalition accused the government of adding inflationary pressures to the economy through an increase in spending at federal and state levels. But Government Services Minister Bill Shorten said the bank could drive the economy “into a brick wall” because it was overestimating overall demand.

Bullock said public demand was not an issue for the bank. It was focused on household consumption, which accounts for about 55 per cent of total economic activity, price pressures in residential house construction and the outlook for the trade sector.

“These are the things that are going to be … critical to the evolution of the economy inflation over the next couple of years,” she said.

“Public demand is not the main game at the moment.”

AMP chief economist Shane Oliver said while Bullock had signalled rates were on hold, the economy was weakening.

“We continue to see the bank starting to cut in February on the back of slower growth, higher unemployment and lower inflation than it’s currently forecasting,” he said.

A growing concern is the strength of China, which is Australia’s single largest export market.

Industrial production in China is continuing to contract.Credit: AP

Data this week showed a further contraction in Chinese investment, another slowdown in industrial production and the 14th consecutive fall in average house prices across 70 major cities.

Iron ore spot prices fell to $US95 a tonne on Thursday, the lowest price since November 22. Iron ore prices have dropped almost $US20 a tonne in the past three months.

Bullock said the risk China posed to the Australian economy, which expanded just 0.1 per cent in the first three months of the year, was particularly pertinent to the RBA’s inflation outlook.

“The Chinese economy is still performing okay. It’s meeting their target of around about 5 per cent growth, but they still have a very big drag from the problems in their real estate sector there, and China is really important for us because of our trade relationship with China,” she said.

“That is something that we’re watching quite closely because … developments in China can have quite a big impact on the way our trade develops and therefore on our growth.”

The bank is still waiting on changes to its structure, including the creation of a separate board to set interest rates, that were supposed to start from July 1. They form part of the recommendations of last year’s independent review of the bank.

The Coalition wants all members of the current RBA board moved to the new monetary policy committee. A separate board would oversee the bank, which also has responsibility for the nation’s money supply and payments system.

Bullock said she would not mind one or two experienced board members on the new committee, adding bank staff would like the issue to “settle down”.

In a podcast with The Conversation, Treasurer Jim Chalmers said he and shadow treasurer Angus Taylor were still in talks about the issue with a resolution in sight.

“Hopefully, we can progress things quite soon and get it finished so that the changes can come in at the start of next year,” he said.

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