RBA’s Bullock defends strategy after keeping rates on hold

Reserve Bank governor Michele Bullock signals a measured approach to future rate cuts, while dismissing concerns about rising unemployment as labour market rebalances gradually.

RBA governor Michele Bullock is sticking to her rates strategy. Picture: David Crosling/NewsWire

Reserve Bank governor Michele Bullock is sticking to her guns.

Ms Bullock, who has been under fire over the central bank’s communication strategy, has defended its decision to leave interest rates unchanged in July and set the scene for a relatively modest easing cycle barring adverse global developments.

In a speech on “the RBA’s dual mandate – inflation and employment” at the Anika Foundation in Sydney on Thursday, Ms Bullock said the rise in the unemployment rate for the June quarter was not a “shock”, even though the jobless rate spiked to a 43-month high of 4.3 per cent at the end of the quarter.

“Some of the coverage of the latest data suggested this was a shock – but the outcome for the June quarter was in line with the forecast we released in May,” she said.

“That on its own suggests that the labour market moved a little further towards balance, as we were anticipating.”

While the June monthly data showed a “noticeable pick-up” in the unemployment rate, other measures – such as the vacancy rate – had been “stable recently”.

“More broadly, leading indicators are not pointing to further significant increases in the unemployment rate in the near term,” Ms Bullock said.

“Nevertheless, the risks we highlighted in May remain.

“As always, there is uncertainty around how labour market conditions stand relative to full employment, and we will continue to closely monitor incoming labour market data.”

RBA governor Michele Bullock at the Anika Foundation event in Sydney. Picture: Gaye Gerard/NewsWire

More broadly, Ms Bullock defended the RBA’s measured approach to interest rate hikes after the post-pandemic inflation crisis, arguing it had successfully lowered price pressures while preserving employment gains.

Since February, the RBA has cut the cash rate by 50 basis points to 3.85 per cent, but has signalled a cautious approach to further easing.

“The board continues to judge that a measured and gradual approach to monetary policy easing is appropriate,” she said.

Australia’s strategy of gradual rate rises meant “interest rates in Australia did not rise as high as they did in some other economies, and so we may not need to lower them as much on the way down”.

Ms Bullock highlighted what she described as a “remarkable” achievement in bringing down inflation from its peak of 7.8 per cent in late 2022 to the lower half of the RBA’s 2-3 per cent target band, while unemployment had risen only modestly from 3.5 per cent to 4.2 per cent.

“The fact that unemployment has remained low, and employment growth has remained strong, is remarkable – and very welcome,” she said.

This success was partly attributed to the fact that inflation expectations remained “anchored” throughout the crisis, allowing the RBA to take a more gradual approach than other central banks.

Ms Bullock noted that the jobs market had adjusted through less disruptive means than job losses, including declining job vacancies, reduced working hours, and fewer workers voluntary job switching.

“These shifts aren’t without their challenges, but they all tend to be less disruptive than outright job losses,” she said.

Ms Bullock also stressed that the RBA does not “target” specific outcomes such as unemployment rates or job losses, but focuses on its dual mandate of price stability and full employment.

“Having your hours cut is tough, but it’s often preferable to losing a job altogether,” she said, noting that some of the decline in hours worked had been voluntary.

Looking ahead, Ms Bullock said the RBA expected trimmed mean inflation to continue declining slowly towards 2.5 per cent, but recent monthly data suggested it might not fall as fast as forecast in May.

Monetary policy was “well-placed to respond decisively to adverse international developments if needed”, she said, noting that the likelihood of a severe global trade war appeared to have diminished.

Economists said the speech reinforced market expectations that the RBA will continue its cautious approach to rate cuts, prioritising its dual objectives of maintaining low inflation while supporting employment.

NAB head of market economics, Tapas Strickland, said Ms Bullock’s speech was “slightly hawkish” and showed that an August rate cut is “not a done deal.”

“The most interesting aspect of the speech was the governor’s assessment that the May Statement on Monetary Policy conclusion of ‘some tightness in the labour market’ remained,” he said.

“Governor Bullock noted that “the ratio of vacancies to unemployed people remains high’” and “unit labour cost have been increasing strongly”.

“June’s two-tenth’s lift in the unemployment rate to 4.3 per cent was largely downplayed.”

Asked in Q&A about productivity, Ms Bullock noted RBA staff would be revisiting their assumptions around productivity. But the monetary policy implications were less clear.

“Overall, one gets the impression that the RBA is clearly waiting on Q2 CPI on Wednesday 30 July,” Mr Strickland added.

After the speech, the money market remained fully priced for another 25 basis point interest rate cut to 3.60 per cent after the August 11-12 meeting.

The cash rate target was priced to fall to about 3.08 per cent by May 2026.

Originally published as RBA’s Bullock defends strategy after keeping rates on hold