In a stunning admission, the Governor of the Reserve Bank of Australia (RBA), Michele Bullock, has ruled out rate cuts this year as “inflation is still too high.”
The statements were made on Thursday as Bullock and her team face the House of Representatives economics committee for its twice-yearly grilling sessions.
Last week, the central bank left its cash rate unchanged at 4.35 per cent for the sixth meeting in a row.
“Inflation is still too high and, in underlying terms, is not expected to be back in the top of the band until the end of next year,” she told the committee. “Circumstances may change, of course, and the outlook is uncertain. But based on what the board knows at present, it does not expect that it will be in a position to cut rates in the near term.”
The RBA lifted interest rates 13 times over an 18-month period to November last year to tame inflation.
For perspective, the increase in interest rates have taken a serious toll on many households, with monthly repayments rising by more than $250 for each $100,000 borrowed.
Home building costs are still climbing sharply at a rate of 5 per cent annually, making it harder to get inflation back to target, says Bullock. Construction costs have increased about 25 per cent since the pandemic. Bullock said the shortage of tradespeople had been compounded by financial concerns at construction firms, who signed fixed-price contracts and were now finding projects unprofitable to complete.
Michelle Bullock, Governor of the Reserve Bank of Australia (Image: RBA)
Bullock defended her decision of maintaining the high cash rate by telling the parliamentary committee, “I understand that this is not what many households want to hear. Those with mortgages are feeling the squeeze on their cash flows from the increase in interest rates over the past couple of years. Businesses too are facing higher borrowing costs. But the alternative of higher inflation for longer is much worse.
“Inflation has not been this high for a few decades and I think many people have forgotten how bad it is – some younger people will not have experienced high inflation at all. There is a reason why there is so much talk about the cost of living – high inflation hurts everyone.”
The RBA has said it expected inflation, now at 3.8 per cent, to be back within its 2-3 per cent target range by 2026. This is longer than the 2025 figure that the RBA had proposed as recently as May.
Inflation peaked at 7.8 per cent in the December quarter 2022. It came down to 4.1 per cent at the end of 2023 but since then has only declined a further 0.3 percentage points to 3.8 per cent in the June quarter of 2024.
Bullock has laced any suggestion that interest rate cuts were imminent even next year by adding that things could very quickly turn for the worse.
Noting the effect of geopolitical situations on inflation, she said, “It does have the potential to basically backtrack on a lot of the progress we’ve made on inflation around the world, particularly in the goods area. Energy prices obviously feed into everything.”
Bullock has also confirmed that they are keenly watching China’s economic situation impacted by its real estate downturn unfold, which could in turn have an impact on the Australian economy.
“China is really important for us because of our trade relationship … it’s very important in particular for the prices of the commodities that we export, in particular iron ore. We would like to look through supply shocks, but if they’re consistent and persistent, it makes it very difficult to just completely ignore them and the potential impact they might have … on inflation expectation, and the level of inflation around the world.”
Earlier this year she noted that she wouldn’t shy away from increasing the cash rate even further.
