RBA governor issues unusually candid warning to every household
Reserve Bank of Australia (RBA) Governor Michele Bullock has warned households of a potential fourth cash rate hike in a matter of weeks as she sounded the alarm about the headwinds battering the economy.
On Tuesday, Bullock provided the clearest indication yet that her central bank is seriously considering increasing interest rates at the next meeting on August 11, following three hikes to start the year.
Reserve Bank Governor Michele Bullock. Louie Douvis
“Inflation has… increased and is now above target,” she said in an address to a fundraiser for the Anika Foundation.
“Indeed, it was rising and above target even before the recent oil price rises.
“This means that we haven’t yet achieved our objective of returning inflation sustainably to target.”
“The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed,” she added.
Underlying inflation is sitting at 3.6 per cent, well above the RBA’s 2-3 per cent target. Bullock’s comments come a day before crucial new inflation data is released.
In tempering her warning, the RBA governor noted that rate changes operate with a lag, and it wasn’t yet clear if this year’s three hikes would be enough to put a lid on inflation.
However, she also warned it may take an increase in unemployment to bring inflation back down.
“We continue to assess that some further easing in labour market conditions will likely be required to bring inflation back to target,” she said.
Three of the big four banks – Commonwealth Bank, NAB and ANZ – predict the RBA will hold rates for the remainder of the year before delivering at least two cuts in 2027.
Meanwhile, Westpac is forecasting two more hikes this year, followed by two cuts next year.
If the RBA does increase the cash rate target to 4.60 per cent at its next meeting, it would take it to the highest setting since 2011.
Bullock also used her speech to raise concerns about Australia’s slow productivity growth, saying it is preventing the economy from growing strongly without putting pressure on inflation.
Bullock warned it may take a rise in unemployment for inflation to be brought back down. Dion Georgopoulos/AFR
It is also weighing on wage growth, which she said is impacting living standards over the long term.
“This is a fundamental challenge for the Australian economy over the next few years,” she said.
Productivity growth is a driver of economic growth, real wages and overall living standards and has been identified as an area of concern by the government.
In the span of two decades, it fell from 1.8 per cent in 2003-04 to 0.8 per cent in 2023-24.
The OECD found Australia had one of the sharpest declines in living standards in the developed world, with real wages dropping by 5.1 per cent since March 2021.
Bullock said the cash rate is unable to address the slow productivity growth.
Improving technology and skills can help boost output instead, according to the Productivity Commission.
“In these circumstances, the best contribution monetary policy can make is to maintain low and stable inflation and support sustainable full employment,” Bullock said.
The federal government delivered productivity reforms in its May budget, forecast to boost long-term growth by $13 billion a year and promote $400 million more investment in research and development.
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