The Reserve Bank is braced for a “challenging” year ahead as it confronts homegrown price pressures, its new governor Michele Bullock says, indicating interest rates are likely to remain elevated for a while even if they don’t rise further.
In a speech on “monetary policy fit for the future” on Wednesday, Bullock told a Sydney gathering of economists that the RBA sought to tread a “narrow path” of bringing inflation back to its target 2%-3% range while keeping as many people as possible in work.
Inflation took nine months to decline from 8% to 5.5% but the RBA expects it will take another two years for price increases to drop below 3%.
While easing supply restrictions had helped, “the remaining inflation challenge we are dealing with is increasingly homegrown and demand driven”, Bullock said.
“That is what the board is aiming to do with monetary policy – to slow the growth of demand enough to bring inflation back to target while keeping employment growing.”
The RBA lifted its key interest 25 basis points to 4.35% earlier this month after stronger than expected growth in the economy meant inflation was likely to fall at a slower pace than previously forecast.
Minutes from the 7 November rates meeting, released on Tuesday, also noted the RBA’s projections assumed one or two more interest rate rises – one of which happened this month.
Bullock said demand and supply had to be brought “into closer alignment”, a message that “will not resonate with some”.
“Everyone is seeing prices for goods and services rise strongly but this has a particularly severe impact on low-income households,” she said. “This emphasises the need to get inflation back down.”
Evidence that excessive demand rather than supply constraints was now driving inflation included the fact price increases were broad-based. About two-thirds of items were increasing at more than 3%, “often a long way above that number”, Bullock said.
“So inflation is much broader than just rising prices for petrol, electricity and rents – prices are rising strongly for the majority of the goods and services we all consume.”
Prices for services such as hairdressers and dentists, dining out, sporting and other recreational activities were also rising strongly.
“Labour costs have risen, especially when we incorporate the effect of weak productivity growth, and the price of domestic non-labour costs such as energy, business rents and insurance has increased noticeably,” Bullock said.
Firms, too, were operating with limited spare capacity, a third pointer to strong domestic demand.
The Australian Bureau of Statistics will release October consumer price index figures next Wednesday. After receding in the first half of the year, the monthly headline CPI has lately crept up, rising at an annual pace of 4.9% in July, 5.2% in August and 5.6% in September.
‘Open to fresh ideas’
Bullock also used her speech to detail how the RBA will implement recommendations of the wide-ranging review into the central bank.
“My vision for the bank is [for it] to be an institution of diverse perspectives and inclusive processes,” she said. “I also want the bank to be open to fresh ideas from outside, by increasing and diversifying our external engagements and leveraging the experience of our people with external expertise.”
Bullock, the first woman to head the RBA, said she would remain as chair of the bank’s diversity and inclusion council, a role held by the deputy governor since its reception.
“We won’t change the culture unless we can change our leadership behaviour,” she said.
The bank is cutting the number of board meetings from 11 to eight, and these longer sessions will begin on Monday afternoons ahead of the Tuesday gathering to set the cash rate.
“With longer meetings we will have opportunities to reflect on our processes, on what sort of analysis would be helpful for upcoming meetings and whether our communication is hitting the mark,” Bullock said.
