Reserve Bank governor Michele Bullock said the central bank won’t hesitate to lift interest rates again to reduce “persistently high inflation” while acknowledging “I know this is not what people want to hear”.
In a speech on Thursday in the northern New South Wales town of Armidale, Bullock also talked up the need for more investment in renewable energy zones, noting these would account for half of electricity generation in coming decades.
“All communities” including farmers would also need to prepare for “increasing volatility in our weather patterns and rising temperatures over time”, she said.
On the economy, Bullock said that while growth had been weak, estimates of the gap between demand and supply were “larger than previously thought and this is resulting in persistent inflation”.
“Growth of demand looks like it will pick up over the next year, although there is considerable uncertainty around the outlook,” she said. “[The RBA’s] expectations for when inflation will come back to target have been pushed out.
“The board remains vigilant with respect to upside risks on inflation and will not hesitate to raise rates if it needs to,” Bullock said. “I know this is not what people want to hear.”
The RBA on Tuesday left its cash rate unchanged at 4.35% for a sixth consecutive meeting. In a subsequent media conference, Bullock stressed that market expectations of a rate cut this year weren’t “aligned” with the board’s view.
Despite those comments, financial markets presently assess a 50:50 chance of a rate reduction when the RBA board next meets on 23-24 September, according to the ASX rate tracker. Investors put the chance of a December rate cut at more than 80%.
Earlier on Thursday, the prime minister, Anthony Albanese, defended his government’s actions, including plans for a 15% pay rise for early education workers, provided childcare centres limit fee increases.
“They deserve decent wages and conditions, and the productivity commission inquiry has shown that, unless we do something about wages in this sector, we won’t have a workforce,” Albanese said.
As for criticism increased public spending was fuelling inflation, he said two budget surpluses and cost-of-living measures had put downward pressure on prices.
“Fee-free Tafe, cheaper childcare, energy price relief – all of these measures are aimed at making sure we look after people but do so in a way that’s designed to see inflation continuing to moderate, which is what we want to make sure happens,” Albanese said.
In updated forecasts, the RBA has projected public demand – from federal, state and local governments – would rise at annual pace of 4.3% by December and 4.1% by next June. That compared with projected 1.5% and 2.1% clip respectively in the RBA’s forecasts in May.
In a question and answer session, Bullock said the RBA doesn’t expect interest rates to come down quickly. That said, if market volatility returns and there were “traumatic changes in circumstances”, the bank also “wouldn’t hesitate” to take the right steps, including cutting the cash rate.
Asked about the effects of migration on inflation, Bullock said it had probably been a “net wash”. Yes, migrants spent more money in the economy - including for housing - but they also added to supply of labour.
On the question of whether the government could use section 11 of the RBA Act to reverse a rate hike if they didn’t like it, she said: “My feeling is if it did happen, I think it would have an impact on what people see as an independent central bank but I don’t actually think we’re in any danger of that happening.”
Bullock noted the regions accounted for about a third of the nation’s population and a similar share of economic output. Post-Covid, they had also tended to enjoy lower unemployment rates but also tighter housing markets than the cities.
“In Armidale, average housing prices have risen by almost 40% since the beginning of the pandemic, while average advertised rents are up by almost 25%,” she said.
While climate change would pose challenges for farmers and others, there would also be opportunities.
“The shift towards renewable energy sources and commitments to reduce carbon emissions mean the share of coal-driven electricity could halve over the next 10 or so years,” Bullock said, adding that the electrification of transport and industry would also happen at the same time.
“Taken together, this suggests the need for greater investment in new energy generation capacity, storage and transmission,” she said.
“This investment should bring with it significant economic benefits, including jobs and new income streams for landholders hosting this infrastructure,” Bullock said, noting there remained “some good reasons for optimism about the future of many of our regions”.
