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Michele Bullock, assistant governor for the financial system at the Reserve Bank of Australia, poses for a photograph in Sydney, Australia, on Tuesday, March 14, 2017. Australian regulators could tighten macroprudential measures to improve the quality of mortgage lending as the impact of measures taken more than two years ago begins to wane, Bullock said. Photographer: Brendon Thorne/Bloomberg

RBA Governor Bullock shows inflation won’t fall without a fight.

Peter Switzer
8 November 2023

The winner of the Melbourne Cup might have been called Without a Fight, but the opposite is the case for the new Governor of the Reserve Bank, with Michele Bullock telling us that the progress towards her inflation target between 2-3% was too slow. As a consequence, she’s prepared to fight on, quietly warning us that she might slug us again.

From the sidelines, Treasurer Jim Chalmers, who previously made comments suggesting that a rate rise on Cup Day was possibly unnecessary, found room to support the RBA’s action.

The RBA’s Michael Read captured Dr Chalmers reaction saying: “The primary driver of inflation in the most recent data was petrol but there are other inflationary pressures in our economy as well and the Reserve Bank is responding to that.”

That’s true. The fact that Ms. Bullock’s Bank needed to raise rates for the 13th time is an admission that their previous work hadn’t been executed to the RBA’s own standards!

As you know, I opposed a rise yesterday. Like me, NAB’s chief economist Alan Oster and AMP’s Shane Oliver, thought it might be unnecessary. The SMH’s Ross Gittins was blunt on the subject, saying “the case for a rise was weak.” If we’re right, this should be the last rise, but we do need economic data to support our case.

This chart from Shane Oliver points to inflation now on the slide. Shane compares the official Consumer Price Index (CPI) to his Pipeline Indicator (the blue line), which is now below 2%, while the CPI is above 5%. (See the right-hand axis.)

The red line above shows the fall in the official CPI but Ms. Bullock says it’s too slow. However, inflation indexes, just like interest rate policy, works with a lag, which has no set period.

It can be as quick as six months to have impact, but it can take as long as 18 months. The magnitude of each rise, the time between, the toughness of the language from the central bank, other inflation factors not affected by interest rate rises (such as oil price spikes), and how many borrowers are on fixed rate loans can determine how well rate rises work to beat inflation.

For those worrying, Read says money markets think a December rise is a 7% chance, but another by February is priced in at 36%.

In explaining her raising the cash rate of interest from 4.1% to 4.35%, the assessment of the tone of the Governor’s language was “dovish”, which means she wasn’t talking tough. If she had have spoken more firmly, she would’ve been seen as hawkish, and the foreign exchange market would’ve pushed the dollar higher.

The currency fell slightly to US 64.35 cents but if the Governor was into scaring us into less spending, she would have been far more aggressive about not letting inflation stay higher for longer.

We now have to hope that economic data that we see between now and the first Tuesday in December shows that the previous 12 rate rises have been working, but the data has been slow to tell the true story.

The RBA wants to see lower retail sales, lower house price rises, emptier restaurants, price cutting in the services sector and lower inflation readings.

But to get all that, she might have to get OPEC+, Vladimir Putin and the warring parties in the Middle East to stop doing what they’ve done to drive up petrol prices.

She also needs the Albanese Government to put a brake on immigration, get councils to make it easier for builders to build homes and Treasurer Jim Chalmers to cut the fuel levy. This is the official explanation of the levy: “As at 29 September 2022, the excise is charged at a rate of 46 cents per litre (CPL). The principal purpose of fuel excise is to raise revenue for the budget. Fuel excise is indexed every 6 months, in February and August, to upwards movements in the consumer price index (CPI).”

So, inflation raises the levy, and this actually adds to inflation!

Given many economists think we’re close to a fall in inflation that might satisfy the RBA, why wouldn’t Dr Chalmers support a temporary reduction in the fuel levy?

It seems so obvious that the RBA isn’t having a big impact on the two-thirds of Australians who don’t have a home loan, even though businesses and tenants do both directly and indirectly get affected by higher interest rates.

However, to date, the impact isn’t hard enough to stop price-setters raising prices and consumers, as well as businesses, paying these higher prices.

It’s time for tougher talk from the RBA boss and tougher decisions from Dr Jim to get inflation down.

He can’t stay on the sidelines without a fight to knock out inflation.

In case you’re wondering, the 0.25% increase adds another $114 per month to repayments on a $750,000 loan and that takes another $1,368 a year off those with home loans.

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