Reserve Bank governor Michele Bullock before senate estimates

A rebound in inflation or more persistent-than-expected price pressures would force the RBA to raise interest rates again, Reserve Bank Governor Michele Bullock told a Senate estimates hearing.

“If we think we’re on a narrow path, we can basically stay, more or less where we are: not ruling anything out, ruling anything out,” he said.

“But if it turns out, for example, that inflation starts to rise again or is much more persistent than we think and we are not going to be able to reduce it, then we will not hesitate to move and raise interest rates again.”

However, if growth was lower than expected, Bullock said the RBA would move to cut interest rates.

“If it turns out that the economy is much weaker than expected, and that puts more downward pressure on inflation, then we will look for easing,” he said.

Economic growth will be “quite low” in early 2024

Bullock told the hearing she expected March quarter national accounts data to show growth in the first three months of 2024 was “quite low”.

Economists expect the data to show Australia’s economy expanded by an anemic 0.2% in the first quarter of 2024, a result that would take annual growth to just 1.2% – the weakest result yet. outside of the coronavirus pandemic since the 2000 dot.com crash.

Asked by Liberal Senator Jane Hume whether the economy was experiencing a per capita recession – that is, population growth exceeding economic growth – Bullock said the concept was not useful as recessions referred to “loss of jobs work and human difficulties”.

“I just think the word recession per capita is just bandied about in a way that isn’t very helpful,” he said.

“Our feeling at the moment is that the economy is weak, and that is certainly reflected in consumption.”

“Complex” budget questions aren’t helpful, Bullock says
Bullock dodged questions from Senator Hume about whether Treasurer Jim Chalmers’ May budget was expansionary or restrictive, arguing the answer was not simple.

“It’s a very complex question to answer,” Gov. Bullock said.
“The reason it’s not simple is that it’s not the only thing that affects whether we are simple or not [in] a phase of expansion or contraction”.
Domestic and international conditions would impact the path of Australian inflation, not just the federal budget, Bullock added.
“I don’t think it’s helpful to think about the budget and say it’s expansionary or contractionary without thinking about what else is happening in the economy,” he said.
Treasury Secretary Steven Kennedy refused to answer a similar question posed by Senator Hume during Monday’s estimates hearing.

The RBA will review energy rebates

Bullock rejected suggestions that the round of federal and state energy rebates will not make a significant difference to underlying inflation, and therefore will not undermine the RBA’s efforts to tame inflation.

Treasurer Jim Chalmers announced in the May budget that every household will receive a temporary $300 energy rebate, which Treasury forecasts will reduce measured headline inflation by 0.5 percentage points.

State governments in Queensland and Western Australia have tabled similar measures.

“We try to look at things that are one-offs and that will be reversed,” he told National Senator Matt Canavan.

“But in terms of the underlying pulse of inflation… we don’t think it’s going to have an impact on that.”

Economists were quick to raise concerns that savings generated by the discount would be spent elsewhere, further stoking inflationary pressures and complicating the RBA’s inflation-fighting efforts.

“I think the quantum seems small enough that I don’t think they really have much of a second-round impact on demand,” he said.

“When you think about that $300, are people going to go out and spend a lot on that? No I do not think so.”

The RBA does not rule out a rate hike before the election

Questioned by Liberal Senator Dean Smith, Bullock said the RBA board would not hesitate to raise interest rates again if the economic situation required it.

Asked to clarify whether this could include during an election campaign, he replied: “I’m not speculating on any campaign periods, but the council will do what they think they need to do on inflation.”

“The council will be driven by data and the data will tell us whether we need to move,” he said.

The last time the Reserve Bank board raised the interest rate in an election campaign was during the 2007 election, when incumbent Prime Minister John Howard clashed with Kevin Rudd. A few weeks later Mr. Howard lost.

Average mortgage rates will rise another 20 basis points: Kent

The effect of the 13 rate hikes implemented by the RBA since May 2022 has yet to be fully passed through to all borrowing households, RBA assistant governor Christopher Kent has said.

He said a small group of borrowers have not yet moved their ultra-cheap fixed-rate loans to much higher variable rates.

“People have been able to handle these changes, more or less. The fact that the maturity of fixed rate mortgages doesn’t look very different to an adjustable rate mortgage, in terms of your ability to make payments,” Dr Kent said.

“Most of these will end this year, and that could add another 20 basis points or so to the average outstanding mortgage.”

Increased competition among banks to win home mortgage customers has also softened the blow of rate rises on household borrowers, Dr Kent added.

“The other thing that happened very quickly is that banks actually competed a little more vigorously to snap up good quality borrowers,” he said.

“Those who are able to switch banks or negotiate with their banks get better deals than they might otherwise have gotten… which is why only about 80% of the cash rate increase is passed on.”

And there’s more.

Read related topics:Reserve Bank

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