Michele Bullock set tongues wagging this week when she suggested inflation was home-grown — a message at odds with the Government’s framing.
The tone of the speech, in which the Reserve Bank governor also shed light on how she’s working to change the institution’s internal culture, was subsequently labelled “hawkish” — which suggests the RBA’s already-professed low tolerance for inflation surprises is getting lower.
Bullock, in her public appearances since taking on the top job in September, has been consistent in that she knows interest rates hikes are tough for many people and unpalatable, but the RBA governs for the nation’s wellbeing, not individual financial circumstance.
The tough talk should also be seen by the Government as a warning — the RBA will raise rates again if need be.
But you’d hope the Government was giving Bullock undivided attention when she answered a question about the impact of the contentious stage three tax cuts on the bank’s inflation forecasts.
Bullock said the tax cuts were already in the RBA’s inflation forecasts and “thinking for monetary policy”.
Those are the same forecasts that don’t see inflation getting back to the crucial 2 to 3 per cent target until the tail end of 2025.
The government’s been stuck between a rock and a hard place on the tax cuts — promised by its predecessors, Labor has stuck by the idea that they will provide relief to people who really need it. They will cost the Budget $313 billion over 10 years.
Tax cuts and concessions are largely perceived as inflationary because they provide people with more money to spend.
By the time they kick in from next July, it’s likely that money would be much needed, with another rate hike widely expected in February.
But the question remains: would the RBA expect the inflation rate to come down faster — and with it shorten the time in which more rate hikes could reasonably occur — if the tax cuts weren’t a factor.
That would be a tough sell — but the government could pin its hopes to expectations the economy would start to improve from 2025, and suggestions that rate cuts could kick in from mid- to late 2024.
In the meantime, Bullock will need to keep talking tough to try to push services demand lower. The challenge here is price-setting by businesses — while the governor nominated hairdressers, dentists and hospitality in her speech this week, the reality is it’s across the economy as business operators battle to maintain margins or stay profitable while dealing with higher power and utilities prices, insurance bills and wages costs.
The upshot — apart from the spectre of another series of rate hikes looming large — is that being thrifty beyond the supermarket could really pay off. If possible, shop around and try to avoid accepting higher prices.
The RBA is keen to ensure this is a relatively short-lived period, but its efforts will hampered if people merely accept and expect prices will rise.