RBA Will Struggle With Jobs Goal If CPI Stays High, Bullock Says

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The Reserve Bank of Australia will struggle to maintain low unemployment if inflation remains above its target “indefinitely”, Reserve Bank Governor Michelle Bullock said, warning households and businesses that interest rate easing is still a long way off.

In a speech in Sydney, the RBA chairman stressed that the rate-setting board is alert to the risks of rising inflation and that monetary policy will need to remain “sufficiently restrictive” for the consumer price index to move sustainably towards its 2% to 3% target. Australia’s core inflation has been well above that range since 2021 and, while it has recovered from its peak, remains worryingly high at 3.9%.

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“Given that core inflation has fallen very little over the past year on a quarterly basis, the Board is vigilant against upside risks,” Bullock said Thursday. “Higher inflation ultimately requires lower inflation, which could lead to longer-term costs to households through higher unemployment.”

The governor said the RBA board was seeking to strike a balance between bringing inflation down within a reasonable timeframe and preserving as much as possible the recent gains in the Australian labour market, with the unemployment rate falling to 4.2 per cent. “Ultimately, it is important to remember that our goal of full employment is not achieved by allowing inflation to remain above target indefinitely,” she added.

Bullock’s speech focused heavily on the risks of prolonged periods of high inflation and how the current cycle disproportionately hurts low-income and young Australians. She stressed the need to address this problem.

Her message comes as central banks from New Zealand to Canada have already begun cutting interest rates, and as the US Federal Reserve is expected to embark on a path of monetary easing this month.

Australia remains an outlier, raising interest rates by less than its peers during the 2022-23 tightening cycle in an attempt to hold on to employment gains. The Reserve Bank of Australia raised the cash rate to a 12-year high of 4.35%, about a percentage point lower than the United States.

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Financial markets still expect the Reserve Bank of Australia to start cutting interest rates later this year, although central bank officials have rejected that pricing.

“It’s too early to think about cutting interest rates,” Bullock said Thursday, reiterating comments he made at a news conference last month.

“Conditions may, of course, change, and if economic conditions do not develop as expected, the Governing Council will respond accordingly. However, if the economy develops broadly as expected, the Governing Council does not expect to be in a position to cut interest rates in the near term,” she said.

Current restrictive policy settings are working to bring demand and supply into greater balance, although domestic capacity pressures are still keeping prices high, Bullock said.

She said the main factors behind the current high inflation are housing costs and market services, noting that the latter recorded 5.3% in the year to the second quarter.

However, data released on Wednesday showed Australia’s economic expansion remained tepid in the three months to June as consumers stuck at home in the face of persistent inflation. The Reserve Bank of Australia believes the second quarter was the nadir of the slowdown, and expects growth to recover in 2025.

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Bullock also provided a preview of the Reserve Bank of Australia’s semi-annual Financial Stability Report, due out on September 26. The key points were:

• Only a small percentage of borrowers are currently at risk of defaulting on their mortgage payments.
• For homeowners with variable rate loans, the RBA estimates that around 5% are in a particularly difficult position, with essential spending and mortgage repayments outstripping their income.
• Low-income borrowers represent a large percentage of people who are really struggling.
• If inflation stays higher for longer than the RBA expects, the share of borrowers most at risk of not being able to service their debt will increase slightly, although the numbers are not large enough to pose a “material risk” to the stability of the financial system.

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