Michele Bullock sheds doubt on future rate cuts, warns US tariff hike raises risk of retaliation

She also warned against the "Goldilocks" view of the market amid trade disruptions and US-imposed tariffs. “[I] think that the very seemingly rosy view of the markets probably isn’t right here, there is going to be a long running impact,” she said.

When asked about the recent threats of dramatic tariff hikes on China she said it raises the risk of retaliation or defensive strategies from some countries, which would have negative effects, though noted trade has been "nimble" so far.

The context: Bullock was speaking ahead of new labour force data due out this morning.

She referred to criticism received by the RBA earlier in the inflation cycle for not pushing rates up higher much more quickly, noting the central bank was trying to maintain low levels of unemployment.

“4.2% [unemployment] at the moment is good … we’ve got inflation now back in the band,” she said.

“A little bit of recent data suggests a couple of things. The first is that we have been predicting that the economy would start to turn, particularly consumption would start to turn, because real wages have been rising and also wealth has been rising particularly in terms of housing prices and equities and those two things usually result in an increase in consumption,” she said.

“I’d have to say the most recent data suggests that’s been maybe a little stronger at the margin than we thought.”

She said the labour market is “possibly a little tight” but noted this is “a bit uncertain”.

Bullock said the economy is “probably close to balance in terms of the output gap” but it was challenging to judge this accurately.

She pushed back on criticism earlier in the easing cycle, too, that the RBA should have eased more to support economic growth. And she said how fast demand grows from now onwards depends on how fast supply grows and “that’s when this whole issue of productivity comes up”.

What they said: “We only started lowering interest rates in February, we’ve gone down three quarters of a percentage point in that time,” Bullock said.

“We still think it’s 12 months with monetary policy … to flow through.”

Referring to the “Goldilocks” view the markets appear to hold on the macro economy, she referenced the potential effects on the region and more specifically China as a result of the disruption. She talked down the more disastrous forecasts but noted there would be long-run effects.

“From Australia’s perspective, we’ve been thinking about what this might mean for the world trading system … for us, what’s really important there is potentially the impact on Asia,” she said.

“Our central projection is for, yes, a bit of a slowing in world trade and a bit of a slowing in China but maybe not too much and that ultimately will be a little bit deflationary for Australia,” she said, noting the worst possible outcomes appear to be avoided.

“If tariffs go up I think there is potentially quite a lot of disruption to the world trading system, I think it potentially raises the risk of defensive strategies from other," she said.

"And ultimately I don’t think it’ll be good for the Chinese economy either because at the same time as they’re trying to solve this problem of oversupply the [Chinese] government hasn’t really done anything at the moment that is addressing the long run issue in the Chinese economy.”

More broadly, Bullock acknowledged she had been notoriously gun shy on providing forward guidance to the markets and while she said she wouldn't rule out using this tool in future if required, her commentary suggested this was unlikely.

"We are trying very hard to give the market an idea of the sorts of things we are looking at to enable them to figure out what they think our reaction function might be. I think what happened in July [when the RBA remained on hold despite widespread cut expectations] was they read something into the data which we did not read at all … maybe the lesson from that was that we weren’t clear enough in explaining how we use the data and the limitations,” she said.