RBA's Michele Bullock refocuses economic debate back to inflation
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The news: Reserve Bank governor Michele Bullock has put the focus firmly back on inflation as the main source of economic woes after a firestorm week in which Treasurer Jim Chalmers was accused of attacking the central bank.
In a public speech on Thursday afternoon Bullock reiterated the damage that high inflation wreaks on households and businesses, and the importance of getting it back into the 2% to 3% target range. She did not mention the government, fiscal policy or public spending in her 13-page address.
Her focus was instead on the damage that inflation does to households and businesses and, in particular, lower income borrowers.
However, she indicated that while the RBA has a dual mandate to also aim for full employment it would not risk inflation remaining too high "indefinitely", noting that high inflation also does not serve labour force goals in the long term.
The numbers: The vast majority of mortgage holders in Australia are still in a position where they can afford to repay their loans. Bullock previewed the upcoming Financial Stability Review, noting that 5% of owner occupiers with variable rate loans are in a “particularly challenging situation” with a cash shortfall in their income versus expenses. Lower income borrowers are over-represented in this cohort.
Bullock noted that if inflation remains higher for longer than the RBA is forecasting, and rates therefore have to stay at current levels or move higher, the risk would be that the share of those unable to meet their repayment obligations would rise somewhat.
While the RBA currently does not expect to cut rates in the near-term from 4.35%, Bullock pointed out the uncertainty in the forecasts. One of these relates to household consumption and employment, with the latest Statement of Monetary Policy included varied scenarios that could see the central bank take a different approach. The latest National Accounts showed a sharp slowdown in spending.
The context: On Sunday, Chalmers published a statement that said higher interest rates and global volatility were "smashing the economy" ahead of releasing National Accounts that shows GDP is growing at the slowest rate since the early 1990s (excluding the pandemic).
This was taken as a criticism of the RBA in some parts of the media and politics and added extra pressure on Bullock. Bullock will take questions from media later today.
What they said: "We know that if high inflation becomes entrenched in the expectations of firms and households it would be more difficult and costly to reduce. If businesses and workers come to expect that prices and wages will continue rising quickly this adds to inflationary pressures, requiring even higher interest rates to bring inflation down," Bullock said.
"Ultimately, we would need to slow the economy down by more, which would result in a larger rise in unemployment and higher risk of recession.
"Inflation has not been as high as it has been recently for a few decades and I think many people have forgotten how bad it is — people under the age of 40 will not have experienced high inflation until the last few years.
"There is a reason why there is so much talk about the cost of living — high inflation hurts everyone, and especially the most vulnerable."
The source: Michele Bullock speech to the Anika Foundation
