In her testimony before Australia’s parliament, Governor Michelle Bullock reiterated the RBA’s view that it is “premature to be thinking about rate cuts” given inflation is “still too high“. That said, Governor Bullock added the caveat “circumstances may change.”
We continue to expect that the RBA will commence a gradual easing cycle in February, with risks skewed to an earlier cut if the labour market deteriorates faster than anticipated later this year. The latest unemployment figure is 4.2%, but that is expected to rise a little further.
On the outlook for rates, Governor Bullock noted “financial markets are still pricing in a rate cut by the end of the year. The Board’s message, though, was that it is premature to be thinking about rate cuts. Inflation is still too high and, in underlying terms, is not expected to be back in the top of the band until the end of next year. Circumstances may change, of course, and the outlook is uncertain. But based on what the Board knows at present, it does not expect that it will be in a position to cut rates in the near term.“
On the global outlook, Governor Bullock noted some peer central banks had started lowering interest rates but were doing so cautiously given services inflation generally remained elevated. Bullock also noted “there is a risk things turn down more quickly” and highlighted that the RBA was “closely” watching developments in China’s housing market given potential spillovers to Australia.
Unexpected geopolitical events could cause inflation to rise and undo the progress the RBA has made in taming inflation, Governor Bullock said. “They particularly have the potential to flow on effects to energy markets.
She added: “So we’ve had all this progress on goods price inflation. It has the potential to reverse that at a time when services inflation is still elevated.” Bullock noted supply chain disruptions have direct effects on prices and indirect consequences on inflation by raising the cost base for businesses. “It does have the potential to basically backtrack on a lot of the progress we’ve made on inflation around the world, particularly in the goods area. Energy prices obviously feed into everything.”
On the Government’s proposed changes to the RBA’s Board structure, Governor Bullock noted the RBA was supportive of the changes but highlighted she would prefer if the two new Boards comprised a mix of current Board members and new members.
Source: AFR
