Reserve Bank governor Michele Bullock said on Tuesday that the bank was prepared to lift the cash rate further if needed, even as housing markets eased and workers faced the costs of another round of monetary discipline. Speaking to the Anika Foundation in Sydney in a speech titled Monetary Policy in an Era of Shocks, she said the Reserve Bank’s job was to keep inflation expectations anchored and stop shocks from turning into lasting inflation.
Who Pays When the Bank Moves
Bullock said the world has become more shock-prone in recent years and warned that adverse supply shocks can constrain growth, reduce real incomes and add to inflationary pressures. That’s the language of the apparatus, stripped bare: growth for whom, incomes for whom, and who gets squeezed when prices jump. She said inflation and capacity pressures were already elevated, and that recent shocks had added further to the inflation impulse. That was why the bank tightened monetary policy earlier this year and remained focused on returning inflation sustainably to target.
She also said if inflation kept rising from here, the Reserve Bank’s Monetary Policy Board would be prepared to lift interest rates even higher if necessary to achieve its inflation mandate. Bullock said monetary policy could not address Australia’s slow productivity growth, and while that problem persisted, workers would probably keep experiencing limited growth in real wages. The burden lands low. The board keeps the lever.
Oil, War, and the Price of Stability
Bullock said the latest spike in oil prices was another complication for monetary policy and noted that five months had passed since the United States and Israel began bombing Iran. She said oil prices had been highly volatile since the conflict began and that conditions could change quickly. The effect on fuel prices and headline inflation had so far been smaller than initially feared, but headline inflation remained well above target at 4 per cent in May.
She also said business confidence in Australia fell sharply at the start of the conflict but had rebounded somewhat over recent months. The people at the bottom get the volatility first. The people at the top get to call it a complication.
Bullock said Australia’s economy was more resilient than in the past because of the adoption of a credible inflation target by the RBA in the 1990s and because the economy had become less dependent on oil than it was in the 1970s. Even so, she said a given increase in oil prices still had a less direct and less pervasive effect on inflation today than it would have in the 1970s. She said the world had been more shock-prone in recent years against a backdrop of persistently weak productivity growth in Australia, which had been weighing on real incomes and wages for years already.
Housing Eases, But the Pressure Stays
Bullock said the housing market had been a little weaker than expected in recent months. The RBA had expected conditions to ease in response to the changed outlook for monetary policy and the rise in the cash rate earlier this year, but she said the housing market had eased by more than anticipated in May. She said this appeared to reflect a range of factors, including recent policy developments affecting the housing market and a general softening in housing market sentiment.
She said the easing in established housing prices had so far been modest after a period of strong growth. Price declines had been concentrated in the Sydney and Melbourne markets, but prices in those markets remained around where they were before interest rates started to rise in February this year. The most recent data suggested negative equity remained very limited, affecting less than 1 per cent of borrowers. The bank expects property prices to be hit when rates rise. It just doesn’t call that its target.
Bullock said what mattered for monetary policy was how changes in housing prices affected household spending, investment decisions and, ultimately, inflation. That’s the hierarchy in plain sight: homes as inputs, households as transmission lines, inflation as the sacred metric.
More Unemployment, Less Room to Breathe
Bullock said the labour market had also eased a bit more than expected in recent months, with the unemployment rate rising a little faster than expected. Even so, she said the labour market probably needed more unemployment or underemployment to bring inflation back down. She said some further easing in labour market conditions would likely be required to bring inflation back to target.
The national unemployment rate is currently 4.4 per cent, and the RBA is forecasting it to be 4.6 per cent by the end of next year. Bullock said with continued weak productivity growth, Australia’s economy would not be capable of growing strongly without putting upward pressure on inflation, and that would limit the choices of policymakers in the coming years. She called that the fundamental challenge for the Australian economy over the next few years.
The message was blunt, even if wrapped in central-bank calm: the bank will defend its target, and workers, renters and borrowers will absorb the strain. The institution keeps its mandate. Everyone else gets the bill.