Reserve Bank governor Michele Bullock before senate estimates

A pick-up in inflation or stronger-than-expected price pressures would force the RBA to raise interest rates again, central bank governor Michele Bullock told a Senate estimates hearing.

“If we think we’re on a narrow path, we can stay basically, almost where we are: not deciding anything in, not ruling anything out,” she said.

“But if it turns out, for example, that inflation is going to start rising again, or that it’s much stickier than we think, that we won’t cut it, then we won’t hesitate to move and raise rates again.”

But if growth is lower than expected, Ms Bullock said the RBA would cut interest rates.

“If the economy turns out to be much weaker than expected, and that puts more pressure on inflation, then we will look to moderate it,” she said.

Economic growth will be “fairly low” in early 2024.

Ms Bullock told the hearing she expected national accounts figures for the March quarter to show growth was “quite low” in the first three months of 2024.

Economists expect the figures to show Australia’s economy expanded by an anemic 0.2 per cent in the first quarter of 2024, a result that would bring annual growth to just 1.2 per cent – the weakest outside of the coronavirus pandemic since the collapse of the dot .com in 2000.

Asked by Liberal senator Jane Hume whether the economy was experiencing a per capita recession – meaning population growth outstrips economic growth – Ms Bullock said the concept was not applicable as recessions were about “job losses and human problems”.

“I just think the word recession per capita is just being used in a way that’s not very helpful,” she said.

“Right now, we think the economy is weak, and that’s certainly showing in consumption.”

“Complicated” budget issues aren’t helpful, Bullock says
Ms Bullock dodged a question from Senator Hume about whether Treasurer Jim Chalmers’ May budget was expansionary or contractionary, saying the answer was not simple.

“This is a very complicated question to answer,” Governor Bullock said.
“The reason it is not simple is not the only thing that affects whether we are or not [in] expansion or contraction phase.
Domestic and international conditions would affect the path of inflation in Australia, not just the federal budget, Ms Bullock added.
“I don’t think it’s helpful to think about the budget and say it’s expansionary or contractionary without thinking about what else is going on in the economy,” she said.
Treasury Secretary Steven Kennedy declined to answer a similar question from Senator Hume during Monday’s hearing on the estimates.

RBA to ‘review’ energy rebates

Ms Bullock rejected suggestions that the raft of federal and state energy rebates would not have a significant impact on core inflation and therefore would not threaten the RBA’s efforts to tame inflation.

Treasurer Jim Chalmers revealed in the May Budget that every household will receive a temporary $300 energy rebate, which the Treasury predicts will shave 0.5 percentage points off measured headline inflation.

State governments in Queensland and Western Australia have unveiled similar measures.

“We’re trying to look at things that are one-offs and will turn around,” she told state Sen. Matt Canavan.

“But in terms of the underlying pulse of inflation … we don’t think it will be affected.”

Economists were quick to express concern that savings generated by the rebate would be spent elsewhere, adding to inflationary pressures and complicating the RBA’s efforts to fight inflation.

“I think the quantum seems small enough that I don’t think they really have a big second-round impact on demand,” she said.

“When you think about that $300, are people going to go out and spend a lot on it? No, I don’t think so.”

The RBA will not rule out a pre-election rate hike

Asked by Liberal senator Dean Smith, Ms Bullock said the RBA’s board would not hesitate to raise interest rates again if economic conditions called for it.

Asked if that could include during the election campaign, she said: “I’m not speculating on any campaign periods, but the committee will do what they think they have to do with inflation.”

“The board will be driven by the data and the data will tell us if we need to move,” she said.

The last time the central bank’s board of governors raised the cash rate during an election campaign was during the 2007 election, when incumbent Prime Minister John Howard faced off against Kevin Rudd. Weeks later, Mr. Howard lost.

Average mortgage rates to rise another 20 basis points: Kent

RBA Assistant Governor Christopher Kent said the impact of the RBA’s 13-fold rate hike from May 2022 would not yet be fully passed on to all household borrowers.

He said a small group of mortgage borrowers had still not converted their ultra-cheap fixed rate loans to much higher variable rates.

“People have more or less managed to master these changes. That expanding fixed-rate mortgages now don’t seem much different than variable-rate mortgages in terms of their ability to pay,” said Dr. Kent.

“Most of that will end this year and that can add an extra 20 basis points to the average mortgage outstanding.”

Increased competition among banks to acquire home loan customers also softened the blow of rising interest rates for household borrowers, added Dr. Kent.

“The other thing that happened very quickly is that the banks actually competed a little bit harder for quality borrowers,” he said.

“Those who are able to switch banks or negotiate with their banks are getting better deals than they would otherwise … so only about 80 per cent of the increase in the cash rate goes.”

More to come.

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