Michele Bullock’s run of good news may be about to end

“People are doing it tough and the board and I are very conscious of that,” Bullock said. Indeed, the governor, herself, was seeing the pinch.

“I went to fill up my car with petrol the other day and I got an absolute shock when I saw the price of it. That’s something that is really obvious to people,” she said. “It is frustrating. But as I’ve said, we do feel we’re on the right path.”

Rates higher for longer

The decision to keep rates on hold did not come as a shock to economists or financial markets. While there had been speculation of a surprise increase, investor pricing suggested the likelihood was small.

Yet, with inflation accelerating over the first quarter of the year, economists were expecting the RBA to sound more hawkish. It is rare for such a pace of inflation to occur without a rate increase.

What they got instead was a far more nuanced message, both on the central issue of interest rates and on broader economic themes.

The RBA board’s post-meeting statement maintained its neutral position on monetary policy, not ruling anything “in or out”. The anticipated hawkish pivot – perhaps a return to February’s language saying “a further increase in interest rates cannot be ruled out” – was not forthcoming.

This was made more surprising by the RBA’s statement on monetary policy also released on Tuesday.

It showed the central bank expects headline inflation to tick up, upgrading its near-term forecasts for annual CPI from 3.3 per cent to 3.8 per cent in the June quarter, above the 3.6 per cent recorded in March.

It also upgraded its forecasts for trimmed mean inflation from 3.6 per cent to 3.8 per cent in the year to June 30, and from 3.1 per cent to 3.4 per cent over calendar 2024. Trimmed mean inflation is the RBA’s preferred measure for price rises that trims away volatile changes to get underlying inflation.

The key pressures are the strong jobs market and high petrol prices, which flow through the economy.

Despite the upgrades, inflation was still forecast to get back to the mid-point of the 2 per cent to 3 per cent target band by mid-2026; unchanged from the previous forecasts delivered in February.

The main reason for this lies in a key assumption being made by the bank. In February, it assumed multiple rate cuts over the second half of this year. Three months later, it assumed no rate cuts until at least mid-2025.

“For the purposes of those forecasts, what drives inflation down in the later years is the fact there is a higher interest rate path in there,” Bullock said.

She was quick to add the assumptions used in the RBA’s modelling should not be seen as any indication of what the bank intends to do: “Is that the interest rate path that’s eventually going to be actualised? I don’t know.”

Vigilant to upside risks

Certainly, Treasurer Jim Chalmers will be hoping for something sooner, given the next federal election must be held before May 2025.

But with the overall inflation trajectory unchanged between February and May despite the absence of three interest rate rises in the next 12 months, the implications are clear.

First, on the positive front, the threshold for raising the cash rate again is high. Inflation will need to accelerate significantly above the RBA’s forecasts before it will increase rates again.

Second, on the negative side, while a rate rise is unlikely anytime soon, so, too, is a rate cut – interest rates look set to stay higher for longer.

“Given longer-term trimmed mean inflation forecasts were left unchanged, the implication is the RBA expects to keep the cash rate on hold for even longer,” says TD Securities senior rates strategist Prashant Newnaha.

“The forecasts imply the absolute earliest the RBA cuts would be August 25, if not later.”

Which perhaps explains why, despite maintaining its neutral stance, the RBA board included a hawkish tilt in its language.

“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected, and it remains high,” its post-meeting statement said. “The board expects it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.”

Inflation-fighting budget

In her post-board meeting press conference, Bullock elaborated further, outlining what the bank saw as the biggest policy mistake.

“The cost on the upside is higher than it is on the downside if you like, so even if the risks are balanced, it is more costly if we end up with higher inflation than we are expecting,” she said. In other words, the RBA would rather keep rates higher for a bit longer to ensure inflation gets sustainably back to target, rather than risk embedding it at an unsustainably high level.

For households, that means mortgage repayment relief is possibly not on the cards for another 12 months or more.

For businesses, it means the slowdown in consumer spending may continue longer than expected. That means higher input costs will be more difficult to pass on to consumers, which is precisely what the RBA wants.

For governments, it means the pressure will be on not to work against the RBA’s contractionary monetary policy.

Chalmers this week has already indicated his third budget on Tuesday will put fighting inflation as the main near-term priority before boosting spending and deficits in later years to stoke growth. Based on the RBA’s forecasts he will need to hold true to that.

NAB head of market economics Tapas Strickland noted there is “little ability to absorb additional upward inflation surprises if the economy remains resilient”; a stimulatory budget could spark a fresh rate rise, which, aside from being a blow to households, would be politically disastrous for Labor.

Bullock would not be drawn on her view on fiscal policy other than to say that Chalmers was saying all the right things. She would also not give any hint about the likely path for interest rates, even joking during the press conference that people would “understand why I’m very cautious about suggesting any particular rate increases or decreases.”

Bullock’s easy run

To date, Bullock’s press conferences have been seen as a success. While she still explains economic concepts and ideas, they usually come sandwiched between expressions of empathy for people doing it tough. The conferences avoid black-and-white language that might indicate some happiness at others’ misery.

When asked about the RBA’s want to see capital and workers go from less productive businesses to more productive businesses – a process known as business dynamism that creates churn in company creation and destruction – Bullock was careful about how she talked about the issue.

Where Lowe might have given a textbook answer and said something about bad businesses going under and their employees moving to new businesses being a good thing for the economy, Bullock saw the trap.

“I wouldn’t use the word ‘need’ or ‘want’ or ‘like to see’, I wouldn’t use any words like that,” she said, before giving a long, sweeping answer that somewhere in the middle slipped in the answer: “You do need a bit of business dynamism if you’re going to get productivity improvements.”

When Lowe fronted the media, he had to address 12 interest rate rises and the anger of millions of affected households. So far, Bullock had never had to deliver bad news (her first press conference was well after the bank raised rates in November 2023), and she may not, if all goes according to plan.

But any further upward pressure on inflation will likely push out the bank’s narrow pathway to bring inflation back to target in a reasonable timeframe, and the consequences of that will be far more challenging to explain.