Reserve Bank Governor Michele Bullock has warned it could take a recession to control inflation after borrowers were hit with a fourth rate rise this year — taking the Reserve Bank of Australia’s cash rate to a 15-year high of 4.6 per cent.
The Middle East conflict and AI data centre construction were expected to keep inflation elevated, but Australia’s most powerful central banker has argued higher interest rates will see Australians get cheaper imports as they spent less on Australian-made products.
The central bank’s nine-member monetary policy board voted unanimously to raise the cash rate for the fourth time since February to the highest point since November 2011, adding more than $100 to monthly repayments on an average new mortgage.
Another follow-up hike by Christmas is regarded as likely, which would take the cash rate to an 18-year high of 4.85 per cent and see variable mortgage rates climb above 7 per cent for the first time since the global financial crisis in late 2008.
“The board will raise interest rates again if that’s what needed to bring inflation down,” Ms Bullock said at her post-announcement press conference in Sydney.
“High inflation hurts all of us, especially the most vulnerable. Pay packets don’t go as far as they used to and that’s why we need to stop this high inflation.”
She suggested it could take a recession to bring down inflation expectations, which last occurred as a result of higher inflation and interest rates in 1991.
“If that gets away, then that is a circumstance which I think you might need to have quite a dramatic slowdown in the economy and that’s our worry,” Ms Bullock said.
“Back to the mortgage holders and so on, I know they don’t understand why we have to do this, but the point is if we don’t address this, inflation will get worse and interest rates will have to be higher and the economy in a worse position.
“We knew that this was going to hit some people pretty hard but we have to do it if we are to bring inflation back down — ultimately, in the long run, hopefully in those couple of years when we get inflation back down, this will all have been worth it.”
With unemployment at a five-year high of 4.6 per cent and inflation at 3.5 per cent, putting it above the RBA’s 2-3 per cent target in July for the 12th straight month, Ms Bullock denied the Reserve Bank had simultaneously failed its dual mandates on full employment and inflation.
“I wouldn’t call inflation of 3.5 per cent and an unemployment rate of 4.6 per cent stagflation,” Ms Bullock said.
“I’d say that you’re right: we haven’t met our target in terms of inflation.
“At the moment, we’re not overshooting our employment target; at the moment, we’re undershooting it.”
With the Australian dollar back above 70 US cents, following rate rises in February, March and May, Ms Bullock suggested rate hikes would encourage consumers to buy more cheaper imports and less Australian products.
“The most important channel is the exchange rate channel and raising interest rates impacts import prices, it makes imports cheaper, it encourages people to spend more on imports rather than domestically-produced goods,” she said.
While the RBA also considered holding interest rates on Tuesday, Ms Bullock said the Middle East conflict and rising fuel prices was regarded as more of a risk than falling house prices discouraging homeowners from spending.
“We think part of the downturn in the housing market has been related to interest rates — that sort of affects people’s wealth, it affects how they feel, it might affect the share market, so that can affect consumption,” she said.
“The first risk, the Middle East, that’s more or less materialised: that’s now worse than we were thinking.”
Tensions in the Middle East, that have seen Iran-backed attacks on Saudi Arabia’s East-West Pipeline, were cited in the RBA decision.
“Inflation remains elevated and some of the upside risks flagged in August are materialising,” it said.
“The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts.
“Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation.”
The construction of AI data centres is also expected to add to demand in the economy.
“AI-related demand is driving rapid growth in global prices for technology-related goods. And there remains pressure on domestic capacity,” the RBA said.
“Liaison indicates that firms are experiencing cost pressures and are either increasing the prices of their goods and services or looking to do so.”
Ms Bullock said that while weak productivity and not wages were driving up inflation, she argued the Productivity Commission and not the RBA was responsible.
“There’s nothing we can do about productivity,” she said.
“Again, I’m not the productivity tsar.”
Treasurer Jim Chalmers was quick to blame US President Donald Trump for the latest rate hike.
“The war in the Middle East is pushing up inflation and interest rates all around the world but that doesn’t make it any easier for Australians,” he said.
“Australian workers didn’t choose this war, but they are paying a hefty price for it.”
The RBA also warned of weak economic growth continuing amid lacklustre productivity that stirs inflationary pressures if GDP expansion is above 2 per cent.
“A period of prolonged uncertainty may also cause growth to be lower overseas and in Australia,” the RBA said.
“To date, however, growth in Australia’s major trading partners has been stronger than expected, as the boost from AI-related investment has outweighed the adverse effects of the Middle East conflict.
“In Australia, weak productivity growth continues to constrain potential growth and there are uncertainties about the economic effects of the downturn in the housing market.”
A borrower with an average new mortgage of $731,000 will see their monthly repayments climb by another $121, adding up to $1452 over the year.
Since February, monthly repayments for the same-sized mortgage have soared by $475, or an annual pace of $5700.
The RBA monetary policy board opted to raise interest rates even though the Australian Bureau of Statistics isn’t releasing inflation data for August until Wednesday.
But Ms Bullock said RBA meetings were scheduled 18 months to two years in advance to accommodate the commitments of other board members.
“When the ABS change the date, it’s not ideal but there wasn’t much we could do about it,” she said.
“It’s very challenging. I can tell you that financial markets do not like us moving around our scheduled meetings.”
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