RBA interest rates live updates: Central bank hold rates at 4.35pc as homeowners now await Bullock’s next move

Bullock was aksed why there was such a knowledge gap among the public about the link between interest rates and inflation.

She said there were two reasons why people are “a bit confused” about thinking higher interest rates drives up inflation.

“One is that inflation is higher, you tend to see interest rates rising, so it might be a correlation thing,” she said.

“The second reason is because people who have mortgages, they see the cost of their mortgages going up, and therefore their cost of living goes higher.

“They’re saying cost of living going up is inflation. They’re actually not that same thing, but I get why people think that rising interest ‘is making my life harder. It’s making everything more expensive, costing me more’.”

She said targets for her communication team to explain the correlation was women and young people who had indicated that “they’re not sure they quite understand, but they want to understand”.

“But you probably know as well as I do that trying to get information through to people takes time,” she said.

“You have to repeat yourself and repeat yourself and repeat.”

Bullock said there were no financial stability risks to Australia’s banks as the heat comes out of the housing market and property prices cool.

“We think that it’s not a massive risk to financial stability, banks have generally been quite conservative on their loan-to-valuation ratios, and housing prices have risen a lot,” she said.

“So, in fact, if you look at the percentage of households who are in negative equity, it’s under it’s under one per cent.

“If property prices - I think we’ve done some scenarios - if property prices fell by 20 per cent still only about 5 per cent of households would be in negative equity.”

Bullock said negetive equity was only relevant if a homeonwer was forced to sell as the market falls.

“But it doesn’t pose a risk to the financial institutions because they are very well capitalised,” she said.

“They’re very well covered in the systems. Yes, we’re alert to that, and we are looking at the potential impacts of that, but we don’t think there are financial stability implications.”

Bullock said the US and Israel war against Iran, inflation and the domestic labour market at intrinsically linked.

“We have got upside risks potentially if this conflict continues to go on in the Middle East - the longer it goes on, the more likely businesses are to embed cost increases into their prices,” she said.

“We have seen a bit of flow through, but we think we we actually think there’s a risk that there’s more to come.

“The labour market still, notwithstanding that it’s eased, it’s still a bit tight, and there’s some areas of the economy where labour shortages, and this comes out in our liaison, is still still an issue.

“So these are the sorts of steps that are still in the board’s mind. That these upside risks are there. They’re not centralised in the forecast because they’re very uncertain. But those were the things that the board was discussing today about why we might want to be looking at an increase in interest rates.

“In the end, we decided to wait for a bit more information, but it’s still front of mind.

“The supply shocks that we’ve seen through the Middle East conflict and so on, they worsen the trade-off. They mean that for every unemployment rate, we’ve got a higher inflation rate turned around.

“It means that for every inflation rate, we have to have a higher unemployment rate, so it does make this challenging. And I wouldn’t like people to think that because we’re seeing a slowing and a rise in the unemployment rate, that means that we have to reverse course.

“Actually, we need that. We need growth to slow because potential growth in the economy is not very, it’s not growing strongly. We need to slow. We need a little bit less tightness in the labour market in order to bring inflation down.

“So the fact we’re seeing those things means policy is working, but it doesn’t mean that monetary policy is wrongly too tight. It means that monetary policy is doing what it’s supposed to be doing.”

The governor was asked why the RBA’s statement of monetary policy “says nothing about the tax changes and the impact on business investment” and “why would you leave such an important bit of analysis out”.,

Bullock conceded board members are not experts in business taxation.

“I actually don’t know how some of these tax changes are going to affect business investment, and some of them aren’t even in yet,” she said.

“So, we’re relying on our colleagues at Treasury to work with us on these sorts of things, we our expertise isn’t in business taxation, and potential impacts and incentives.

“That is actually what Treasury are working on, and we take a lot of our information on these sorts of things from Treasury. That’s appropriate.”

Bullock says there are key indictaors ahead for the board to consider and was asked about the money market’s suggestion of the need for a hike in February.

“We’ll be looking at the next board meetings at the end of September. There’s a few things we’ll get by then,” she said.

“We’ll get labuor force. We’ll get national accounts. We’ll get some more inflation readings. We’ll get some more information from liaison programs, which is also very important in this.

“And what we’ll be looking for ... is are these things evolving broadly as we expect in the forecasts.

“If it looks like they’re not, and some of these particularly upside risks to inflation are starting to crystallise, then the board is thinking very hard about when it’s appropriate to raise.

“I reiterate, we did not discuss a reduction in interest rates.”

The RBA governor was asked directly about house prices, but insists “it’s not the main gaime” and that a cut was not discussed at this meeting.

“Housing prices have risen by about 50 per cent since 2020, and yes they’ve turned down, and the reason that’s of interest to us.

“It works through, basically, dwelling price inflation, building dwellings, and so on.

“So there’s a way in which it impacts the economy, but that isn’t really the main game here for us at the moment.

“The main game here for us is excess capacity, tight labour market, particularly in some areas like construction, the Middle East conflict, the AI boom.

“These are all the things that are front of mind in terms of risks, the inflation outlook.

“So, yes, the board is looking at housing and looking at what’s happening in that market because it might have some flow-on effects, but it’s not the main game.

“And before anyone asks, no, the board did not discuss an interest rate cut at this meeting. It only discussed a raise and a stay.”

Michele Bullock acknowledged the struggles of homeowners after three rounds of interest rates hike, even as theboard leave rates on hold at 4.35 per cent.

“Now, I understand this is a difficult period for some households,” she said.

“High inflation hurts all Australians, especially the most vulnerable, and that is why inflation, bringing inflation down, is our priority.”

She said the board was determined to ensure that expectations of higher inflation do not become embedded in price and wage setting decisions.

The board also remains concerned about the continued weakness in productivity growth, she said.

Stay tuned for her comments, which may give us a steer on where rates are heading next.

The RBA’s monetary policy board was unanimous in its call to keep rates on hold, with all nine agreeing to staty put.

But we’re not out of the woods yet, with the board saying inflation is not expected to return to around the midpoint of the 2 to 3 per cent target range until late 2027.

“And there are upside risks to this projection,” it noted.

“With monetary policy judged to be somewhat restrictive, the board decided to leave the cash rate target unchanged while it assesses how the economy is evolving.

“The board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise.”

While admitting there were plenty of pros and cons for a move today, Compare the Market’s economic director David Koch says the RBA was right to keep official rates on hold at 4.35 per cent.

“There’s so much going on at the moment,” he said.

“Yes, employment is strong, so the Reserve Bank would be ticking that going. ‘great, we don’t have to do anything there’.

“Inflation is still rising at a greater rate than the Reserve Bank would like, but it’s being driven by factors beyond the control of Australian households, who are still facing a massive cost-of-living crisis. It’s even growing, that crisis, I think.

“And then you layer on that, their biggest asset - property prices - are recently starting to come down and there’s a lot of stress out there.

“Average Australians are going into the bunker; their house prices are starting to come down and they’re stressed by all these things that are out of their control.

‘Inflation is going up largely because of the Middle East issue, and because governments are spending and putting demand into the market.”