AARON PATRICK: RBA Governor Michele Bullock’s inflation message perplexed investors

Not only are they regarded as the smartest guys the room, they are meant to be the adults in the room when it comes to running the economy. Which is why Tuesday’s post-interest-rate-rise press conference by Reserve Bank of Australia governor Michele Bullock was deeply worrying.

Ms Bullock conceded the central bank had been caught out by the war over Iran. The inflation impact of the disruption to the global oil trade is more severe than the Reserve Bank’s economists predicted, exacerbating inflation that was already causing trouble before American bombs started falling on Tehran.

Then you have the artificial intelligence boom. For the convenience of ChatGPT’s essay writing powers, commercial interest rates are heading upwards around the world as data centres-builders suck up capital to fund new server towers.

Faced with an inflation outlook that is deteriorating, when it should be improving, Ms Bullock and her board increased the cash rate to 4.6 per cent. The objective is to inflict financial pain on millions of Australians, driving people out of work, diners out of restaurants and shoppers out of department stores.

“We are trying to bring employment to a level that is consistent with low and stable inflation,” Ms Bullock said.

According to Jonathan Kearns, a former Reserve Bank economist now at Challenger Investment Management, the central bank regards about 4.75 per cent at the rate at which unemployment does not make inflation worse. It is currently 4.6 per cent.

Which suggests that, unless the universe unexpectedly provides some kind of deflation bonus, Ms Bullock and her colleagues will drive that jobless rate towards 5 per cent.

Too much growth

The Government, credible economists say, is not helping. But spending $22 billion (the equivalent to four or five nuclear submarines) more than it raised last financial year, Treasurer Jim Chalmers is making inflation worse.

Dr Chalmers today repeated his frequent assertion that the Government is helping fight inflation with “responsible” economic management. He also boasted, without any sense of irony, of what he said was Australia’s superior growth to other economies.

Australia’s immediate economic problem is growth — too much of it. Gross domestic product expanded 2.1 per cent last financial year, faster than the Euro zone’s and Britain’s 1.2 per cent and equal to America (where rates are rising too).

The whole point of higher interest rates, which act as a tax on borrowers, is to slow economic growth. Don’t believe me. Ask the Reserve Bank, which on Tuesday explained the strategy for driving down inflation: “To achieve this, growth in aggregate demand needs to remain subdued for a period to reduce capacity pressures and bring inflation back to target.”

After reading this, and the rest of the official statement, the dollar rose about 0.1¢ against the US dollar. It was a sign investors expected interest rates to rise, because higher rates make a currency more popular among global investors.

Fives minutes after Ms Bullock began talking, the dollar began to fall. By 4pm, the currency had dropped about 0.4¢. The message investors heard was, rightly or wrongly: the Reserve Bank is not as committed to inflicting pain on Australians as it might otherwise be.

The inflation fight will take years, giving the Reserve Bank many more opportunities to explain itself clearly. But the central bank’s work is as much psychological as mechanical. If business owners and workers aren’t convinced inflation is slowing, they will keep raising prices or demanding higher wages.

Despite Ms Bullock’s implicit threat that a recession could be necessary, not everyone were persuaded by Tuesday’s performance.