MNI: Fresh Forecasts To Dictate RBA's Nov Decision - Bullock

The Reserve Bank of Australia board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation, RBA Governor Michelle Bullock noted in her first public speech on monetary policy.

Speaking in Sydney Tuesday, the newly installed governor said the RBA board will have a range of fresh data and forecasts when it meets on Nov 7, which it will consider closely. “At the same time, the Board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy,” Bullock added.

The RBA board held the cash rate steady at 4.1% on Oct 4, its fourth consecutive pause. (See MNI RBA WATCH: New Governor Points To Oil Prices) However, the accompanying statement -- Bullock’s first as governor -- took a decidedly hawkish turn compared to past communications sent by former Governor Philip Lowe, according to market participants.

TRADE-OFFs

Bullock’s speech, Monetary Policy In Australia: Complementarities and Trade-offs, noted the Reserve board often struggled to balance its objectives between price stability, full employment and maintaining financial stability.

She noted, despite public debate to the contrary, the Reserve’s mandates were often complimentary. “Over time, low inflation and full employment go hand in hand,” she said. “Low and stable inflation is a prerequisite for strong and sustainable employment growth because it creates favourable conditions for households and businesses to make decisions about how to use their resources.”

The RBA Review, which published its findings earlier this year, called on authorities to focus the Reserve’s objectives on price stability and full employment. (See MNI Brief: Panel Reviewing RBA Tables Report)

The government has also recently sought to redefine full employment, however, Bullock this did not conflict with how the RBA views the metric. She did not give an updated view on the non-accelerating rate of unemployment and noted putting an exact target on full employment would "be unwise".

"For one, full employment can change over time, as the structure of our economy evolves. It is also not a concept that can be directly measured. And it cannot be comprehensively summarised by a single statistic such as the unemployment rate.

On the RBA’s goal to pull inflation back to its 2-3% target by mid-2025, Bullock noted raising the cash rate higher to fight price rises faster risked higher unemployment. “As such, the Board judged that, at that time, the costs outweighed the gains from restoring inflation to target quicker,” she noted, adding the board had low tolerance for allowing inflation to return to target more slowly than expected.

“Accepting this would risk eroding public credibility in our commitment to low and stable inflation. And as I have discussed, the long-term costs to the economy if that were to happen would be considerable.”

EXCHANGE RATE

Bullock also noted the Australian dollar had remained stable over the last two years on a trade weighted basis. “While the exchange rate remains an important channel of monetary policy transmission, recent stability in the trade-weighted exchange rate has meant it has not played a large role in recent monetary policy decisions,” she said.