RBA Won’t “Hesitate” To Hike If Needed

RBA Governor Bullock spoke in Armidale on “Economic Conditions in Post-Pandemic Australia with a Regional Lens”. She reiterated that at the August meeting a rate hike had been “explicitly considered” and that the Board won’t “hesitate” to tighten if it is needed and doesn’t see rates coming down quickly “based on what we know now”. Policy is less restrictive in Australia and so we need to be a bit more “careful”. But if there is a shock overseas and employment and inflation ease, they will cut. But the Board won’t react to one number.

• She noted that services inflation remains high and “sticky” and that as the return to target was pushed out a hike was discussed. The larger gap between demand and supply and its impact on inflation persistence was also mentioned.
• The neutral interest rate is estimated at around 3.5% with real at 1%. Therefore at 4.35% monetary policy is “restrictive”. But the RBA can’t target particular sectors, but it expects current rates to eventually pressure elevated inflation in non-discretionary sectors.
• Productivity growth remains a problem and if it doesn’t improve then 3.5% wage growth will be difficult without adding to inflation.
• The RBA is expecting rate differentials to have more of an impact on the AUD going forward as central bank actions diverge than it has since tightening began post-Covid.
• When asked about fiscal policy, Bullock remained very neutral as she has in the past. She noted that the RBA will use any profits its makes to recapitalise its balance sheet given pandemic-related losses.
• The rest of Bullock’s speech covered the economy in regional Australia. She noted that the regions account for around a third of the population and economy with the agricultural and mining sectors concentrated in these areas.