(Bloomberg) — Australia’s central bank is conscious of the high economic cost of above-target inflation and won’t hesitate to raise interest rates again if needed — though its assessment remains that this may not be required.
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“Even though the risks are balanced, the cost of higher inflation is something that we’ve got in mind,” Reserve Bank Governor Michele Bullock told a senate panel on Wednesday. “So if it did seem that there’s a shift to the upside then we’re very conscious that costs of that are much higher.”
Bullock reiterated that it was “really important” for the rate-setting board to bring inflation back to its 2-3% target. “And if it doesn’t look like it’s getting there then we’ll have to take action.”
The remarks come after Australia’s inflation came in hotter than expected in the first quarter while price gains quickened in April to 3.6%. Overnight-indexed swaps are currently predicting a rate cut in the first-half of 2025.
While Bullock’s comments sounded hawkish, economists say the bar for further hikes remains high, predicting an easing cycle will begin late this year as economic activity weakens markedly.
Data released after the testimony showed Australia’s A$2.3 trillion ($1.5 trillion) economy all-but stalled in the first three months of the year. Bullock had predicted that GDP growth would be “low,” adding that household spending in the economy is “very, very weak.”
Even though the GDP weakness had been anticipated, the quarterly slowdown to 0.1% growth, from 0.3% in the final three months of 2023, may still concern policymakers. Indeed, the annual result was the weakest, outside the pandemic, since early 1992, when Australia was emerging from a recession.
When asked if the economy was showing signs of stagflation, Bullock pushed back, pointing out the jobless rate is still below the RBA’s assessment of full employment even as labor market participation remains near record highs.
The governor said the RBA could bring inflation down quicker by raising rates further, but reiterated that the board has chosen to do so more slowly in a bid to ensure the economy keeps chugging along. However, she refused to rule out another hike.
“If inflation doesn’t come down then we have an issue and the board won’t hesitate to act if it feels that inflation isn’t coming down or it’s not coming down quickly enough or inflationary expectations are starting to rise,” she said.
The RBA chief said the impact on underlying inflation of energy rebates announced in the government’s budget is unlikely to be significant. Bullock also said she doesn’t expect consumers to boost spending as a result of the savings on their power bills.
In describing the board’s rate-setting strategy, the governor said there was a “plan A” which is to remain data driven and “not rule anything in or out.” Then there are two “Plan Bs” — one in which inflation remains stubbornly high and another where the economy deteriorates more.
If it turns out that inflation is starting to head higher again or it’s much stickier “then we won’t hesitate to move and raise interest rates again,” Bullock said. “In contrast, if it turns out that the economy is much weaker than expected and that puts downward pressure on inflation then we’ll be looking to ease.”
The rate-setting board next meets on June 17-18 when no change in policy is expected.
Ahead of that, policymakers will get a chance to assess another round of labor market data next week. On Friday, markets will hear from new RBA Deputy Governor Andrew Hauser — formerly at the Bank of England — as he speaks on Australia’s economic outlook at a conference in Sydney.
(Updates with Q1 GDP, further comments.)
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