RBA Governor Michele Bullock denies interest rate cut was result of Government pressure

Reserve Bank Governor Michele Bullock has used to her testimony to Parliament’s Standing Committee on Economics to scotch suggestions that this week’s interest rate cut was a “lay-down misere” as a result of Government pressure.

Following the 0.25 per cent cut on Tuesday, many commentators leapt on the RBA’s “hawkish” tone as a sign it was cutting rates sooner than necessary, pointing to the forward estimates of inflation at the top of the bank’s target band and Ms Bullock’s statement that market forecasts for further rate cuts were overly optimistic.

Rejecting that conclusion, Ms Bullock said the bank’s board was instead highly attuned to the timing effect of interest rate cuts, pointing to the fact the RBA was one of the last central banks to raise rates in response to inflation driven by the pandemic and the war in Ukraine.

“Arguably we were late raising interest rates on the way up, we didn’t respond as quickly as we should have to rising inflation,” Ms Bullock told the committee.

She pointed the the better than expected inflation data in December, and the fact that wages were “well behaved” as giving the Bank enough confidence to act and get in front of the lag effect of rate movements.

“If we’re going to start reducing interest rates, then we need to be thinking of doing it not when we are already back in the band, but as we start to get more confidence we’re coming back to the band,” she said.

She also rejected the suggestion, made by Queensland Liberal National MP Garth Hamilton that the introduction of cameras to record Board deliberations was part of a public relations exercise.

“Quite a few commentators took the view that the photos were, I guess, evidence of the rate cut being confirmed leading into it. But did you consider that as a risk, and how that might be perceived?” Mr Hamilton asked.

“No, because we hadn’t made a decision,” Ms Bullock replied, saying the decision to introduce media into the board room was the Bank’s alone.

Speaking to reporters, Opposition Leader Peter Dutton said Ms Bullock had done an “exceptional job” as governor, while underscoring the central bank’s independence.

“Everyone’s 20/20 with the benefit of hindsight and no doubt the bank, if they believe that they’ve made mistakes in the past, they’ll learn from that so that they can get it right into the future,” he said.

Ms Bullock continued to assert that the Bank would be “data-driven” in the next rate cut, explaining that it was treading a so-called “narrow path” between keeping inflation in check or overly stimulating the economy.

She told the committee that the Bank was using market signals of a further 0.75 to 1 per cent of future interest rate cuts in their inflation modelling. That modelling showed an inflation rate higher than the 2.5 per cent target the RBA was aiming for.

Deputy governor Andrew Hauser said if the bank cut rates to the degree markets had forecast, the inflation target would not be met.

“We’re not saying that’s our preferred path, we’re saying that if it followed that path, we would not achieve our target,” Mr Hauser said.

Keeping rates on hold however, was seen as a worse option.

“If we kept the interest rate where it was for the foreseeable future, it’s highly we’d be putting too much downward pressure on inflation (and it) would be starting to come through the bottom of the band,” Ms Bullock said.

“The board decided in the end that taking off just 25 basis points and then sitting and waiting for more data was the best thing to do. It was a recognition that some of the indicators at least, were coming in for us slightly softer and good news for inflation.”

Ms Bullock said that it was lower income renters who had borne the brunt of the impact of inflation and said that “group often gets forgotten and I just want to make sure that people understand they are people that have really been hurt very hard.”

She also warned that despite the reduction in inflation growth, the 18 per cent rise in prices seen since the start of the pandemic-induced cyle were here to stay.

“The unfortunate news is that the price level doesn’t go back. We can get inflation down to stop it increasing quite so quickly in the future, but the price level isn’t going back to where people remember it being a few years ago,” she said.

Wages would have to do the work instead.

“I don’t expect it will start feeling better immediately, but I think if we can keep inflation back down in the target band and real wages are rising, I think people will start to feel a bit better over the coming year,” she said.