RBA Will Struggle With Jobs Goal If CPI Stays High, Bullock Says

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(Bloomberg) — Australia’s central bank will struggle to maintain low unemployment if inflation stays above its target level “indefinitely,” Governor Michele Bullock said, in a warning to households and firms that interest-rate relief is still some way off.

In a speech in Sydney, the Reserve Bank chief reiterated that the rate-setting board is alert to upside risks to inflation and that monetary policy will need to remain “sufficiently restrictive” until CPI moves sustainably toward its 2-3% target. Australia’s core inflation has remained well above that band since 2021 and while it has come off a peak, at 3.9% it’s still worryingly high.

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“With underlying inflation having fallen very little over the past year in quarterly terms, the board is vigilant to upside risks,” Bullock said Thursday. “High inflation eventually requires disinflation, which can have long-lasting costs for households through higher unemployment.”

The governor said the RBA board is seeking to balance reducing inflation in a reasonable timeframe and maintaining as many of Australia’s recent labor market gains as possible, with unemployment at a low 4.2%. “Ultimately, though, it is crucial to remember that our full employment goal is not served by letting inflation stay above target indefinitely,” she said.

Bullock’s speech focused heavily on the pitfalls of prolonged periods of high inflation and how the current episode is disproportionately hurting lower income earners and young Australians. She reiterated it must be overcome.

Her message comes as peers from New Zealand to Canada have already begun cutting rates and with the US Federal Reserve expected to embark on its monetary easing path this month. 

Australia remains an outlier, having raised rates by less than counterparts during the 2022-23 tightening cycle to try to hang onto employment gains. The RBA has lifted the cash rate to a 12-year-high of 4.35%, about 1 percentage point below the US.

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Financial markets still anticipate the RBA will begin cutting rates later this year, though central bank officials have pushed back on that pricing.

“It is premature to be thinking about rate cuts,” Bullock said Thursday, reiterating comments from last month’s press conference. 

“Circumstances may change, of course, and if economic conditions don’t evolve as expected, the board will respond accordingly,” she said. “But if the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term.”

Bullock said that current restrictive policy settings were working to bring demand and supply more into balance, though domestic capacity pressures were still keeping prices high.

Key drivers of elevated inflation at the moment are housing costs and market services, she said, highlighting that the latter ran at 5.3% in the year to the second quarter.

Still, data on Wednesday showed Australia’s economic expansion remained tepid in the three months through June as consumers hunkered down in the face of stubbornly sticky inflation. The RBA reckons the second quarter was the nadir of the slowdown, predicting growth will pick up in 2025. 

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Bullock also provided a preview of the RBA’s semi-annual Financial Stability Review which will be released on Sept. 26. The key points were:

• Only a small share of borrowers is currently at risk of falling behind on their mortgage repayments
• For owner-occupiers with variable-rate loans, the RBA estimates around 5% are in a particularly challenging situation, with essential spending and mortgage repayments that exceed their income
• Lower income borrowers are over-represented in the group of people who are really struggling
• Should inflation remain high for longer than the RBA is forecasting, the share of borrowers most at risk of being unable to service their debts would increase a little further, though the numbers aren’t large enough to pose a “material risk” to the stability of the financial system

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