Speaking before the House of Representatives economics committee on Friday, Reserve Bank of Australia governor Michele Bullock admitted that the RBA was slow to respond to rising inflation in the past, a factor that contributed to its decision to implement a rate cut on Tuesday.
“The board doesn’t want to be late,” the governor said.
“Arguably, we were late in raising interest rates on the way up, we didn’t respond as quickly as we should have to rising inflation,” she added, alluding to then RBA governor Philip Lowe’s first cash rate hike in May 2022, which came months after many other central banks had already taken action.
“I think the board has been quite cognisant of the fact … That 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 [inflation target] band, but as we start to get more confidence that we’re coming back to the band,” Bullock said.
The governor also pointed to international comparisons, noting that Australia’s inflation overshoot is similar to that of other central banks when they began introducing interest rate cuts.
“If you look at the experience overseas with other economies, the amount by which we are over our target is about the same as other central banks were when they started to introduce their interest rate cuts,” she said.
The RBA delivered its first rate cut in over four years on 18 February, reducing it from 4.35 per cent to 4.10 per cent.
In her hawkish press conference, Bullock explained that the rate cut essentially reverses the cautious 0.25 per cent increase from November 2023, describing it as an “insurance” measure that the RBA no longer deemed necessary.
“In November 2023 we raised interest rates again ... to the 4.35 [per cent]. We copped quite a lot of criticism of that at the time, and people said ’You’ve overdone it’,” she said.
“We’d taken out a bit of insurance, we’ve removed that now because we think it’s still a prudent move,” she said.
Bullock also fielded a question on Friday regarding the RBA’s fixation on a 2.5 per cent inflation rate, noting that “our target is the midpoint, and the reason our target is the midpoint is it gives us our best chance, with all the uncertainties out there, of staying within the band”.
“If we target 2.7 per cent, why not target 2.9 per cent? The reason being, with the uncertainties around it, you’re much more likely to end up at the top of the band in those circumstances,” she said.
The RBA’s projections suggest that an inflation rate of 2.7 per cent is likely if the bank were to implement two more rate cuts this year and one early next year.
The 2023 RBA review suggested that the central bank focus specifically on the mid-point of the 2 to 3 per cent target band – 2.5 per cent – rather than considering the entire range as its target, as it had done in the past.
Responding also to jobs data, Bullock said that while a tight labour market is a good thing, the real question is, “Is it a little too tight to sustain, to continue to bring inflation back down to the target and sustain there?”
“That’s the million-dollar question,” she said.
On Thursday, data from the Australian Bureau of Statistics revealed seasonally adjusted unemployment rate rose by 0.1 percentage point to 4.1 per cent in January, while employment rose by 44,000 people above the 20,000 expected by economists.
