Public spending is continuing to be a thorn in the Reserve Bank of Australia’s side as it looks to determine its timeline toward interest rate cuts, the governor has said.
Speaking at a Committee for Economic Development of Australia event in Sydney this week, Michele Bullock suggested that while “variable error bands” around the bank’s predicted trajectory made it challenging to anticipate a timeline for rate cuts, consumption could be more easily controlled.
Answering questions on interest rate cuts, Ms Bullock confirmed the bank was poised to respond if public spending fell more quickly than is currently forecasted.
“If consumption in particular doesn't pick up like we're forecasting it, well, it could fall more quickly, and if it does, then the board will be taking that into account and responding,” she said.
Both Black Friday and Cyber Monday sales are likely to drive consumption up for the end of the year, along with the regular spike each December from Christmas spending.
Reserve Bank of Australia governor Michele Bullock says the bank is poised to respond should there been an opportunity for rate cuts. Picture: News Corp Australia
However, Ms Bullock said the bank does not necessarily need inflation back in its 2-3% target range to cut rates.
“We do need to be pretty convinced that we need to have a fair degree of confidence that [2-3%] is where we are heading,” she said. “You don't have to be there, but you have to have a pretty good degree of confidence.
“Our central forecast at the moment is that by the end of 2025 we will be back down below 3% inflation.”
The governor also has addresses criticism in recent months over high interest rates in Australia next to comparable economies.
Interest rates in both Canada and New Zealand have been seen multiple cuts, while the UK, the US and economies in Europe have also felt rate pressures ease since the middle of the year.
“They are lowering interest rates in response to what they're seeing happening in their employment markets,” Ms Bullock said. “These will flow on, and they're seeing it flow on to their inflation rate as well.”
Canada’s inflation Rate is at 2.02%, compared to 1.64% last month and 3.12% last year. In New Zealand, the inflation rate is 2.2% for the third quarter of 2024.
The governor said the bank was holding firm on her long-held argument that Australia remains in a unique position.
“All central banks care about inflation and the potential impact of their policies on the economy and the labour market, but there have been some important differences reflecting the different weights that central banks place on the two objectives,” she said.
“In Australia, interest rates did not reach the same levels of restrictiveness as many other countries and consistent with this, inflation has been somewhat higher relative to target here than in most of those economies.”
She warned the tighter labour market is also continuing to create distinction between Australia and other nations.
“This means that even with a similar approach to setting policy, the time to adjust domestic monetary policy settings can differ from peer central banks,” Ms Bullock explained.
“It’s gradual and slow, but so far, we seem to be trending in the direction,” she added. “Provided we continue along our trajectory, then we will be in a position at some point to consider whether it's appropriate to cut rates.”
The RBA monetary policy committee will meet on 10 December for its final decision on interest rates for 2024. Westpac, ANZ and National Australia Bank economists are forecasting the first cash rate cut for May, while the nation’s largest lender Commonwealth Bank is holding firm on February.
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