RBA’s Bullock makes race day rate call

New Reserve Bank of Australia (RBA) governor Michele Bullock has raised interest rates to 4.35 per cent.

In her second monetary policy meeting, Bullock opted to raise rates by 25bps. 

On 3 October, Bullock held rates at 4.1 per cent, her first rate decision as the RBA governor. This was the fourth consecutive meeting which left the policy rate unchanged, following Philip Lowe’s final meeting in September which saw another rate hold.

In a statement, Bullock commented: “Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago.

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"While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe."

Prior to the rate decision, nearly 70 per cent of experts and economists were certain of a cash rate jump, according to research site Finder. 

“The effects of previous hikes are only starting to take effect, so another rate rise could spell disaster for many homeowners,” remarked Graham Cooke, head of consumer research at Finder.

Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy, predicted the rate to rise by 25 basis points to 4.35 per cent. 

“Governor Bullock will likely try to pitch the decision as largely precautionary in nature,” he commented. 

Paul Bloxham, chief economist at HSBC Australia, echoed this forecast for November and described the RBA as being in ‘calibration mode’.

“The past month has seen more evidence that although inflation is falling, it may not be falling fast enough. At the same time, although the jobs market is loosening, it, too, may not be loosening fast enough,” he said.

“Overall, the economy is headed in the right direction for the RBA to achieve its inflation mandate, but it does not appear to be moving in that direction as fast as the central bank had been forecasting.”

Bloxham described a follow-up hike in December as unlikely, while a rate rise in February 2024 could be probable. 

Emma Lawson, fixed income macroeconomics strategist at Janus Henderson, also expected a rate of 4.35 per cent following Tuesday’s meeting.

“The RBA are cognisant of the pressures building in the economy, but they cannot ignore the persistent inflation pressure. We see them holding the cash rate at contractionary levels until September 2024 before commencing a modest easing cycle” she remarked. 

Bullock took over the role of governor from Lowe on 18 September, having been appointed by Prime Minister Anthony Albanese in July. A deputy governor to replace her previous role is due to be appointed in due course and Treasurer Jim Chalmers has said he expects to announce a name before the RBA’s December monetary policy meeting on 5 December.

In an interview with the ABC, Chalmers said: “We have been interviewing a number of candidates from the shortlist - some internal, some external, some from Australia and some from overseas.

“We’ve got some more due diligence to do and I want to make sure that I take it to the Cabinet colleagues in the course of the next month.

“We’ve been consulting very, very closely with Michele Bullock because we need to make sure that the deputy is someone who can work closely with her but also complement of these other appointments that she will make.”

The Treasurer also announced his plans on introducing legislation for the Reserve Bank Review, which made 51 recommendations for the bank earlier this, in the last week of November.

“It has come after a long period of consultation with the Reserve Bank, with the Opposition and with others. And there's been I think a really welcome public debate about the recommendations of the review that I released early in April. That's been a good thing. 

“And so we've taken into consideration all of that feedback, all of that consultation and collaboration. And what people can expect to see in the RBA Review legislation is keeping faith with the recommendations of the review but there have been a couple of instances where after that consultation and collaboration, we think we've got a better way to land the spirit of the review,” Chalmers said.