Bullock squares up for inflation fight in first speech

Tellingly, it took Bullock only two minutes to refer to her predecessor Philip Lowe and his warning that high inflation inevitably led to higher interest rates and unemployment.

So, quickly raising the cash rate to 4.1 per cent and potentially going again is a short-term pain, long-term gain: it is best for all of us in the RBA’s eyes. The bond market has got the message loud and clear, predicting one more rate rise in the coming six months before a cut late next year.

Bullock’s 20-minute maiden speech was delivered to a room of about 200 bankers, asset managers and Australian company executives in Sydney on Tuesday night, gathered for a conference organised by Commonwealth Bank of Australia. They spent two days talking about Bullock and the economy, before the governor herself had her say.

Her speech was also delivered on the eve of an important economic data point, Australia’s quarterly inflation, where economists are tipping a 1.1 per cent rise in prices for the three months to September 30, on both a headline and trimmed mean basis. That’s well above the RBA’s targeted 2 per cent to 3 per cent annual range.

But as Bullock also made clear in her speech, it is inflation expectations that are as important as last quarter’s price increases.

She said that when households and businesses believe the RBA will do what is required to keep (or return) inflation to its targeted range, it can put up with things like soaring energy prices or natural disasters that can hit both inflation and jobs. The balancing act is that the longer inflation is outside the targeted range, the more likely it is that households and business’ expectations will shift.

As for the Australian dollar, which was trading at US63.7¢ late on Tuesday, she said it had been reasonably stable in the past two years in trade-weighted terms. And as the RBA board told us in its October minutes, it is that trade-weighted exchange rate that is the relevant measure for imported inflation in Australia.

Wednesday’s CPI is the next data point to watch, while Bullock will front up to a Senate estimates hearing on Thursday, where she is sure to be quizzed about interest rates, jobs, inflation and just about anything else you can think of in the domestic economy.

Of course, it is a great time to be an RBA watcher. Joining us on the outside is Luci Ellis, who was assistant governor of the bank’s economic department until a fortnight ago, and is now Westpac’s group chief economist.

Ellis told clients on Friday that the RBA had four near-term inflation worries: goods prices not unwinding quickly enough, domestic demand and services price inflation, labour costs, and energy costs. Of those, she said the steady increase in domestic demand and services price inflation was concerning, while the heat had come out of labour costs and goods prices. Energy is mixed – electricity prices have settled, while oil is one to watch.