Renters better off than in 2021: RBA’s Bullock

Several economists expect elevated services inflation and a surge in petrol prices above $2 per litre will force the RBA to raise the cash rate as soon as next month, while money markets are pricing in a one-in-three chance of a November rate rise on Melbourne Cup Day.

Ms Bullock rejected a suggestion from an attendee during the question-and-answer session the RBA was behind the curve on inflation.

“I wouldn’t say we are behind the curve, I’d say we’ve been a bit more cautious,” she said. “In Australia, we’ve got variable rate mortgages that have hit households much harder than they’ve hit many other countries”

Ms Bullock said the average household with a mortgage had experienced a significant decline in its cash flow between December 2021 and June 2023 due to the combination of high inflation and rapidly rising interest rates.

Up to 50 per cent of highly indebted borrowers – people whose home loans were at least four times larger than their incomes – were not earning enough money to pay their mortgage and a broad measure of essential expenses such as private health insurance and school fees.

While rents are increasing at their fastest pace in a decade due to a nationwide shortage of homes, Ms Bullock presented RBA research showing renters had actually seen their spare cash flow improve since 2021 due to higher income growth. This is due to lower-income people gaining work and more hours in the hot labour market.

People who owned their home outright were in the strongest position, as they benefited from higher employment and interest income more than offsetting inflation.

“Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing,” Ms Bullock told the Commonwealth Bank global markets conference in Sydney.

“It is possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently forecast.

“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.

“At the same time, the board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy.”

Oil price pain

Ms Bullock said last week she was worried the escalating conflict between Hamas and Israel could keep inflation and oil prices higher for longer, while also triggering a slowdown in global growth.

Volatility in oil markets has increased since Hamas’ initial October 7 attack on Israel, as speculators contemplate the possibility that the US could impose fresh sanctions on Iranian oil exports if the country is officially linked to Hamas’ attack on Israel. Brent crude traded at $US90 a barrel on Tuesday.

While she did not single out the oil price in her speech, Ms Bullock said there were strong grounds for the RBA to respond when there were a series of supply shocks acting in one direction to raise inflation, as is the case at present.

When a shock was short-lived, however, she said the RBA board could look through it.

“When households and businesses have a high level of confidence that the board will do what is needed to return inflation to target, we can afford to look through a greater share of negative supply shocks – even those that will last for a lengthy period,” Ms Bullock said.

“Of course, there are limits here,” she added, saying inflation expectations would shift higher if the RBA permitted inflation to remain outside its target for an extended period of time.

The ANZ-Roy Morgan consumer survey shows inflation expectations jumped to 5.7 per cent in mid-October due to higher petrol prices, up from 4.9 per cent in September.

The RBA does not expect inflation to return within its 2 per cent to 3 per cent target range until late 2025.

Ms Bullock also dismissed a “claim” by some commentators that a tight labour market no longer pushed up inflation, presenting a chart showing the link between low rates of “labour under utilisation” and higher inflation.

“When demand for workers is very strong and the unemployment rate is very low, inflation will be high,” she said.

“It can also become more difficult to acquire goods and services as we need them, as firms struggle with high vacancies and staff turnover.”

She also dismissed speculation that the government’s employment white paper objective, “everyone who wants a job should be able to find one without searching for too long”, conflicted with the RBA’s inflation goal.

She said government policy could influence the sustainable level of full employment over the longer term. “The focus of monetary policy is the short to medium term – a period of between a few quarters and a few years. But governments rightly have a longer horizon when thinking about full employment.”