Reserve Bank of Australia (RBA) governor Michele Bullock
RBA Governor Michele Bullock has appeared before a federal parliamentary committee. Image by Lukas Coch/AAP PHOTOS
  • economy, business and finance

RBA says productivity, conflicts cloud inflation path

Poppy Johnston February 9, 2024

Inflation remains unfinished business in the Reserve Bank of Australia’s books.

Sluggish productivity growth and conflicts in the Middle East and Ukraine lurk as potential risks that could keep inflation high, RBA governor Michele Bullock told a parliamentary hearing on Friday.

At the same time, there are reasons to fear a deeper economic slide, including a weaker consumer and China’s troubled property market. 

The central bank started lifting interest rates in 2022 when inflation was rising quickly.

Economic data suggests the tightening cycle is working and a softer December quarter inflation print has fuelled hopes of an end to hikes and directed the conversation towards the timing of cuts.

Ms Bullock would need to be “very confident” in the inflation outlook before easing rates, she said, but the key price measure did not have to be within the two-three per cent target range before cuts could start.

With uncertainty still clouding the path forward, the RBA has kept further interest rate hikes on the table.

But when asked for her opinion on calls from the International Monetary Fund and others to lift interest rates higher, the governor conceded “they’re a bit more hawkish”.

“They have a slightly different view on the balance of risks to us and I think they put a little bit more emphasis on inflation expectations,” Ms Bullock said. 

MIchele Bullock
 The RBA governor warned rates would not fall until the bank had confidence in the inflation outlook. Image by Lukas Coch/AAP PHOTOS 

Several committee members queried Ms Bullock on sluggish productivity growth, which has been flagged as a risk to the inflation outlook. 

Wage increases in the absence of productivity growth mean businesses are producing less output with the same amount of input, keeping upward pressure on the prices firms want to charge to maintain profit margins.

Ms Bullock said there were good reasons to expect productivity growth to recover, including an uptick in business investment. 

The pandemic could also explain much of the recent weakness in productivity growth and should eventually drop out of the longer-run trend. 

Ms Bullock said a failure to kickstart productivity growth could push out the planned timeline to return inflation to target.

ANZ head of Australian economics Adam Boyton and his colleagues said communication from the RBA over the week had been “a little more hawkish than the market expected”.

At the same time, the central bank’s updated economic forecasts were “arguably a little more dovish” given its inflation predictions were built on an assumption the cash rate eases to 3.4 per cent by the end of 2025. 

“We think the board will want to be very confident that inflation is coming back to the band in a sustainable fashion before changing its rhetoric,” ANZ’s note read.

Ms Bullock traversed a range of other topics at the hearing, including her views on price gouging.

Firms in several industries, including electricity and aviation, have been accused of leveraging a lack of competition to charge excessively high prices in a report by former Australian Competition and Consumer Commission chair Allan Fels.

Ms Bullock said she was not “personally qualified” to talk on the subject but if a lack of competition was impeding normal dynamics between supply and demand and the subsequent price response, then “that’s an important thing for the ACCC to be looking at”.