The Reserve Bank governor, Michele Bullock, has said that Labor’s redesigned stage-three tax cuts will not have a material impact on inflation.
During three hours of questioning, in her first appearance before the parliamentary economics committee, Australia’s first female governor was circumspect when questioned over the direction of interest rates, although she left the door ajar for further rises.
These are five important takeaways from her responses to the committee on Friday.
1. Tax cut changes aren’t inflationary
The RBA has long included the stage-three tax cuts in its forecasts, and does not see Labor’s recently announced changes as having any significant impact on its fight to lower inflation.
“The point with the stage-three tax cuts is that they’re staying within the fiscal envelope,” said Bullock.
“It’s a redistribution, and we don’t see that that’s going to have any material impact at all on inflation or our forecasts.”
Labor’s changes will pass parliament after the Coalition agreed to the reform that redistributes benefits to low and middle-income earners.
2. Interest rates could go higher
The RBA left its interest rate unchanged at 4.35% earlier this week, raising hopes that borrowing costs have peaked.
While inflation has been falling, it remains well above the 2% to 3% band the RBA is targeting.
On Friday, Bullock refused to rule out further rate hikes, even as parts of the wider investment community have already priced in interest rate cuts this year.
“At this stage, the board hasn’t ruled out a further increase in interest rates, but neither has it ruled it in,” Bullock said.
Like her predecessor, Bullock acknowledged the pain caused by increasing borrowing rates, but said high inflation was worse.
“The board understands that rising interest rates have put additional pressure on households that have mortgages,” Bullock said.
“But the alternative of lower interest rates and high inflation for a prolonged period would be even worse for these households, as well as all the households without mortgages.”
Inflation last ran hot in Australia in the 1980s, with an annualised rate of more than 8%, before the start of the recession in late 1990 led to a quick drop.
3. Rates could fall before inflation target reached
Australia’s inflation rate has retreated to a two-year low of 4.1%, although it sits well outside the RBA’s intended destination, the midpoint of the target band which is 2.5%.
Bullock said that doesn’t mean inflation needs to hit that target before rates are cut.
“Do we have to be in the band at 2.5% before we think about doing that? No, I don’t believe we do,” Bullock said.
“But we do need to be very confident that we’re going to get there as we start to remove the restrictive nature of policy.”
4. RBA is neutral on price gouging claims
The RBA previously dismissed any role that profiteering played in fuelling inflation, citing data that it said showed corporate profits were unremarkable outside the mining and energy sectors.
Bullock, who became governor in September, took a more neutral stance on Friday.
“I’m not sure we’re in a position to make a judgment on that, all we can really observe is what’s happening with prices,” Bullock said in response to questions on whether price-gouging was lifting inflation.
She said that if people believe businesses are able to increase prices because they are not under competitive pressure, then it’s a worthy issue to investigate.
“If a lack of competition is impeding that, then that’s an important thing for the ACCC to be looking at,” said Bullock, referring to the Australian Competition and Consumer Commission.
An ACTU report by the former competition watchdog Allan Fels released this week found that Australians are continuously overcharged by major corporations enjoying scant competition, resulting in higher inflation and intensifying cost-of-living pressures.
Australia’s major supermarkets are subject to state and federal parliament inquiries, and a 12-month investigation by the ACCC.
5. Australians to have say over $5 note design
The Reserve Bank will be taking public feedback on a redesign of the $5 note over the coming months.
Bullock told the parliamentary committee the central bank wants to “honour and celebrate the culture and history of First Nations peoples” with the banknote’s appearance.
“As a first step in determining the design we will be asking members of the public over the course of March and April to share with us what they think should be on our $5 banknote,” Bullock said.
“In recent weeks, we’ve also begun visiting First Nations community organisations in key regional and remote locations across Australia and the Torres Strait, and we’re doing that to engage with local communities about the theme nomination process.”
