Michele Bullock, the Reserve Bank governor, stated that the redesigned stage-three tax cuts by Labor will not significantly impact inflation. During her first appearance before the parliamentary economics committee, Bullock was cautious when discussing the direction of interest rates, leaving the possibility of further increases open. Here are five key 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. Bullock stated, “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. She acknowledged the pain caused by increasing borrowing rates but said high inflation was worse. Inflation last ran hot in Australia in the 1980s, with an annualized 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.