RBA governor says bank was too late to hike interest rates
By Millie Muroi
Reserve Bank governor Michele Bullock has admitted the bank was too late to hike interest rates during the recent inflation surge and the bank cut rates this week to avoid being slow to respond a second time.
Appearing before a House of Representatives economics committee hearing on Friday, Bullock said the RBA was arguably too slow to raise interest rates from emergency lows when inflation – which reached 7.8 per cent at its peak in December 2022 – started taking off earlier that same year.
RBA governor Michele Bullock.Credit: Alex Ellinghausen
“We didn’t respond as quickly as we should have to rising inflation,” she said.
The cash rate had been lowered to a record low of 0.1 per cent in November 2020 to bolster the economy during the pandemic. But the RBA’s pivot towards lifting rates came months after many other central banks had started doing so.
RBA governor Philip Lowe, who was helming the bank at the time, raised the cash rate in May 2022, just before that year’s federal election, as a surge in spending and global supply chain issues fuelled inflation.
Bullock said the RBA’s delayed response to that bout of inflation was on the board’s mind this week and that it didn’t want to be late to move again.
“I think the board has been quite cognisant of the fact … that if we’re going to start reducing interest rates, then we need to be thinking of doing it not when we are already back in the [inflation target] band, but as we start to get more confidence that we’re coming back to the band,” she said.
On Tuesday, the RBA cut interest rates for the first time in more than four years after recent data showed annual inflation had fallen to 2.4 per cent in the December quarter.
Bullock said while there was “active debate” about the decision among board members this week, it ultimately reached a consensus decision to cut rates because of broad signs of easing inflation.
However, on Friday, Bullock repeated the RBA’s position that further rate cuts would only come into play if there were more progress on inflation, and that it would be keeping a close eye on the unexpectedly strong labour market as a potential sign of continuing price pressures.
While Bullock refused to answer a question at her press conference earlier in the week about the impact of government policies on the board’s calculations, on Friday she said the budget surpluses banked by the Albanese government in its first two years had been helpful in dampening inflation.
“It was helpful that there were those surpluses there because, at the time, the pressure on the economy, the pressure on the supply side of the economy from the massive increase in demand, was evident in inflation,” she said.
The government is now forecasting a deficit of $26.9 billion for the current financial year.
Asked about the future of cash, Bullock gave notes and coins a 10-year prognosis, labelling the decline in physical currency “inevitable” and saying nothing would turn around the race towards digital payments.
“Cash is going to be around probably for another 10 years,” she said, noting both customers and businesses found electronic payments much more efficient, and that the cost of handling cash – including theft costs – were higher than accepting card payments.
“It’s costly in terms of all the back office costs, counting it, taking it to the bank, particularly if you haven’t got a branch anywhere near you,” she said.
Cash usage in Australia has plunged from 70 per cent in 2007 to 13 per cent in 2022, expedited by the pandemic.
In June last year, Armaguard received $50 million of funding from the big banks, retail giants and Australia Post to shore up the distribution of banknotes and coins. However, the funding runs out in June.
While the government last year pledged to force businesses to accept cash when selling essential items, Bullock said the cost of distributing cash would ultimately have to be footed through some form of subsidy, and that longer-term thinking was required to move to a new system.
“The bottom line of cash distribution is … if you don’t want the consumers to pay, then someone has to pay,” she said. “I think the idea that people pay to use cash would not go down well. So that means that in order to make this particular situation viable, someone is going to have to cross-subsidise consumers using cash.”
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