Reserve Bank governor Michele Bullock says she doesn’t agree with the International Monetary Fund that Australia (IMF) should be lifting interest rates even higher.
She said interest rates in Australia seemed to be at the right level for now, even if they were slightly lower than in other comparable countries.
She has also reiterated her view that the Albanese government’s amendments to the Stage 3 tax cuts will have little inflationary impact on Australia’s economy.
She said the overall size of the tax cuts wasn’t changing, and the changes the government was making would simply redistribute money to different households than originally planned.
“We don’t see that that’s going to have any material impact at all on inflation or our forecasts,” Ms Bullock said.
‘They’re a bit more hawkish’
Ms Bullock appeared before a parliamentary committee in Canberra on Friday, in her first time as RBA governor.
Earlier this week, the RBA board decided to keep Australia’s cash rate steady for another six weeks, at 4.35 per cent, saying there were “encouraging signs” that inflation was falling as required.
That decision came after the IMF said interest rates in Australia should be “tightened further” to ensure that inflation comes back to target earlier.
The Organisation for Economic Cooperation and Development (OECD) had also recently warned that advanced economies should be keeping interest rates higher for longer this year to be absolutely certain that they have beaten inflation.
Ms Bullock was asked on Friday about those views from the IMF and OECD.
“They’re a bit more hawkish, that’s true,” she replied.
“They have a slightly different view on the balance of risks to us. I think they put a little more emphasis on inflation expectations. [Now] we’re obviously focused on that but our judgement is, at this point, that we’re probably okay in that respect.
“They’re not saying we should have interest rates one or two percentage points higher, they’re just suggesting, I think, that maybe we could go a little bit further,” she said.
Ms Bullock said Australia hadn’t lifted interest rates as high as comparable countries such as New Zealand, Canada, the US, and the UK, but she was happy with how things were sitting at the moment.
She had already said that she was, however, prepared to lift rates again this year if she felt it was necessary.
Changes to Stage 3 tax cuts won’t impact inflation
At another point in Friday’s hearing, Ms Bullock was asked to elaborate on her view of the Albanese government’s changes to the Stage 3 tax cuts.
On Tuesday, in a press conference following the RBA board meeting, Ms Bullock said Treasury modelling had shown that the government’s proposed changes to the Stage 3 tax cuts would have a negligible impact on inflation.
She said the changes would simply redistribute money towards low- and middle-income households, and even though those households would be more likely to spend more of that money than higher income households, it wouldn’t make much difference to inflation.
On Friday she reiterated that point, saying she didn’t expect the Stage 3 amendments to have “any impact” on the RBA’s inflation forecasts in coming years.
“The point with the Stage 3 tax cuts is they’re staying within the [government’s] fiscal envelope, [and] it’s a redistribution,” Ms Bullock said.
“We don’t see that that’s going to have any material impact at all on inflation or our forecasts,” she said.
The annual pace of inflation is currently running at 4.1 per cent in Australia and the RBA wants inflation to be 2.5 per cent.
According to the RBA’s central forecast, inflation is expected to be sitting somewhere around 3 per cent in 2025 and 2.5 per cent in 2026.
Ms Bullock said if things went according to plan and inflation did touch 2.5 per cent in 2026, it would still mean that inflation would have been sitting higher than the RBA’s target range for four years, and that would carry some risks.
“This is the balancing act that the board is focused on,” she told MPs.
“We are trying to bring inflation back to target without slowing the economy more than necessary on the one hand, or risking high inflation for longer on the other hand.
“The board is attempting to bring inflation down while preserving as many of the recent gains in the labour market as possible,” she said.