An inflation rate with a four in front of it “isn’t good enough”, the Reserve Bank governor says as she defended the possibility of more rate rises this year.
Michele Bullock appeared before the House of Representatives economics committee in Canberra on Friday, days after the board decided to keep the cash rate steady at 4.35 per cent.
She conceded that high inflation was “still a challenge”, as were ongoing cost-of-living pressures, but warned that pre-emptively lowering interest rates could have drastic ramifications.
“The board understands that rising interest rates have put additional pressure on households that have mortgages,” she 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.”
She said that while inflation seemed to be moderating at a faster pace than expected – down to 4.1 per cent in the December quarter – the challenge “isn’t over”.
Ms Bullock emphasised the RBA was aiming for the middle of the 2 to 3 per cent inflation target, in line with a new agreement with Treasurer Jim Chalmers.
“The new statement on the conduct of monetary policy endorses this, but it makes it more explicit that we should be aiming for the middle of the range which is 2.5 per cent. So we still have some way to go before we meet our target,” she said.
The central bank expects the midpoint to be reached by mid-2026.
“Inflation will still have been outside the target range for four years. The longer inflation remains high and outside the target range, the greater is the risk that inflation expectations of households and businesses will adjust higher,” Ms Bullock said.
“If that happens, then the risks of inflation becoming entrenched at a higher level will rise.”
