Borrowers hoping interest rate cuts will follow a sluggish growth report will be disappointed as the central bank waits for more progress on inflation.
The economy is slowing yet Reserve Bank of Australia Governor Michele Bullock warns demand for goods and services in the economy is still stronger than the ability to supply them.
“I understand why people would think that as things are slowing, that should be a reason to lower interest rates, but we need to see the results in inflation before we can do that,” Ms Bullock said in a speech on Thursday.
Her remarks followed a meagre 0.2 per cent expansion in the economy in the June quarter and a one per cent through-the-year increase.
Outside the pandemic, the annual rate was the lowest since the 1991 recession.
A subdued reading was expected, with a slower economy an expected consequence of higher interest rates, jacked up and kept elevated to weaken demand and bring down inflation.
Despite the slowing growth rate, demand for goods and services was still elevated, Ms Bullock said.
That was in part because the economy sprung back to life after the pandemic and had held onto some of that strength.
Underperformance on the supply side was also a factor, with productivity growth not where it needed to be.
“It’s the difference between growth rates and levels,” she told the Anika Foundation Fundraising Lunch.
“That’s why inflation is still there.”
Stubborn price pressures and the subsequent prolonged wait for cuts remains a sore spot for the federal government, which has been defending its budget management from accusations of spending too much.
Ms Bullock said federal and state governments were focused on inflation because it was hurting their constituents.
Asked if Treasurer Jim Chalmers was shifting blame to the RBA, the governor had “no comment to make on the comments”.
“He’s doing his job and I’m doing mine,” she said.
The opposition has seized on national accounts data to attack the government, with Shadow Treasurer Angus Taylor warning Labor had its foot in the accelerator while the RBA had its foot is on the brake.
Finance Minister Katy Gallagher said the government had carefully targeted and staged its spending to support the economy without exacerbating the inflation challenge.
“For example, if we hadn’t been investing and providing people with a bit of extra help during this time, those results would have been more difficult yesterday,” Senator Gallagher told ABC TV on Thursday.
Much of Governor Bullock’s speech was dedicated to the dangers of high inflation.
Inflation expectations remained anchored but could not be taken for granted, with a risk interest rates would need to go higher if firms and households came to expect fast-rising prices.
“Ultimately, we would need to slow the economy down by more, which would result in a larger rise in unemployment and higher risk of recession,” she said.
Should inflation stay higher for longer, more borrowers – especially those on lower incomes – would end up in mortgage stress and even forced to sell their homes.
“There is a reason why there is so much talk about the cost of living – high inflation hurts everyone, and especially the most vulnerable.”
