(Bloomberg) -- A year into her term as Australia’s central bank governor, Michele Bullock is facing headwinds on multiple fronts. They’re only likely to intensify.
Bullock and her colleagues on the policy-setting board have split from global peers by signaling Australian rates will stay at a 12-year-high of 4.35% for the time being. That guidance isn’t going down well with a political class that’s entering campaign mode ahead of an election due by May.
The Reserve Bank is accused of prolonging cost of living pressures at a time when the ruling Labor party’s support is waning among voters. Meanwhile, politicians are sparring over amendments to the legislation underpinning the RBA, hampering efforts to modernize the institution.
“It’s very unfortunate the amount of political heat that’s put on the RBA governor,” said Jonathan Kearns, chief economist at money manager Challenger Ltd. and previously a senior official at the central bank. “I don’t think it’s helpful for how the RBA operates. Some of what you get from political parties is just grandstanding to distract attention.”
Earlier this month, Treasurer Jim Chalmers said the RBA’s rate settings were “smashing” the economy. That was slightly ironic given economists reckon government fiscal largess is partly responsible for keeping inflation elevated. Westpac Banking Corp. research shows the increase in new public spending as a share of the real economy is “unprecedented” in both speed and scale.
Bullock has been at pains to avoid weighing in on the impact of fiscal policy on prices, even as the RBA recently pushed back the timeframe for core inflation to return to the midpoint of its 2-3% target to beyond 2026.
Another reason why Bullock isn’t moving in lockstep with global peers is that Australian policy is less restrictive than in other countries. Its labor market is also on a stronger footing than recent rate-cutters like New Zealand and Canada.
The minority Greens party is demanding the government use its emergency powers to force the RBA to cut rates as a condition to negotiate on bills to split the bank’s board, among other reforms.
The Greens’ call “is a straight out bombardment of the notion of an independent central bank,” said Bernie Fraser, RBA governor from 1989-1996 who oversaw the introduction of inflation targeting in Australia.
During her post-meeting press conference on Tuesday, Bullock was asked how she was feeling about RBA independence. The governor played it straight, saying she wasn’t “focused on what other people are saying about the RBA board.”
Bullock was also questioned about political pressure and whether that was discussed at this month’s meeting. “I’ll stay out of the politics,” she responded.
“The RBA is trying to communicate something very nuanced and the political noise isn’t helping,” said Philip Brown, head of research at FIIG Securities in Melbourne. He added that the criticism of the RBA is increasingly less respectful, partly due to its past policy missteps.
Philip Lowe, Bullock’s predecessor and the only governor in a generation not to be reappointed, said the attention on policy in Australia is greater than in the rest of the world.
“The intense political/media focus on interest rates in Australia means that providing forward guidance that later needs to be changed is more difficult here than elsewhere,” he said by email.
Rates traders said Bullock’s press conference jarred with the RBA board’s post-meeting statement on Tuesday, leading to an unintended drop in short-term government bond yields. Responding to a question, Bullock said the board had not “explicitly” considered a rate rise scenario — the first time since March that a hike wasn’t on the table — prompting some in the market to interpret the RBA as softening its hawkish stance.
“The governor said far more than was probably necessary,” said Sean Keane, chief Asia-Pacific strategist for JB Drax Honore. “The more she spoke the more that short-end interest rates fell.”
Overnight indexed swaps now imply a greater than 70% chance of a rate cut in December, up from 50-50 odds shortly before Bullock’s press conference.
Australia’s hot housing market is another factor in the RBA keeping a hawkish tone. A rate cut at the start of the key spring sales season would further fuel a rally in prices which are already at record highs. The RBA doesn’t target home prices but ensuring financial stability is part of its mandate.
Some argue the central bank would have been in a position to lower rates now had it gone harder during the 2022-23 tightening cycle. Instead, it chose to run an experiment to preserve employment gains while fighting inflation.
“If the 2026 Australian economy is just the same, or better than peers, the RBA will deserve to be feted in the annals of central bank history,” FIIG Securities’ Brown said. “And it might well happen.”
--With assistance from Matthew Burgess and Ben Westcott.
©2024 Bloomberg L.P.
