Australians spend too much, the economy is too strong to cut rates, says Reserve Bank Governor Michele Bullock

Australians are spending too much for the liking of Reserve Bank of Australia governor Michele Bullock, and she’s going to make them pay.

On Tuesday, the central bank’s board kept official interest rates on hold at 4.35 per cent. Even though many Australians are getting smashed by expensive mortgages — thanks to Bullock — the central bank governor said the economy remains too strong to cut rates anytime soon.

“Inflation is still above our target and is proving to be sticky,” Bullock said at a press conference in Sydney after a two-day board meeting. “The message clearly from the board is that in the near term, it does not see interest rate cuts.”

One of the reasons inflation isn’t under control is because home prices keep going up. This makes people feel wealthier, and they spend more. Another reason is a lot of people have moved or returned to Australia since the end of the COVID-19 pandemic.

They’re buying more things than the economy can produce, according to the central bank, which is driving up inflation.

Bullock didn’t even rule out the possibility that interest rates might go higher, although the Reserve Bank’s economists expect inflation to drop to its target of 2-3 per cent by the end of 2025. Once inflation is in that band, the bank can cut rates.

At her press conference, Bullock outlined a fine balancing act: she wants Australians to spend less without triggering a big jump in unemployment.

Some economists see the approach as a cop-out. They believe the Reserve Bank is prolonging Australians’ pain by allowing interest rates to peak below other countries, which are now cutting rates, including Europe, Britain, Canada and the US, which last week cut official interest rates for the first time in four years, and by half a percentage point, which is a lot.

Bullock acknowledged there was another way.

“That could be an alternate strategy: go up really hard; smash the economy .. and be prepared to come back down very quickly,” she said.

But she emphasised that avoiding a jobless spike is a personal priority: “One of the most important things for people to be able to continue to meet their expenses and keep their homes is that they have employment.”

The unemployment rate in August was 4.1 per cent, up from a record low of 3.5 per cent in July, 2022.

Some left-wing politicians and economists would prefer lower interest rates. Government allies, including former treasurer Wayne Swan, have been critical of the Reserve Bank for raising rates 13 times since 2022.

Asked by The Nightly if she felt the central bank’s cherished independence was under threat, Bullock didn’t answer the question.

Treasurer Jim Chalmers has avoided direct criticism of the Reserve Bank, even though political commentators say interest rates are damaging support for the government. After rates were kept unchanged Tuesday, Chalmers claimed the lack of increases since last November was proof of good economic management.

But some economists say federal and state government spending is contributing to a too-hot economy, forcing rates higher than they would otherwise be.

“Now, the fact that interest rates haven’t gone up for the best part of the year, I think is an indication that we have been making welcome and encouraging progress in the fight against inflation,” Chalmers said.

“It’s still higher than we’d like, but it is definitely trending downwards.”

The Coalition’s Treasury spokesman, Angus Taylor, said: “Is this Treasurer so out of touch that he thinks Australians should thank him for keeping interest rates higher for longer?”

Independent economist Saul Eslake said the Reserve Bank looks like it won’t consider cutting rates until February.

“And that’s despite the fact that all of the RBA’s peers … have started cutting rates,” he wrote on his website. “All of them started raising rates earlier than the RBA, and raised them by more than the RBA did.”

On Wednesday, the statistics bureau will publish inflation for August, which may be below 3 per cent. Although that sounds great, Bullock indicated the Reserve Bank will mostly ignore it because one-off factors, including a government energy rebate, have temporarily slowed price increases.