Interest rate rises replace cuts on Michele Bullock's RBA agenda

Those of us who watch central banks spend many hours trying to read the tea leaves to divine the thoughts and plans of the technocrats who set interest rates.

We were busy doing it when the Reserve Bank board released its post-meeting statement, which contained familiar obfuscations, such as:

"The recent data suggest the risks to inflation have tilted to the upside" and "the board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions".

Early views were that the RBA had shifted in a "hawkish" direction, where the possibility of rate rises was now on the table, but further rate cuts hadn't been ruled out.

Then, just an hour later at her press conference, Michele Bullock threw out the teapot.

"It does look like additional cuts are not needed," the RBA governor boldly declared.

"The private economy is recovering; it's taking over from public demand."

And, if that answer left any doubt, the governor's answer to a question from my colleague David Chau left none.

"So what's the more probable outcome for next year? Interest rates going down or interest rates going up?" he asked.

After saying that she doesn't like "probabilistic statements", Bullock replied with far more certainty, at least as far as one option was concerned.

"I don't think there are interest rate cuts on the horizon for the foreseeable future," she declared.

"I couldn't put a probability on those, but I think they're the two things that the board will be looking closely at coming into the new year."

Not since her predecessor Philip Lowe infamously declared in late 2020 and through 2021 that the board did not expect to raise interest rates until at least 2024 has an RBA governor been quite as explicit in their outlook for rates.

'Door has been opened' to February rate hike

Economists scrambled to adjust their forecasts to the governor's rhetoric.

CBA's head of Australian economics, Belinda Allen, concluded: "The door has been opened for a rate hike as early as February based on the press conference." Although she still doesn't expect the RBA board to walk through it.

AMP's veteran chief economist Shane Oliver bet on the extended hold option.

"On balance, we expect to see the cash rate remain at 3.6 per cent in 2026, with the swing back to rate hikes more a story for 2027," he wrote.

Westpac's economists, led by the RBA's former chief economist Luci Ellis, are still forecasting two more rate cuts, but not until mid-2026, when they believe it will become clearer that the current spike in inflation was just temporary.

But their confidence in that forecast was shaken by the governor's words.

"Following Governor Bullock's comments in today's press conference, the probability of a rate hike has risen," they noted.

"This would be dependent on persistence of the current re-acceleration in inflation.

For its part, the wisdom of the market suggests that a February rate rise is about a one-in-three chance, but a move up by June is fully priced in, with two rate rises by the end of next year expected.

If analysts and the market have got it wrong, Bullock's deputy Andrew Hauser will have a chance to set them straight when he speaks with me for ABC News on Wednesday next week, in the bank's last public appearance for the year.

A rate rise isn't all bad news

As much as borrowers may be disappointed by the rate cut option falling off the table, at least for now, the news isn't so bad economically.

Interest rates seem high to many borrowers based on recent history, but you don't have to go back to the days of 17 per cent-plus mortgages in the late 1980s and early 90s to see that the current cash rate is far from punitive.

While it took a pandemic to get the cash rate close to zero, it was already at unusually low levels below 3 per cent for many years before that.

That was the era described by leading Australian economist Ross Garnaut as the nation's "dog days", our equivalent of the lost decade, when the economy sputtered along, productivity growth collapsed and real wages stagnated even though inflation consistently missed the RBA's 2-3 per cent target on the low side.

In this era, unemployment was consistently stuck above 5 per cent.

In many ways, the pandemic — and stimulus associated with it — was a circuit breaker to this low-growth trajectory.

What the Reserve Bank has been trying to do is engineer a reduction in the inflation that stimulus and supply disruptions caused, but without exiling the economy back into the dog house.

Bullock still believes it's on track to achieve that aim.

The almost inevitable consequence of that stronger economy is higher interest rates.

"We didn't go as high as other countries, so we possibly had not as far to come back as other countries," she observed.

The reality appears to be that, from here, it's likely to take some pretty bad news for the economy to see further rate cuts.