Reserve Bank boss Michelle Bullock mocks Treasurer Jim Chalmers with three cutting words

Reserve Bank chief Michele Bullock has openly mocked Treasurer Jim Chalmers by suggesting she could hypothetically ‘smash the economy’ with more rate rises.

The cash rate was left on hold at a 12-year high of 4.35 per cent on Tuesday, despite the US, UK, Canada, EU and New Zealand already cutting rates this year.

But Ms Bullock has weaponised Dr Chalmers’s critique of the most aggressive rate rises in a generation, just three weeks after the Treasurer accused the Reserve Bank of ‘smashing the economy’.

‘That could be an alternative strategy which is go up really hard, smash the economy – to use a term – and then come back down, be prepared to come back down very quickly,’ she told reporters on Tuesday, who responded with laughter.

Dr Chalmers earlier this month claimed the RBA’s rate hikes had significantly slowed the economy, ahead of official data showing Australia’s annual growth pace of 1 per cent in 2023-24 was the slowest since 1991, the year of a recession, outside of a pandemic.

‘With all this global uncertainty on top of the impact of rate rises which are smashing the economy it would be no surprise at all if the national accounts on Wednesday show growth is soft and subdued,’ he said.

The Treasurer is still committed to boosting the RBA’s independence and wants to remove the government’s power to overrule the Reserve Bank on interest rates.

The policy has never been used since the Reserve Bank of Australia was established by law in 1959 but the Greens will only back Labor’s RBA reforms in Parliament if it forces the central bank to cut rates.

Treasurer Jim Chalmers (pictured in Toowoomba on Tuesday) held a press conference 30 minutes before the RBA boss

Ms Bullock has also suggested the federal government’s $300 energy rebates, that came into effect on July 1, would do little to bring down underlying inflation – the RBA’s preferred measure which determines monetary policy.

This was despite an expectation monthly inflation data for August, due out on Wednesday, would show a reduction in headline inflation to a level within the RBA’s 2 to 3 per cent target.

‘That’s going to lower energy prices, fuel prices have also come down in recent months so, it could well be on current forecasts that the headline inflation rate in fact comes in – 12 month ended – below 3 per cent,’ the RBA governor said.

‘That is important because it’s reflecting cost-of-living relief so it is reflected in the prices that people are seeing.

‘But it’s not really reflective of the underlying inflation pulse which is more, what are we observing happening with services really, which is the crux of the matter.’

The RBA board emphasised its preferred underlying inflation measure, known as the trimmed mean, would be unlikely to fall under 3 per cent until the end of 2025

Underlying inflation, stripping out volatile price movements, was 3.9 per cent in the year to June, putting it way above the RBA’s 2 to 3 per cent target.

‘Inflation is still above our target and it’s proving to be sticky,’ Ms Bullock told reporters on Tuesday.

Ms Bullock (pictured) has also suggested the federal government’s $300 energy rebates, that came into effect on July 1, would do little to bring down underlying inflation

‘Progress in getting underlying inflation down has slowed and it’s likely to have remained slow in the September quarter.

‘It’s not really forecast to come back sustainably into the band until 2026.’

Headline inflation was slightly lower at 3.8 per cent because of moderating petrol prices but this isn’t the RBA’s preferred inflation measure because it’s more erratic.

The Reserve Bank was also critical of high immigration and international students keeping inflation high.

‘Earlier declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption,’ Ms Bullock said.

‘However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, remained more resilient.’

The Treasurer (pictured) is still committed to boosting the RBA’s independence and wants to remove the government’s power to overrule the Reserve Bank on interest rates

In a sign of tension with the RBA, Dr Chalmers scheduled a 3pm AEST media conference on Tuesday afternoon, ahead of Ms Bullock’s 3.30pm press conference.

He reiterated that immigration levels had fallen, even though the annual growth of 432,150 in the year to July was barely lower than March’s near record-high pace of 509,800.

‘We’ve got a sensible, methodical, considered way to manage net overseas migration down. It has started coming down,’ he told reporters in Toowoomba.

‘The data doesn’t yet capture that.’

The Reserve Bank’s 13 interest rate rises in 2022 and 2023 were the most aggressive since the late 1980s.

But the 12-year high cash rate of 4.35 per cent is still lower than the levels reached in the US, UK, Canada, EU and New Zealand, which started with a ‘five’. 

‘Economic circumstances here are a little different than they are overseas,’ Ms Bullock said.

‘New Zealand, Canada, for example have seen quite sharp rises in their unemployment rates; some of those countries have seen inflation come down further than we are at the moment so their disinflation and process is more advanced than ours is.’