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

Reserve Bank Governor Michele Bullock has openly ridiculed Treasury Secretary Jim Chalmers by suggesting she could theoretically “destroy” the economy with further rate hikes.

The cash rate remained unchanged at 4.35 percent on Tuesday, the highest level in 12 years, despite the US, UK, Canada, EU and New Zealand all cutting interest rates this year.

But Ms Bullock has weaponised Dr Chalmers’ criticism of the most aggressive rate hikes in a generation, just three weeks after the Chancellor of the Exchequer accused the Reserve Bank of “ruining the economy”.

“That could be an alternative strategy, which is to go up very hard, destroy the economy – to use a term – and then come back down. Be prepared for the economy to come back down very quickly,” she told reporters on Tuesday, to laughs.

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

“Given all this global uncertainty, and then the impact of interest rate hikes wreaking havoc on the economy, it would not be a surprise if the national accounts showed weak and muted growth on Wednesday,” he said.

The Chancellor of the Exchequer still wants to strengthen the RBA’s independence and withdraw the government’s power to overrule the Reserve Bank on interest rates.

This policy has never been implemented since the Reserve Bank of Australia was established by law in 1959, but the Greens will only support Labor’s RBA reforms in parliament if they force the central bank to cut interest rates.

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

Ms Bullock has also indicated that the federal government’s $300 energy rebates, which came into effect on July 1, will do little to curb underlying inflation – the RBA’s preferred benchmark for setting monetary policy.

This came despite expectations that monthly inflation figures for August, due to be published on Wednesday, would show headline inflation falling to a level within the RBA’s target of 2-3 per cent.

“That will lead to lower energy prices. Fuel prices have also fallen in recent months. So it could well be that current forecasts indicate that inflation over the past 12 months will be below 3 percent,” the RBA governor said.

‘That’s important because it reflects the relief in the cost of living and you see that reflected in the prices that people see.

“But it’s not really a reflection of the underlying wave of inflation. It’s more about what we’re seeing happening in the services sector, which is the crux of the matter.”

The RBA’s governing body stressed that its preferred underlying measure of inflation, known as the trimmed average, is unlikely to fall below 3 per cent until the end of 2025.

Underlying inflation, excluding volatile price movements, was 3.9 per cent in the period to June, well above the RBA’s target of 2 to 3 per cent.

“Inflation continues to be above our target and is proving to be persistent,” Bullock told reporters on Tuesday.

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

‘Progress in reducing underlying inflation has slowed and is likely to have remained sluggish in the third quarter.

‘It is not expected to return to the tire sustainably until 2026.’

Headline inflation was slightly lower at 3.8 per cent due to falling petrol prices. However, this is not the RBA’s preferred measure of inflation as it is more volatile.

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

“Previous declines in real disposable income and the ongoing impact of restrictive financial conditions continue to weigh on consumption, particularly discretionary consumption,” Bullock said.

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

The Chancellor of the Exchequer (pictured) remains determined to increase the independence of the RBA and wants to withdraw the government’s power to overrule the Reserve Bank on interest rates

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

He reiterated that the number of immigrants has fallen, although the annual growth of 432,150 in the year to July was barely slower than the near-record pace of 509,800 in March.

“We have a sensible, methodical, considered way of managing net overseas migration. It has started to come down,” he told reporters in Toowoomba.

‘That has not yet been captured in the data.’

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

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

“The economic conditions here are a little different than they are abroad,” Bullock said.

‘New Zealand and Canada, for example, have seen a significant increase in unemployment rates. In some of those countries, inflation has actually fallen even further than we have. So the process of disinflation is more advanced in them than in ours.’