‘Big risk’: RBA’s China warning

Reserve Bank governor Michele Bullock has maintained the central bank has a “low tolerance” for price pressures to stay higher for longer, opening the door for a 13th rate hike on Melbourne Cup Day.

Hotter-than-expected inflation data, released on Wednesday by the Australian Bureau of Statistics, showed headline CPI in the September quarter increased by 1.2 per cent, up from 0.8 per cent in June, bringing the annual rate to 5.4 per cent.

That is well above the December forecast of 4.1 per cent, which is why many economists expect a rate hike to 4.35 per cent when the RBA meets for its next board meeting on November 7.

Speaking at Senate estimates on Thursday, Ms Bullock admitted the inflation numbers were a “little higher” than the central bank had been forecasting but was expected given recent economic data.

“It was pretty much where we thought it would come out, given the information we’ve come into since then,” she said.

Following Bullock’s appearance, Westpac joined the three other major banks - CBA, ANZ and NAB - in forecasting a hike when the central bank’s board meets in just 12 days time.

Services inflation levels not ‘comfortable’: Bullock

The RBA governor noted that while inflation for goods was trending downward, she said services inflation – a measure that more closely reflects surging rental costs and elevated power bills – remained persistently high.

“While goods price inflation is easing quite a lot as supply issues unwind consistently, we‘re seeing that although services inflation is declining, it’s still higher than we’re comfortable with and it’s also reasonably persistent,” she said.

“When I say persistent, it means that the inflation in those sorts of components of the CPI tends to last longer.

“And this is a trend we’ve seen overseas as well, that goods price inflation is easing quite a lot as supply issues unwind.”

Ms Bullock said electricity prices, rents, and wages were all drivers of services inflation.

Nothing new on ‘low tolerance’ for prolonged prices

Ms Bullock noted the RBA’s recent meeting minutes that said the central bank had a “low tolerance”’ for prolonged period of high inflation was not new.

“All I was trying to convey really was the same thing we’ve been conveying all along,” Ms Bullock said in questions from Liberal senator Jane Hume.

“The longer that inflation remains outside the target band, the more likely it is that inflation expectations might adjust to that.”

Markets viewed the inclusion of “low tolerance” in October as more hawkish than previous minutes.

RBA ‘still analysing’ fresh inflation data

Ms Bullock would not be drawn on the influence of Wednesday’s inflation data on the RBA’s November rates decision, saying the central bank is still analysing the figures.

“We‘re still analysing the numbers at the moment. I wouldn’t like to say more or less likely. We’re still looking at it,” Ms Bullock said in questioning from Greens senator Nick McKim.

“(The September quarterly CPI) has confirmed what we’ve been saying all along.

“As I said that the persistence is on the services side, and the goods side is responding, but I think that’s all I’d say from this point.”

‘Big risk’ from China’s property sector

While Ms Bullock said spiralling debt in China’s embattled property sector didn’t appear to be “dramatically impacting” the Australian economy, she conceded it continued to pose a “big risk”.

“At the moment, demand for iron ore is holding up very well, so the price is holding up so our exports are holding up well to China,” she told Liberal senator Dean Smith.

“The government has a longstanding view that the leverage in the property sector in China is not good, and it needs to be reduced.”

However, Ms Bullock noted that assistance from Beijing so far had focused on supporting property buyers rather than creditors, who had been “less looked after”.

“I can’t see personally that they’re going to be bailing out in any sense these property companies. The property sector had driven growth in the world’s second largest economy for many years,” Ms Bullock said.

RBA sounds alarm on youth unemployment

Pointing to the softening of the youth unemployment rate, Ms Bullock said the jobs market had begun to turn as the central bank’s punishing round of rate hikes slowed the economy.

“(Youth unemployment) is starting to rise again now. That‘s one of the indicators we’re looking for and gives us information in terms of where the labour market is,” she told Senator Smith.

“But I make the point that the labour market – even though it’s easing – it’s still pretty tight.”

According to the most recent jobs data, released by the Australian Bureau of Statistics, just 3.6 per cent of Australians who are in work or are looking for work are unemployed.

However, the youth unemployment rate is significantly higher at 8.1 per cent.

Bullock backs Chalmers

In further questioning from Senator Hume, Ms Bullock said Treasurer Jim Chalmers’ fiscal strategy was not adding to inflationary pressures.

“I actually think that what they’re doing at the moment is good,” Ms Bullock said.

“At the moment, the decision has been made to basically bank the revenues. And I think that’s pretty positive.”

Ms Bullock added that increased tax revenues that had been saved, not spent, was “helpful”.