RBA Governor: Inflation 'Far Too High' as Board Weighs Hike

By signalling that it is hard to completely look through supply shocks, Bullock indicated the RBA is less willing to overlook the energy-driven surge in prices than the RBNZ was earlier. Any additional rise in crude thus directly strengthens the argument for an RBA rate increase. Her direct language, combined with firmer core inflation and her assessment that demand still outstrips supply, backs market pricing for a move on November 2 and 3 and supports the Australian dollar and front-end yields. The gap with the RBNZ's hold sharpens the policy divergence, which favours AUD/NZD. While Bullock's refusal to provide guidance leaves some uncertainty, the overall tone leans clearly hawkish.

--- Bullock did not pre-announce a hike, but “far too high” and “difficult to look through supply shocks” are about as close as a central banker gets without saying it.

Summary:

• RBA Governor Michele Bullock said inflation is far too high, in Senate committee testimony after the Q3 CPI release.
• She said the data was consistent with upside inflation risks and that it is difficult to completely look through supply shocks.
• Bullock said domestic demand is still higher than domestic supply, but declined to give guidance on the November 2 and 3 Board decision.
• Deputy Governor Andrew Hauser said the CPI was in line with expectations but too high. Assistant Governor Sarah Hunter said it was stronger than the RBA expected in August.
• Hunter said she does not expect a recession in Australia.
• The Q3 trimmed mean rose to 3.7% y/y, above the 3.6% expected, and September headline inflation hit 4.3%.

During a Senate committee hearing on Wednesday, Reserve Bank of Australia Governor Michele Bullock said inflation is far too high, as she and other senior officials responded to hotter-than-expected September quarter CPI data, just days before the RBA Board convenes to decide on interest rates.

Bullock said the latest figures aligned with the upside risks to inflation the RBA had flagged, and that it is difficult to completely look through supply shocks such as the current surge in energy prices. She added that domestic demand is still running ahead of the economy's capacity to supply it, a sign that price pressures are not only being imported. However, she declined to give guidance on the Board's decision on November 2 and 3.

Her deputy, Andrew Hauser, said the CPI numbers were in line with expectations but still too high, while Assistant Governor Sarah Hunter said inflation came in stronger than the RBA had expected in August. The two comments are consistent: the data broadly matched what economists forecast ahead of the release, but ran above the path in the RBA's August Statement on Monetary Policy. Hunter also said she does not expect Australia to fall into recession.

The remarks followed a data release that added to the RBA's concerns. The trimmed mean, the central bank's main gauge of underlying inflation, rose 1.0% in the September quarter and 3.7% year on year, above the 3.6% expected, while monthly headline inflation climbed to 4.3% in September. Earlier in the hearing, before the data was released, Bullock had said inflation was likely to run higher than the RBA's August forecasts, citing re-escalating conflict in the Middle East, much higher energy prices and a labour market that looks a little tighter than the RBA had judged.

Bullock's comment on supply shocks is significant. Central banks often look through one-off jumps in prices such as fuel, on the basis that they fade on their own. By saying that is hard to do completely, Bullock signalled that the RBA is concerned about higher energy costs spreading into broader prices and into inflation expectations, particularly with underlying inflation already above target.

The RBA has raised its cash rate by a cumulative 100 basis points this year. Bullock has said a key question for next week's meeting is whether that tightening will be enough to return inflation to the 2% to 3% target in a reasonable time. While she stopped short of signalling a move, the combination of firmer core inflation, a tight labour market and the Governor's blunt language keeps another hike firmly in play. The Board's decision next week will be accompanied by updated forecasts.