Last month’s lower-than-expected inflation figures have also forced the Reserve to revise down its near-term inflation forecasts,but the bank still does not believe it will be within its 2-3 per cent inflation target until the end of 2025. It won’t be close to the midpoint of the target until mid-2026.
Inflationfell to 4.1 per cent in the year to December – its lowest level in two years – although inflation for some goods and services,including insurance premiums and rents,continued to rise and remains “well above target”,the bank said.
Asked whether the RBA board had erred in November when it lifted interest rates by a quarter of a percentage point,Bullock said that was the appropriate move at the time given the available data,and the board had to balance getting inflation down while not driving unemployment up too high.
“We didn’t make a mistake,” she said.
“We haven’t gone up as far as other countries have gone,because we are trying very hard to make sure that we bring this balance in terms of employment and inflation objectives.”
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The bank’s economic outlook showed it was also concerned about the 5 per cent of borrowers that were not earning enough to meet essential costs,and who could struggle to meet mortgage payments in the first half of the year.
“Some of these borrowers are at risk of depleting their buffers within six months,which would see them fall behind on mortgage payments,” the report said.
Households more broadly have reacted to the combined pressures of high inflation,high interest rates and a two-year decline in real disposable incomes by slashing their spending and saving less,dropping the household savings ratio below pre-pandemic levels.
“Many households have had to make difficult adjustments in response to the challenging conditions,particularly households with lower financial buffers,” the report said.
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When asked whether the bank really understood how much some people were struggling,Bullock said the biggest issue was inflation.
“Grocery prices increased by over 20 per cent the last two years. That’s massive,and that’s really hurting people – particularly people on low incomes,” she said.
“I know it’s really hard for people to understand this when they’re being impacted by interest rate rises,but the alternative is much,much worse,and if we can just get inflation down,then that will benefit everyone and interest rates can come back to a more normal level. That’s the critical thing.”