The Reserve Bank of Australia (RBA) governor, Michele Bullock, has confirmed that while inflation is easing, Australians should not expect prices to return to previous levels.
The Nightly reports that, speaking before a parliamentary committee, Bullock acknowledged the ongoing financial pressure on households but indicated that real wage growth may offer some relief over time.
Inflation Cooling but Price Levels Remain High
Bullock explained that although inflation is slowing, the overall cost of living remains significantly elevated. Since the start of the COVID-19 pandemic, prices have risen by approximately 18%, and she made it clear that these increases are unlikely to reverse.
“The unfortunate news is that the price level doesn’t go back,” Bullock stated. “We can get inflation down to stop it increasing quite so quickly in the future, but the price level isn’t going back to where people remember it being a few years ago.”
This means that while future price increases may moderate, Australians will need to adjust to a higher baseline cost of living.
Interest Rate Cut Follows Delayed Response to Inflation
The RBA recently lowered the cash rate by 0.25 percentage points to 4.1%, marking the first rate cut since November 2020. This move comes after a series of 13 consecutive rate hikes aimed at controlling inflation.
Bullock acknowledged that the RBA had been slower than other central banks in raising rates, which contributed to prolonged inflationary pressures. She noted that this week’s rate cut was partially motivated by a desire to avoid another delayed response.
“Arguably, we were late raising interest rates on the way up; we didn’t respond as quickly as we should have to rising inflation,” she told the committee.
The RBA’s current approach seeks to balance inflation control with economic stability, ensuring that monetary policy does not overly strain households and businesses.
Future Rate Decisions Remain Uncertain
While many economists predict up to three further rate cuts in 2025, Bullock cautioned that the RBA will remain data-driven and cautious. She stressed that decisions on future cuts will depend on evolving economic conditions, including job market resilience and global trade uncertainties.
“The board is committed to being guided by the incoming data and our evolving assessment of the risks,” she said.
One of the external risks identified by Bullock is Donald Trump’s proposed trade tariffs, which could have uncertain inflationary effects on Australia. She explained that the impact could unfold in different ways.
If China responds by exporting goods more cheaply elsewhere, including to Australia, this could help lower prices and have a disinflationary effect.
However, if the US dollar strengthens due to increased import duties, this would make imports more expensive for Australians, adding to inflationary pressures.
“The first point to make is that it is not only uncertain, it’s unpredictable,” Bullock said, referring to US trade policies. “What’s policy one day is not policy the next day.”
Real Wages and Economic Confidence Key to Household Relief
Despite concerns about sustained high prices, Bullock expressed optimism that as real wages—wages adjusted for inflation—begin to rise, Australians will start to feel some financial relief.
“I don’t expect it will start feeling better immediately, but I think if we can keep inflation back down in the target band and real wages are rising, people will start to feel a bit better over the coming year,” she said.
The RBA’s target inflation range of 2% to 3% is now within reach, with core inflation slowing to 3.2% in December 2024, its lowest level since 2021.
The Future of Cash in Australia
Beyond inflation and interest rates, Bullock also addressed the declining use of cash, predicting that physical currency may only remain widely used for another ten years.
However, she recognised challenges in cash distribution and reaffirmed the RBA’s commitment to ensuring that Australians can continue accessing and using cash as long as needed.
She noted that cash remains an important store of wealth, particularly during periods of economic uncertainty, and serves as a useful backup for electronic payment systems.
