Opinion: RBA’s Bullock throws another soft punch at inflation

Sometimes in life, the best medicine is the toughest one.

Remember when you had a horrible cough as a child and your parents brewed their disgusting home remedy, or handed you that foul-tasting syrup from the pharmacist?

You dreaded taking it. But you swallowed it because the point wasn't to enjoy the medicine. The point was to get better, fast.

Australia has been battling the ailment of inflation for years. Yet the RBA still seems reluctant to administer enough of the bitter medicine needed to properly break it.

The Reserve Bank lifted the cash rate by another 25 basis points on Tuesday - it's fourth for the year - taking it to 4.60%, noting that "inflation is still too high". Unsurprisingly, its decision statement was laden with familiar language about global energy prices and "capacity pressures" in the domestic economy.

All of those things matter. But eventually, the excuses wear thin, and the endless dance of blaming external factors becomes tiresome.

Inflation is still above the RBA's 2–3% target band. Headline CPI was running at 3.5% in July, while the more important trimmed mean measure was even higher at 3.6%. 

The RBA itself says the economy continues to face capacity constraints and that inflation isn't expected to return to around the midpoint of its target until 2028 "as capacity pressures and conflict-related cost pressures ease." Seriously?

Betting on inflation gently drifting back to target over the next two years while administering another 25 basis points here and there doesn't strike me as cautious. It strikes me as timid monetary policy built around a guessing game.

At what point do you stop chasing inflation and actually get in front of it?

Canada swallowed the bitter medicine

Australia's approach looks particularly unusual when compared with what some other developed economies did as inflation surged after the shackles of COVID restrictions were finally removed.

Take Canada (my other home).

The Bank of Canada began its tightening cycle with a policy rate of just 0.25% in early 2022. By July 2023, it was 5%.

And Governor Tiff Macklem didn't get there by politely nudging rates higher every few months while desperately trying to keep everyone happy.

There were seven consecutive hikes in 2022 alone, including a monster 100-basis-point increase in July. The Bank explicitly described its strategy as "front-loading" rate rises: inflicting more pain earlier in an effort to stop inflation becoming entrenched and reduce the risk that even higher rates would be needed later.

Macklem refused to tiptoe around the problem. Monetary policy “isn't always perfect” and “isn't painless”, he acknowledged. But neither did he want “to be too slow to respond if inflationary pressures are becoming more persistent.”

It was the 'nuclear option', and borrowers hated it. The economy slowed. Housing markets corrected. Consumers pulled back. Politicians fumed.

But eventually, the bitter medicine gave way to something much sweeter: substantial interest rate cuts.

As someone who spends considerable time in both countries, the difference is noticeable. Canadian consumers certainly haven't escaped the cost-of-living crisis – but at least with this approach inflation has largely been contained to its 1-3% target for more than a year. Here in Canada, there is some semblance of price stability.

And I get to see the difference firsthand: bags of onions for under $1, big bags of chips for under $2, those bags of avocados for $4, and entire meals you can easily cook for less than $5.

Prices in Canada increasingly feel calm and, dare I say it, affordable. In Australia, the weekly shop still feels like discovering which everyday staple has suddenly become a luxury item.

Somehow, I've bought Australia's favourite chocolate biscuit, Tim Tams, at Walmart in Canada for $2.98 while watching it sell for around $6 at Woolworths back home. Work that one out!

The RBA keeps chasing the getaway car

In contrast to Canada, watching the RBA fight inflation increasingly feels like watching a police chase where the officers can see the getaway car but never quite manage to pull alongside it.

Markets are already contemplating rates around 5% by May 2027. At this pace, Australia isn't fighting inflation - it's putting it under siege and hoping it eventually surrenders.

To be fair to Bullock and the board, monetary policy operates with a lag. The RBA cannot control global oil prices, wars or supply disruptions. And with unemployment having risen to 4.6%, there are now clearer signs that the economy is slowing.

Those are legitimate reasons for caution, but caution has a cost too.

Dragging a tightening cycle out over years doesn't eliminate the pain of higher interest rates. It changes how that pain is distributed – and potentially prolongs it.

Time to consider the tougher medicine

That is why the RBA should at least be willing to contemplate a more aggressive option if inflation continues refusing to cooperate.

A stronger-than-25-basis-point increase would be controversial. It would hurt borrowers. It would weigh further on property prices and household spending. It would probably attract enormous political criticism, and it would shock markets.

But those consequences alone don't make it the wrong policy.

Canada's experience offers an important lesson. When inflation surged, it chose to act forcefully and relentlessly, accepting more pain upfront to reduce the risk of inflicting even greater economic pain later.

Australia has largely chosen the opposite path, and there is another uncomfortable consequence of leaving rates elevated for longer.

Higher interest rates punish heavily indebted households, but reward those sitting on piles of cash and interest-bearing assets. The longer rates stay high, the longer savers collect elevated returns while households and businesses carrying debt remain squeezed. The longer this goes, the more unfair it is.

Bullock doesn't need to prove she is "tough". Central banking isn't theatre, and bigger rate hikes aren't inherently better policy.

But if the incoming data continue to show inflation stuck materially above target, the board should stop treating 25 basis points as though it were the only dose available.

Sometimes the bitter medicine taken quickly is preferable to spending years sipping it.

And Australia has been sipping for long enough.