The Point Live: RBA meeting to decide interest rates

Michele Bullock falls back on this line:

The interest rate is the tool we’ve got. It’s blunt. It does affect people in different ways. And, but it’s the best way we’ve got of controlling inflation, and that’s ultimately what we have to do.

So is it the best way? Or the only way?

And on that depressing note (and before Grog’s self combusts) we are going to shut off the blog. We will be back next week for budget – woo. hoo.

We will be back on Monday to bring you the pre-budget guff and then will take you through the budget on Tuesday all day. Mostly because we have no lives.

Hope to see you there – and please, take care of you. Ax

So what can we take from all of this? The RBA acknowledges that raising interest rates here will not do anything to stop inflation. Because it is supply driven. So taking away more spending power doesn’t do anything to address that inflation.

And the most likely person who voted against this increase is Jenny Wilkinson – the head of Treasury.

But the rest of the board has decided that it needs to take money from you now, to stop you spending when the fuel prices come down. When will that happen? Who knows. But that is the focus. Stopping future spending, by taking money from people now, when they are already experiencing an economic shock.

And the focus is on business. Bullock:

I think you’d be wrong, as I said earlier, to expect that businesses would not look to pass on some of the costs of doing business. Otherwise, if they can’t, then what’s going to happen to the businesses? Then you will end up in a recession.

And who spends money in the businesses? People. And what happens when people don’t have money? They don’t spend it in businesses. But that apparently doesn’t matter, because the bank is focused on FUTURE potential inflation, which it can’t predict, based on what it thinks could happen.

Like I said – it’s cutting off your leg so you can’t sprain it in the future.

So why are they doing it? Because they think that after the ‘oil crisis’ is done, we will all go out and spend like drunken monkeys. So they are basically just robbing from the future. Which is the most Australian way to deal with anything.

Michele Bullock:

The first thing is that, as I said in the remarks, these interest rate rises are not going to do anything for inflation in the next six months. That’s done and dusted. We know that those prices are coming through. Second point I would make is that it’s not unreasonable for firms if they are seeing their cost bases rise because of what’s going on, whether it be fertilizers for farmers or fuel diesel for transport costs. It’s not unreasonable for them to want to recover their costs, because the alternative is, if they can’t, they might end up going bust, and that’s not good either. So there’s nothing unreasonable about that.

What we’re trying to guard against is because we think we had, we’re pretty sure we had excess demand in the system, that it will make it easier for them to do it and easier to pass on, perhaps more. And that’s the way that the inflation expectations gets embedded.

So I want to be absolutely clear; I’m not saying that businesses shouldn’t pass on costs. I think it’s reasonable that they should be doing so what we’re trying to guard against is that once those new price levels are achieved, that people don’t think,

Oh, well, it’s normal for things to go up by four or 5% we’ll just continue to do that. That’s the challenge.

Michele Bullock in her press conference says that there was already too much demand even before the Iran War. 

What she means is that spending was growing too fast and so too was investment.

Well looking at the most recent household consumption per capita figures shows that spending was falling and was WELL below the pre-pandemic trend

So god knows where she thinks all this spending is happening. 

And as for investment – the big boost at the end of 2025 was some investment in datacentres, which to be frank do not employ many people and do bugger all to drive actual demand. 

What a truly bizarre world she lives in.

If there was no war, would this interest rate increase have happened?

Michele Bullock (who has also been asked which way she voted in this question I have paraphrased, re-works the question to her favour)

What I can say is that this oil shock, this that has been driven by what’s gone on in the Middle East. This has complicated things immensely. It has made a trade off for us much worse for any given inflation rate. Now that means lower growth, means higher unemployment, if you like. If you want to be technical, the Phillips curve has sort of shifted right a bit, so it’s quite possible that we wouldn’t have had to increase interest rates a third time if the shock hadn’t occurred. But the fact is, the shock did occur. It occurred at a time when inflation was already too high, and we know that a very salient price, a price that sticks in people’s brains, is petrol.

So the problem then is this is adding now to concern that people will just start to think, well, inflation now is just starting to become embedded. So it’s possible that, I mean, I don’t have a counterfactual, it’s possible, but I would say certainly, what this is the war has done is it’s made the trade off much, much worse. And it’s although we’re trying very we are looking through some of it. We can’t look through everything. We’ve got to be cognizant of the potential impact on inflation expectations.

This will be what the media takes as the RBA warning against governments wanting to offset people’s economic shock through their budgets. Think of it as pre-emptive tut-tutting from media run and written by people mostly inoculated from these sorts of economic shocks:

We have a situation in Australia prior to the war, where we had demand above supply, the ability of the economy to supply the goods and services that will be being demanded in total, including by government and by the private sector, was that was outstripping the ability of the economy to supply it.

That’s why inflation was rising.

So by definition, if we are increasing interest rates, what we are trying to do is slow growth in demand, and that hits the private sector, typically, consumption, investment, those sorts of things, to the extent that the government is demanding goods and services of the economy.

So in the variety of ways that they do, whether it’s direct expenditure or or giving money to households to spend on goods and services in the private sector, that adds to demand. Now, if we’re sitting at a position where we are constrained.

The economy productivity isn’t growing very quickly. We think the potential growth is around about 2% a year. That means that in order to close that gap, we have to have demand growing by less than 2% to close that gap, and both private sector and public sector have to contribute to that. So all I’m saying is that the extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand.

The bottom line, though, on all of this, is this shock has it’s a real income shock for Australia and the world. Australians are poorer because of this shock to oil prices and energy prices and all the other commodity prices that are being impacted. So we are poorer, and there is no way out of that. The trade off is much worse.

The RBA Governor is giving her statement now, ahead of taking questions. She acknowledges that there are already cost pressures in the economy (which, I mean, who can’t?)

Bullock:

We’re already seeing that in many firms that are facing cost pressures, they’re looking to increase prices of their goods and services. If left unchecked, higher costs get embedded into price and wage setting decisions. These second round effects could lead to even higher and persistent inflation, and if so, would require even more tightening and monetary policy to get inflation under control.

We have already seen expectations for inflation over the next year or so increase, and we need to ensure that this does not lead to higher inflation expectations over the longer term, when inflation is already too high and the economy facing capacity pressures, it does not take much additional spending to make the job of returning inflation to target more challenging.

This means spending will need to grow more slowly for a time to help restore the balance between demand and supply.

The recent cash rate increases have been to address the excess demand that existed in the economy prior to the Middle East conflict. Higher fuel prices by themselves will not address this. The board now judges the level of the cash rate to be a bit restrictive*, which will help to address the risk that inflation will be higher and more persistent once the current prices shock passes through the economy. This gives the board space to see how the conflict plays out and the response of Australian households and businesses to the shock.

*Which means the board thinks this interest rate will slow the economy and increase unemployment.

Essentially that means that enough people have a job and actually we could do with a few more unemployed. 

But in the last half of 2025 what we saw was not really a sign of a strong labour market. The big growth of jobs was in “secondary jobs” – ie people getting a second job because their primary one was not paying them enough money to make needs meet

This of course was before the now 3 interest rate rises and the impact of price rises from the Iran War.

So a strong labour market, or people actually struggling? I think the later. 

You constantly hear that the RBA say it is concerned about a “tight labour market.” But what does that mean?

This is central bank talk for there are not enough unemployed people. It basically means that the RBA thinks businesses are not able to easily find unemployed people when they’re hiring.

How do they know that businesses are struggling to find people to hire?

They ask them and whenever they do, unsurprisingly, businesses always say its hard to find workers.

Why does the RBA think this is a problem?

If businesses can’t find workers, then they might have to compete for them by offering higher wages or better working conditions. According to the RBA this would be terrible. Higher wages would increase business costs, and they would be “forced” to increase prices to maintain their profits. Higher prices mean more inflation.

Does this actually happen?

No. Despite the RBA being concerned about a tight labour market for four years, wages have not shot up. In fact, wages have been steady for many years. Even if businesses say its harder to find workers, the ABS statistics say they have not tried to attract them with higher wages.

The Governor of the RBA Michele Bullock will front the press shortly. I have so many questions, but here are a few.

How are higher interest rates going to bring down inflation caused by higher fuel costs?

Has the RBA done any modelling on the chances of the Australian economy going into recession with higher interest rates and higher fuel costs ?

Is the RBA willing push the Australian economy into recession to get inflation down?

How high does unemployment need to go before the RBA no longer things the labour market is tight?

What would be more costly, a recession or high inflation caused by an oil shock?

We are just waiting to hear from Michele Bullock now, who will explain how the bank needed to act, because if it didn’t then inflation will take hold and that is scarier yadda, yadda, yadda. Which is what the RBA governor always says.

But the problem, as Greg and Matt have highlighted, is that the inflation is supply side driven – not demand. So taking money out of the economy doesn’t do anything to fix this. It’s the RBA acting for the RBA acting’s sake. And that’s not going to help anyone.

Jim Chalmers:

You’ll see our forecasts in a week from now, but we’ve made it clear, and we’ve been very upfront in saying that the Treasury’s forecasts will also show a lift in inflation because of the conflict in the Middle East and a slowing of growth because of these developments as well.

The Reserve Bank’s forecasts are not always completely identical to the Treasury’s forecast, but to the extent that they show higher inflation and slower growth, and that will be a fairly familiar story. We have not hit print on the budget yet.

There are good reasons that we have been working on this budget a bit deeper into the cycle than is always the case, but the story, which is told by the inflation forecast today by the Reserve Bank, will be fairly consistent, if not identical, to the forecast that we release on Tuesday night

Asked whether the Victorian state budget (which as a pre-election budget includes a whole heap of little treats to voters) is making his job harder, Chalmers says:

I haven’t paid a lot of attention the Victorian budget yet. I’ll be briefed on it in due course. But I think you’d understand, that my focus today and for the next, for the foreseeable future, is the budget that we are putting together that we will release in a week from now.

Obviously, a lot of the aggregate figures that we see reported from time to time combine commonwealth and state spending, and so it matters the state budget position obviously matters, but not my primary focus right now, for reasons that I hope you understand when it comes to the first part of your question.

I mean, there’s always a lot of speculation about budget measures in the weeks leading up to budgets. That speculation is not always right, and I don’t intend to add to that specific speculation today, except to say that we are already cutting taxes. We cut taxes already. We are cutting taxes again on in July, we’re cutting taxes again the July after that, we’ve got a tax cut in the form of the standard deduction.

We’ve got a tax cut in the form of the 32 cents a liter relief at the bowser This is a government which cuts taxes, and we are enthusiastic about that, because we have seen it as an important way to provide cost of living relief for people who need it. But beyond that, people will have to wait for the budget in a week’s time.

Q: You said you said you see fuel as the driving force behind the inflation and the war in Iran as the driving factor behind the rise in fuel. Do you see Donald Trump as being to blame for this rate rise?

Chalmers:

Well, first of all, I’m pointing to the facts of the Australian Bureau of Statistics release of last week, what we saw in the month of March was overwhelmingly a story of higher petrol prices before our fuel tax cut kicked in, and before we saw some of this welcome moderation at the bowser at least in petrol, if not as much as we would like to see in diesel. And so the inflation that we saw in the month of March was a story about higher petrol prices. Higher petrol prices are all about the war in the Middle East.

I think any objective observer would conclude that now, when it comes to decisions taken in Washington, DC, or indeed in Tehran, Australians are hostage to those decisions taken about the conduct of this war and the end of this war, I think that’s self evident from an economic point of view, from the point of view of a lot of Australians battling with these cost of living pressures, [the end to] this war in the Middle East can’t come soon enough.

And we’ve said that in different ways in recent times. Now, obviously I’m not going to get into, you know, a kind of a rolling critique of the conduct of the war, but my job is to manage the Australian economy and the Australian economy is getting absolutely pummeled by this war in the Middle East and Australians are paying the price for that and we’re seeing that again today with this interest rate decision.

The Treasurer is up and talking about the decision – he is well prepped for this, because everyone and their cat knew this was coming. He does make the point though that this is not about government spending:

We know that some of the costs and consequences of this conflict on the other side of the world are that Australians are paying more particularly for fuel in that most recent inflation data, but those price pressures are expected to be felt more broadly across our economy as well. When it comes to petrol in the month of March, you can see that petrol was the primary driver of that higher inflation figure that we saw in March, and that’s why since then, we’ve cut the fuel excise. Our petrol tax cut is all about recognizing the substantial pressures that motorists are under because of this war in the Middle East, and so we’re acting in a responsible way and a temporary way, to take some of the edge off those higher fuel prices that people would otherwise be confronting. And when it comes to the broader inflationary pressures in our economy. This is why our responsible budget is so important.

Next week, the budget will be handed down one week from today, and it will be a really responsible budget. We will save more than we spend. We will bank all of the upward revisions to revenue. And that’s because we recognize that even though the budget is not the primary driver of prices in our economy or these interest rate decisions, we intend to play a helpful role, not a harmful role, in the fight against inflation.

We know that there are inflationary pressures in our economy. We know that they are made worse by the war in the Middle East, we know that the end of that war and the recovery in the global economy is very uncertain, as the Reserve Bank has pointed out in their statement as well.

Now the reserve bank statement, it’s important to recognize, does not point to public spending as a factor in their decision to increase interest rates today. And I think that’s really important to those people who are pretending that the government’s budget is the sole driver of prices in our economy or interest rate decisions. They weren’t saying that last year when interest rates were cut three times. And so I think that’s an important bit of perspective, as is the statement today, which does not reference public spending as a factor in the Reserve Bank’s decision to lift, interest rates.

Having a look at the RBA statements gives us an insight into their “thinking” 

First change – last time the vote was 5-3 in favour of a rate rise this time it was 8-1.

So what are the big changes?

Last time they noted:

“Information since the February meeting suggests that some of the increase in inflation reflects greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Short-term measures of inflation expectations have already risen.”

Now that is changed to

“Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.”

So they’re mostly concerned about those short-term inflation expectations. But here’s a little secret – you know what most influences consumer inflation expectations? Petrol prices! That is the one price everyone sees every day (roughly every 1km) and so when they go up people think inflation must be going up. 

So well done RBA you are worried that people might have noticed fuel prices went up. 

Other changes to the statement. In March they said

“the Board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed. Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.”

Eeeewwww “labour market has tightened” means too many people have jobs. But well done also on realising the Middle East and Donald Trump are uncertain. 

Ok what are they saying now?

“As expected, developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.”

Hmm no mention of a tight labour market now… So why is it raising rates? Oh those second round impacts from.. the Iran War. 

Gee good thing interest rate rises will affect those. 

Cripes.

Today’s decision to increase interest rates was a split decision but not as split as it was in March.

There are nine members of the monetary policy board and in March the board voted 5 to 4 to increase interest rates. 5 voted to increase and 4 voted to keep them the same. After this decision the Governor of the RBA said that the 4 who voted to keep rates on hold wanted more information on what was happening in the international and Australian economy.

Today the board was split 8 to 1. 8 people voted to increase interest rates and 1 person voted to keep them the same.

So, since March more board members thought that rates should rise. Apparently, the economic situation has become clearer. 

Between the meetings the March inflation figures came out that showed that all the inflation was because of the increase in fuel prices. Without the increase in automotive fuels, headline inflation would have fallen.

At the Governors press conference later today it will be interesting to see if Michele Bullock can explain what is going to happen in the Middle East and what might happen to the Australian economy.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.35 per cent.

Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.

The Bank has updated its forecasts to incorporate recent data and developments in the Middle East. The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February. It then declines as demand growth slows and capacity pressures ease in response to higher interest rates.

Financial conditions have tightened this year. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated. But credit is readily available to both households and businesses.

There are materially heightened uncertainties about the outlook for domestic economic activity and inflation. With the conflict in the Middle East continuing, there are plausible scenarios where inflation is higher and activity lower than envisaged under the baseline forecast. A longer or more severe conflict could put further upward pressure on global energy prices; this would push up near-term inflation and could also increase inflation further out as these costs are passed through and if price rises get built into longer term inflation expectations. But higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia.

Decision

As expected, developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.

In light of these considerations, the Board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations. It was therefore judged appropriate to increase the cash rate target.

The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand and the outlook for inflation and the labour market. Having raised the cash rate three times, monetary policy is well placed to respond to developments and the Board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome.

Today’s policy decision was made by majority: eight members voted to increase the cash rate target by 25 basis points to 4.35 per cent; one member voted to leave the cash rate target unchanged at 4.10 per cent.

Households maybe feeling stressed with higher fuel prices, two previous interest rate increases and another possible one today, but don’t worry not everyone is doing badly. New research out today from the Australia Institute shows that the big 4 banks now make an even bigger profit from the average home loan.

My colleague David Richardson has crunched the numbers and over the 30-year life of an average mortgage the big 4 banks will make a profit of $228,900. That’s not revenue, that’s what they make in profit after paying their costs.

This equates to $929 profit per month in the first year of the loan. Compare that to the estimated $120 a month increase in repayments that someone with an average mortgage will face if the RBA increases interest rates today.

The big 4 banks are still doing very well in Australia and mortgages are an incredibly profitable part of their business. While it is about a quarter of their lending, it makes up about 40% of their profits.

Higher interest rates and huge fuel costs are squeezing families but the big banks profits will keep rolling in.

The Reserve Bank of Australia’s decision to hit borrowers with a third straight interest rate rise heaps more unnecessary pain on home buyers and pushes Australia towards a recession, according to senior economists. 

The RBA today lifted the cash rate from 4.1% to 4.35%, back to its highest point in 15 years, effectively undoing the three rate cuts which were delivered last year.

“Today the RBA made the wrong decision,” said Matt Grudnoff, Senior Economist at The Australia Institute.

“Higher interest rates will do nothing to open the Strait of Hormuz. Higher interest rates cannot change the world price of oil and bring down fuel prices.

“All this does is heap more pain on already stretched households.

“The only tool the RBA has to fight inflation is to change interest rates. But interest rates are ineffective at stopping inflation caused by supply shocks.

“It has chosen to do something, even if that will make things worse, rather than risk being accused of doing nothing.

“Higher fuel costs and now a third interest rate increase this year is likely to impact economic growth and push unemployment higher. This will have real negative impacts on Australian households and businesses.

“If the RBA goes too hard with interest rate increases, it risks pushing the Australian economy into recession. It will then be forced to rapidly lower interest rates to stimulate the economy, which would be a humiliating backflip.

So that decision was made in an eight-one vote. Which means there was one dissenter.

You are going to hear a lot of questions from journalists about whether the interest rate increases, which now take us back to where the cash rate was before the RBA began cutting interest rates, is an admission they ‘went too early’.

The RBA when it talks about inflation likes to talk bout “underlying” or “core” inflation. 

It does this as we saw in March occasionally one of events can cause inflation to jump up or down. So what the RBA does (with the help from the ABS) is measure core inflation. 

This is usually down by looking at the “trimmed mean”. What they do is they cut out (or trim) the biggest 15% increase and decreases. In essence it measures what is happening with the middle 70% of goods and services.

Right now, the trimmed mean is doing nothing – it has been steady at 3.3% for a while now. That it is not “accelerating” should mean that that the RBA is not worried, but as I noted earlier the RBA no longer really cares about accelerating, they just care about it being above 3%. 

The RBA also likes to look at the prices of market services (ie services that are not public things like health care and education). They care about this because services are labour heavy – think hairdressers or car mechanics. And so if prices of those are going up that could be a sign that the wages of those workers is also going up and thus the dreaded (and never to be seen) wage-price spiral is about to occur. 

Well, the RBA can relax, market service inflation is also slowing. 

Similarly discretionary prices are good to watch because if they are rising then that could mean we really are all feeling flush and spending a lot of money on things we can do without. Well again, the inflation of those is slowing as well

The RBA board has taken mortgage holders back to 2024, returning interest rates to where they were before they started their cuts.

Ok so the RBA wants to reduce inflation. 

It’s probably worth looking at what is causing inflation then? 

In March where prices rose 1.1% pretty much all of it was due to petrol price rises:

Those petrol prices have now come down (mostly due to the halving of the rebate, but also some calmness on the world oil price)

So ok, one month is a bit of an anomaly. What about annual inflation?

The ABS breaks down the contributions of inflation into groups and even here you can see the big thing in March was “transport” (ie petrol prices)

The big jump in petrol prices took it up to 4.6%. 

But what if we took out transport prices. Is inflation still going up?

Nope – without the jump in petrol prices, inflation would now be falling

While we wait to see how the RBA thinks increasing interest rates, on top of increased fuel prices will help lower inflation (don’t hold your breath on that one) AAP has pulled together a list of what we know is in the budget so far:

WHAT’S ALREADY KNOWN ABOUT THE BUDGET

* The government has already flagged large cuts to the NDIS, with savings of $15 billion to be rolled out over the next four years. It will involve booting 160,000 people off the disability scheme

* An extra $53 billion will be spent on defence over the next decade in order to lift military spending to three per cent of Australia’s GDP. The spending will be focus on infrastructure such as drones and long-range missiles

* A cut to the fuel excise has already been accounted for in the budget, which cuts 26 cents off a litre of petrol or diesel. It will be in effect until June 30, but a decision has not been made on whether it will be extended

* Speculation has increased an income offset of between $200 and $300 will be rolled out to everyone who pays tax, but the measure has not been publicly announced

* The budget is widely tipped to make changes to negative gearing, capital gains tax discounts and how trust funds are taxed. The prime minister and treasurer have previously said the budget will be about intergenerational fairness

* Australians over 65 will no longer pay discounted rebates for private health insurance, bringing it into line with other age groups. Older Australians will have to pay more than $200 a year extra for their cover

* Workers will be able to claim a $1000 tax deduction without the need for receipts for the 2026/27 financial year

* Tax cuts of $268 for those earning more than $45,000 will come into effect from July

* Tax breaks for electric vehicles will also be phased out. Incentives allowing employers to avoid fringe benefits tax on EVs under $91,000 through a novated lease will be changed to a 25 per cent discount

To understand this thinking lets go back to the whole objective of the RBA.

The RBA has two jobs – maintain a stable currency (which means keep inflation steady) and maintain full employment.

The problem is the RBA thinks you can only have full employment when inflation is below 3%.This is because it has swallowed whole the economic theory of the “non-accelerating inflation rate of unemployment” (NAIRU) where “full employment” is at a point where inflation is not accelerating (ie going from 3% to 4% to 5% etc).

It’s all based around a belief that if unemployment falls too low, too many people are earning money (so spending) and also businesses will have to increase wages to keep staff, which means more money being spent and that will also raise prices and thus cause inflation to rise (or accelerate).

Higher interest rates slow spending (because you have to pay your home loan) and also makes it harder for small business to borrow. 

It’s bunkum, but anyway, to achieve this, back in the 1990s the RBA followed other central banks (New Zealand was the first) by setting an inflation target. They chose 2% to 3% .

The policy notionally delivers stable inflation, but inherently prioritises low wage growth and low inflation ahead of low unemployment.

There is no reason why the target should be 2% to 3%. Canada for example targets 1% to 3% inflation. 

The 2% to 3% target was basically adopted just because in 1992 the RBA governor at the time Bernie Fraser gave a speech in which he said “there is no reason why the current underlying inflation rate of 2 to 3 per cent cannot be sustained” and then in 1994 he gave another speechin which he suggested “In our judgment, underlying inflation of around 2 to 3 per cent is a reasonable goal for monetary policy.”

And that was it.  

They could make it 2% to 4% or 3% to 4%, or they could, which Michele Bullock seems to think is the right thing to do, and not really have a target range but a midpoint of 2.5%. 

The point is this is all arbitrary. 

But it matters, because rather quietly earlier this year the RBA admitted it no longer believed in the NAIRU.

Sarah Hunter, the Assistant Governor (Economic) of the RBA gave a speech in which she noted that inflation no longer “accelerates” when unemployment is lower than the RBA thinks it should be – it’s just that inflation is above 3%. Hunter said “the ‘non-accelerating’ part of the NAIRU name is a bit out of date”

Why does this matter?

As Hunter said:

“When the labour market is tight and operating beyond full employment, we expect to see inflationary pressures across the economy and an elevated rate of inflation. But the rate of inflation doesn’t have to be continually increasing.”

What that means is the RBA no longer believes it needs inflation to be rising in order for it to think unemployment is too low and to justify raising rates – it just needs inflation above 3%. 

So the RBA believes it needs to keep raising rates in order to get more people to be out of a job purely because it has set 2% to 3% as the inflation target. 

And so they will keep doing so. And when inflation is below 3% they will say we have “full employment” 

Will that be it? 

Again, the answer appears to be, alas no. 

The past 2 months have seen some pretty wild movements in forecasts for interest rates.

Two months ago, in early March, the market saw the Iran War begin and thought, well this ain’t good. The increases in costs of petrol and all the other costs going up were going to likely slow the economy (true) and so the view was the RBA might hold off on raising rates any further, because otherwise we might have a recession if you have the double hit of a slowing economy through higher oil prices and the RBA also slowing things down through higher interest rates. 

But then after Bullock’s “recession… meh” reply, the market got very hyped up and began forecasting the cash rate going up to 4.85% by the end of the year (that would ean 5 rates rises in the year).

Things calmed down a bit after that, but for the past month, the market has been predicting at least one more rate raise after today (assuming the RBA does raise rates) and a slight chance of 2 more:

If the cash rate does go up to 4.35% today it will match the highest the cash rate got to in 2023-2025, before the cuts last year. 

Two rate rises this year would take us to 4.6% – that would be the highest since rates were 4.75% back in October 2011

A third rate rise to 4.85% would mean the highest rate since November 2008. 

Alas it appears almost certain they will. 

The finance markets are pricing in the likelihood of a rate rise at 75%.

This is not however rally due to any economic data that has come out recently – the March unemployment and inflation figures did little to change the odds of a rate rise

What really galvanised the belief that the RBA will raise rates it that after the last RBA meeting  on 17 March, the governor of the RBA Michele Bullock was asked by the ABC’s David Chau:

“If necessary, would you be prepared to put Australia into recession if that’s what it takes to bring inflation much lower?

Now you might think that is an easy question to answer – something along the lines of “Don’t be stupid, who in their right mind would think a recession is the solution to anything, are you drunk???!”

But no, Michel Bullock replied:

“We don’t want to have a recession, but if it’s hard to get inflation down, then you know we’re going to have to deal with that possibly.”

Cripes. 

So that is the environment in which we are operating. 

Hello and welcome to a special edition of The Point Live, where we will cover the most likely decision of the RBA – to raise interest rates.

That decision is coming down in just under an hour, so we will bring you the news and what not, as well as context as soon as it comes.

You have Amy Remeikis, Greg Jericho and Matt Grudnoff with you – aren’t you lucky?

Tea is at hand and so is the sugar – let’s get into it.