The woman favoured to replace Philip Lowe as Australia’s next Reserve Bank chief has described aggressive interest rate hikes as the ‘easier’ option to tackle high inflation.

Dr Lowe’s deputy Michele Bullock, a leading candidate to take over in September, last week said more monetary policy tightening would be necessary to make imports cheaper.

With other advanced economies like the United States having even higher interest rates, she told an Australian Industry Group that aggressive rate rises were a better option.

‘It might be much easier just to jack up interest rates,’ she told a Newcastle audience.

Her 11-word answer is set to spook home borrowers who have already battled 12 interest rate rises since May 2022 – the most severe since 1989 – with monthly mortgages surging by 63 per cent in just 13 months.

Dr Lowe’s seven-year term ends on September 17, and Treasurer Jim Chalmers has indicated he will announce an outcome in July, before parliament resumes at the end of next month.

Ms Bullock took over as RBA deputy governor in 2022, after 37 years with the Reserve Bank, and is a leading contender to possibly replace Dr Lowe as someone who already sits on the RBA board.

Should she be chosen, she would be the first woman to lead the Reserve Bank of Australia, almost a decade after Janet Yellen became the first female chair of the U.S. Federal Reserve. 

But she faces potential competition from Jenny Wilkinson, the secretary of the Department of Finance, who has previously worked at the Reserve Bank, along with Treasury secretary Steven Kennedy, who is an existing RBA board member. 

Ms Bullock appears to be just as hawkish on inflation as Dr Lowe.

She last week told the Australian Industry Group the RBA’s aim of returning inflation – now at 6.8 per cent – back to the 2 to 3 per cent target by mid-2025 was lenient compared with other advanced economies.

‘I mentioned in my speech that we are aiming to bring inflation back to target with a slightly longer period than countries overseas and, in many ways, it might be much easier just to jack up interest rates; because official cash rates equivalent overseas are higher than they are here in Australia,’ she said.

The Reserve Bank’s 4.1 per cent cash rate is the highest since May 2012, but the U.S. Fed’s equivalent funds rate is at 5 to 5.25 per cent, the highest since 2006.

A bigger spread between Australian and American interest rates can weaken the Australian dollar – now at a below-average 67 U.S. cents – and make imports more expensive, adding to inflation. 

But Ms Bullock said higher Australian interest rates would encourage people to save and reduce consumer inflation.

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‘As interest rates rise, people are incentivised to save more rather than consume, and that reduces demand,’ she said.

‘It also keeps the exchange rate a bit higher, which means that imported inflation is lower.’

Ms Bullock also stressed higher interest rates were the only way of tackling inflation.

‘So it is our only tool; it works through a number of different mechanisms,’ she said. 

‘But, really, in bringing down inflation, that’s the only tool we have.’

She also expressed concern about low unemployment – now at a near 48-year low of 3.6 per cent – would add to inflationary pressures.

‘If unemployment remains too low for too long, inflation expectations will rise, which will make it that much harder for the monetary authorities to bring inflation back down,’ she said.

‘There is a risk if inflation expectations get ingrained and wages respond to that and wage demands respond to that, we end up in a situation where inflation is very difficult to get down.’

Ms Bullock said unemployment would have to rise back to 4.5 per cent by the end of 2024 so wages growth would stop fuelling inflation – a jobless level economists refer to as the non-accelerating inflationary rate of unemployment.

‘While 4.5 per cent is higher than the current rate, this outcome would still leave us below where it was pre-pandemic and not far off some estimates of where the NAIRU might currently be,’ she said.

‘In other words, the economy would be closer to a sustainable balance point.’

A borrower with an average $600,000 mortgage and a 20 per cent deposit has, since May 2022, seen their monthly repayments rise by 63.4 per cent from $2,306 to $3,769.

This has occurred as a Commonwealth Bank variable rate has risen from 2.29 per cent to 6.44 per cent, to reflect the RBA cash rate climbing from a record low of 0.1 per cent to an 11-year high of 4.1 per cent.

Annual repayments are now $17,556 higher than they were 13 months ago and Westpac, NAB and ANZ are expecting two more hikes in July and August that would take the RBA cash rate to a 12-year high of 4.6 per cent.

Source: | This article originally belongs to Dailymail.co.uk