Who’d want to be Reserve Bank Governor Michele Bullock? On Tuesday she had to do the almost impossible: defend a decision not to cut interest rates at a time when they were being cut in just about every other major industrial nation.

On Thursday the US Federal Reserve joined the Bank of England, the Bank of Canada, the Reserve Bank of New Zealand and central banks in China, Sweden and the European Union in what its officials expect to be a series of cuts, kicking off with a double-header: a cut of 0.50 percentage points instead of the usual 0.25.

In her press conference after Tuesday’s board meeting Governor Bullock said disinflation was “further advanced” in those countries than it was in Australia.

Australian interest rates were “restrictive” (high enough to hurt) but were working “broadly as anticipated”.

While household spending was weaker than had been expected, it would be

some time yet before inflation is sustainably in the target range.

But the problem with what she said, both after the meeting and in her statement, is inflation is probably already within the target range.

Credibility gap

The Reserve Bank’s target is 2-3%. Inflation hasn’t been there since it surged in 2021 as much of the world came out of lockdowns.

On Wednesday, the day after Bullock’s announcement, the Bureau of Statistics will release the monthly consumer price index for August. It’s expected to be the first to show inflation back between 2% and 3%.

Westpac is expecting an annual rate of 2.7%, comfortably back within the target band. When the more-comprehensive quarterly measure is released next month, Westpac is expecting 2.9%.

If inflation is 2.7%, how can it be too high?

Bullock squares her view that inflation is not yet moving sustainably towards the target with the reality that it is probably already there by saying she expects it to “pop back up again” when the temporary effect of electricity bill rebates wears off.

The Commonwealth government announced $3.5 billion worth of rebates in the May budget. They will be applied automatically to electricity bills for each of the next four quarters, and topped by several of the states. In Queensland, they amount to $1,300 per household.

A staged rollout means the rebates hit bills in only Queensland and West Australia in July and will hit other states in August. The Bureau of Statistics says they took 6.4% off the average national power price in July and Westpac expects them to take off a further 15% in August.

A permanent 10% increase in the maximum rate of Commonwealth rent assistance delivered last week will put further downward pressure on inflation.

It’s easy to see why Bullock thinks the temporary measures should be disregarded.

The RBA says what matters is underlying inflation

Bullock is directing attention to the Reserve Bank’s preferred measure of underlying inflation, a measure that excludes sharp movements and gives a better idea of where typical prices are heading.

At 3.9% for the year to the June quarter, she says that measure is still too high. But it has been falling for each of the past six quarters and is on track to fall to 3.5% in the September quarter. By my way of thinking, that shows inflation is moving “sustainably towards the target range” in the way she says she wants.

As in the US and the UK and New Zealand and all the other countries with which we compare ourselves, inflation doesn’t need to be actually back to the target before the authorities ease off on high interest rates. If they waited that long they would overshoot and push inflation too low.

But headline inflation matters in its own right

In any event, a low headline inflation rate is important in its own right, however it is achieved. It’s the rate the Reserve Bank prints at the top of its website, the rate that’s published in the media and the rate that people experience.

If inflation is actually low, however that is brought about, shoppers become less tolerant of price rises (something the Reserve Bank says is happening) and less keen to demand high wage rises (something that is also happening).

They also become less keen to rush out and buy things before their price goes up, something that can perpetuate high inflation.

Right now we are doing everything but rushing out to push up prices.

A briefing note prepared by the Australian Council of Social Service ahead of Tuesday’s Reserve Bank board meeting says real household disposable income per capita has fallen by almost 8% since inflation and interest rates began climbing, far more than in the US, the UK, Germany and Canada.

Bullock is about to get more chances to cut

There’s a chance the tax cuts that began in July will give spending a bit of a boost but much of whatever extra spending there is will be on imports, and the steadily climbing Australian dollar is making them cheaper by the day.

The Australian dollar hit a new high for the year of 68.5 US cents on Tuesday on the back of a widening differential between US and Australian interest rates as the US cuts rates.

Governor Bullock gets two more opportunities to cut rates this year, at the board meeting on Melbourne Cup Tuesday November 5 shortly after news of very low inflation in the September quarter, and on December 9 shortly after news of economic growth likely to show income per person going further backwards.

There’s a fair chance she will take one of them.