Australia's remaining inflation challenge is "increasingly homegrown and demand driven" compared with earlier supply-side disruptions, with implications for policy, Reserve Bank Governor Michele Bullock said.
"If inflation is simply the product of global supply disruptions or other price rises" then the appropriate interest-rate response would be limited, she said in a speech to economists on Wednesday evening. "However, a more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy's potential to meet that demand."
The RBA resumed hiking earlier this month, taking the cash rate to a 12-year high of 4.35% as economic growth and the labor market prove more resilient to policy tightening than anticipated. It also revised up its inflation forecasts that now see consumer prices only reaching the top of the 2%-3% target in late 2025.
Bullock underscored the various drivers of Australian prices by noting that while it only took three quarters for inflation to ease to 5.5% from 8%, it's expected to take two years for the print to fall that much again and go below 3%.
"This is because much of the remaining task of bringing inflation back to target will require bringing aggregate demand and aggregate supply into closer alignment," Bullock said in her address in Sydney.
"That is what the board is aiming to do with monetary policy – to slow the growth of demand enough to bring inflation back to target while keeping employment growing," she said.
Bullock's predecessor Philip Lowe referred to this policy approach as a "narrow path," and the governor affirmed on Wednesday that she is trying to stay on it.
The RBA has indicated that further rate rises will depend on inflation and employment data and how the global economy evolves. Many economists, including at Commonwealth Bank of Australia, predict that the RBA is probably done hiking, though National Australia Bank and Royal Bank of Canada are among a handful that see at least one more hike to 4.6%.
Bullock's speech to the annual Australian Business Economists dinner was divided into two parts: the policy response to inflation and the overhaul of the central bank in 2024, as recommended by an independent review.
Source : Bloomberg
