Australia sees risks on inflation, will not hesitate on rates

AUSTRALIA’S top central banker on Tuesday (Oct 24) warned there were risks inflation would prove more stubborn than expected and that interest rates might have to rise further to bring it to heel.

Speaking at a global markets conference, Reserve Bank of Australia (RBA) Governor Michele Bullock said the bank’s policy board was also aware that past rate hikes were still feeding through the economy and it was keen to maintain full employment.

“Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing,” Bullock said.

“It is possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently forecast.”

The cash rate is at 4.1 per cent, having been lifted by 400 basis points since May 2022, while the RBA’s most recent forecasts see inflation returning to its 2-3 per cent target band by late 2025.

Bullock noted those in-house forecasts would be updated to include data on inflation for the September quarter, due this week, and available for the RBA’s next Board meeting on Nov 7.

“The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” Bullock added.

Analyst forecasts are that consumer prices rose 1.0 per cent in the third quarter, taking the annual pace down to 5.3 per cent from 6.0 per cent in the second quarter.

Core inflation is expected to increase by around 1.1 per cent for the quarter and 5.0 per cent for the year, which would be somewhat above what the RBA had expected a few months ago.

SEE ALSO

Australia’s job market shows signs of cooling as rate hikes bite

The risk of an upside surprise for inflation has led markets to price in about a 30 per cent chance the RBA will hike rates to 4.35 per cent next month.

Bullock emphasised that it was important for inflation expectations to remain anchored, and that might be endangered should inflation stay too high for too long. “The Board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected,” she said.

Turning to the Australian dollar, which recently fell to an 11-month low against its US counterpart, Bullock noted it had been relatively stable in trade-weighted terms for about the past two years.

As a result, the exchange rate had not “played a large part” in recent monetary policy decisions, she said. REUTERS