Australia’s central bank still has work to do to reduce inflation, deputy governor says

[SYDNEY] Australia’s central bank has work to do to tame “too-high” inflation, a top official said on Wednesday (Jun 24), although he added that lower global oil prices stemming from a potential resolution of the US-Israel war on Iran would be a welcome development.

In a speech about the Phillips curve, Reserve Bank of Australia (RBA) deputy governor Andrew Hauser shed some light on the way the framework – which describes the inverse relationship between inflation and unemployment – informed the board’s decisions to raise interest rates this year.

He said the board decided to start raising rates in February, because it was concerned that demand in the economy was exceeding supply by more than expected and generating inflation, moving up the steeper end of the Phillips curve.

This warranted policy tightening to ensure inflation would cool over time.

“But this is where being on the steeper part of the Phillips curve has a potential silver lining,” he added. “It also implies that timely policy steps to reduce inflationary pressures, of the kind we have taken, should also have a proportionally smaller unemployment cost.”

The RBA has raised interest rates three times this year to head off a war-driven energy shock, fully reversing the amount of policy easing from 2025.

Headline inflation slowed to 4 per cent in May, but the trimmed mean measure pushed higher to 3.6 per cent, well above the target band of 2 to 3 per cent.

Signs show that the labour market is cooling, with the unemployment rate edging up to a 4½-year high of 4.5 per cent in April.

Hauser added that some important economic developments have occurred since May, not least the prospect of a possible resolution to the Middle East conflict.

SEE ALSO

Australia’s central bank warns rate hikes might not be over after holding fire

Australian shares fall for fourth day as miners, tech drag

Australia consumer prices slip in May, but core inflation tops forecasts

“By itself, lower global oil prices would be a welcome development, helping to lower and flatten the Phillips curve somewhat,” he said.

“But a full resolution is not yet assured, and we still have work to do to reduce inflation here in Australia, which remains far too high.” REUTERS