Australia’s home-grown inflation requires ‘substantial’ policy response: RBA
AUSTRALIA’S top central banker on Wednesday (Nov 22) warned inflation had become increasingly driven by domestic demand rather than temporary supply chain pressures, requiring a more “substantial” response from interest rates.
In a hawkish sounding speech on policy, Reserve Bank of Australia (RBA) governor Michele Bullock noted price pressures were broad-based and increasingly persistent in the service sector, suggesting demand was too hot for the economy to handle.
“The remaining inflation challenge we are dealing with is increasingly homegrown and demand driven,” said Bullock.
“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.”
This was one reason the RBA board decided this month to raise interest rates a quarter point to a 12-year high of 4.35 per cent. It also left the door open to further tightening if necessary, with financial markets implying around a 40 per cent chance of one further hike to 4.60 per cent in the first half of next year.
Bullock noted that inflation for goods had slowed as global supply chains became unblocked, and that had further to run.
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However, domestic inflation had become more broadly based with inflation in two-thirds of the items in the consumer price basket running at 3 per cent or higher.
Consumer price inflation (CPI) ran at an annual 5.6 per cent in the third quarter, down from last year’s peak of 7.8 per cent but still well above the RBA’s long term target band of 2-3 per cent.
“Inflation is much broader than just rising prices for petrol, electricity and rents – prices are rising strongly for the majority of the goods and services we all consume,” said Bullock.
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Cost pressures in the service sector, she noted, had become particularly persistent and prices were rising strongly for everything from hairdressers and dentists, dining out, sporting and other recreational activities.
Bullock said the RBA’s liaison with firms pointed to a lack of spare capacity, especially in the labour market where unemployment is still near 50-year lows at 3.7 per cent.
“An important implication of this homegrown and demand-driven component to inflation is that getting inflation back to target will take time,” said Bullock.
The RBA’s current forecast is that inflation will not reach the top of the 2-3 per cent target band until late 2025.
“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 added.
Bullock acknowledged that higher rates were squeezing finances at many households, but noted the RBA’s only policy tool was rates and it was a blunt one. REUTERS
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