RBA’s Bullock Says Economy Cooling, Unsure If Rates High Enough

b(04o8i3si05ltuuxagmt3mn_media_dl_2.png Australian Bureau of Statistics,

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(Bloomberg) — Australia’s central bank chief said there are signs the economy is adjusting as anticipated, though it’s still unclear if this year’s interest-rate hikes are enough to return inflation to target or whether additional tightening will be needed.

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In a balanced and wide-ranging speech at the annual Anika Foundation lunch in Sydney on Tuesday, Reserve Bank Governor Michele Bullock highlighted that while the world has become more shock-prone, the economy is more resilient than in the past. She said the key goal is to prevent elevated cost pressures from entrenching inflation.

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“This does mean that some further easing in the growth of demand is likely to be required if we’re to bring inflation back down sustainably to target,” Bullock said in the text of her speech, referring to the RBA’s 2-3% goal. “A key question in the period ahead is whether the tightening in monetary policy earlier in the year is sufficient to achieve this.”

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The RBA raised rates at its first three meetings of the year, trying to restrain resurgent inflation that was accelerating even before the impact of the energy shock triggered by the Middle East conflict. The central bank’s board stood pat at 4.35% at its last meeting and is expected to do so again when the next decision is announced on Aug. 11.

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Money markets are currently pricing a bit better than a one-in-three chance of a rate hike in two weeks’ time, while fully pricing one by December.

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“While conditions vary across sectors, the economy overall has adjusted gradually and broadly as expected,” Bullock said. “The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed.”

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The outlook has been clouded by the inability of the US and Iran to find a way out of their conflict. While oil prices fell steadily after an interim agreement to begin peace talks, a resumption in fighting over the Strait of Hormuz sent it surging again. Global benchmark Brent has since fallen after President Donald Trump said the US and Iran were engaged in talks to end the war.

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“Even if the renewed disruption to oil supply abates quickly, underlying inflation is still expected to be higher as fuel price rises flow through to other prices,” Bullock said.

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The governor highlighted a notable quickening in new dwelling inflation in the May monthly CPI, partly reflecting higher fuel and construction costs. She said the RBA’s liaison program showed non-labor cost pressures have continued to pick up, and more firms are looking to pass these costs on.

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“It’s also important to remember that inflation and capacity pressures in the domestic economy were already too high prior to the recent shock,” she said. “There’s evidence that domestic demand and labor market conditions have been easing as required to bring the economy back towards balance.”