RBA’s Harper Worries Over ‘Uptick’ in Inflation Expectations

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(Bloomberg) — Australia’s longer-term inflation expectations have edged higher, with financial markets now anticipating consumer prices will remain above the Reserve Bank’s target for an extended period — a shift not seen in years, according to RBA board member Ian Harper.

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“Inflation expectations are important,” Harper, a professor of economics, told a Committee for Economic Development of Australia event in Melbourne on Tuesday. “And there is a concern about what’s happening at the long-end.”

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“Higher interest rates are expected to slow the economy and lower the risk that inflation becomes entrenched,” he said. “If there is a risk that long-term inflation expectations are becoming unanchored, as we say, then that requires strong action.”

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Australian policymakers are grappling with the unusual combination of a slowdown in activity even as inflation remains well above the top of the 2-3% target. The RBA has raised borrowing costs at each of its three meetings this year, unwinding a brief easing cycle in 2025, and returning the cash rate to 4.35% as the board tries to slow consumer-price gains. 

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Shortly before Harper’s address, Australia’s industrial relations umpire raised national minimum wage rates by 4.75%, just shy of the RBA’s inflation forecast this fiscal year, citing uncertainty over the economy’s trajectory.

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In addition to rising prices and higher mortgage repayments, households have been hit by a spike in fuel prices due to the Middle East conflict. Harper highlighted that there were renewed inflation pressures even before the energy shock hit, and it will only push prices even higher.

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He said while the RBA can’t prevent that, the board is charged with “ensuring that those effects do not become embedded in the Australian economy.”

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Recent softer data and an unexpected jump in unemployment to a 4-1/2 year high has seen traders slash expectations of further rate rises this year. While markets assign a roughly 50% chance of a hike in August, a full 25 basis-point move is no longer fully priced for this cycle.

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The reduction in rate hike expectations has helped shield Australian debt from the worst of the global bond selloff last month. Instead, traders have shifted rate-hike expectations this year to counterparts including the Reserve Bank of New Zealand and the Federal Reserve.

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Harper sits on the RBA’s nine-member monetary policy board, which votes on interest-rate decisions, and this is his first speech in the role. Non-executive directors are now participating in events to provide them with more of a public profile following a review of the central bank.

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Harper, reflecting on changes to the RBA due to the review, made particular mention of the shift to the board meeting starting on Monday afternoon and then reconvening on Tuesday.

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“It’s a wonderful thing with the new arrangements we have now,” Harper said. He added that there have been instances where he’s said on a Tuesday, “you know what, governor, I’ve actually changed my mind, and then, of course, explain to colleagues why that’s the case.” 

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“And I’m not alone in doing that,” he said.

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—With assistance from Swati Pandey.

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