RBA’s Hunter Sees More Supply Shocks, Reinforces Price-Jobs Goal

b(04o8i3si05ltuuxagmt3mn_media_dl_1.png Australian Bureau of Statistics,

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(Bloomberg) — Australia and the wider world are likely to see more supply shocks such as the energy crisis sparked by the Iran war, a senior Reserve Bank official said, reinforcing the need to aim for low and stable inflation.

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Sarah Hunter, assistant governor in charge of economic forecasting, said more frequent supply shocks may intensify the trade-offs for both central banks and the broader economy. That makes it even more important that such episodes are well understood, prepared for, and responded to in a way that minimizes the risk of persistent inflation while supporting sustainable activity, she said.

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“Ultimately, though, some economic costs are unavoidable,” Hunter said Wednesday in the text of a speech in Canberra. “All policymakers can do is strike a balance in the face of a worsening trade-off.”

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The RBA raised interest rates at its first three meetings of the year before pausing last month at 4.35%. The board was trying to head off resurgent inflation even before the Middle East conflict drove up fuel prices and raised the risk of second-round effects given energy’s importance across the economy.

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“The current oil price shock has shifted the curve out somewhat, implying higher underlying inflation for any level of unemployment,” Hunter said, referring to the Phillips Curve.

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“Inflation may respond more strongly if shocks occur while underlying inflation is already elevated,” she said, adding this raises the risk of inflation expectations becoming untethered. “The effects on activity could be larger if households and businesses become more cautious or if their financial buffers have been eroded.”

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The RBA’s hawkishness this year contrasts with ultra-easy policies pursued by global central banks during the last big supply shock — the Covid pandemic and Russia’s invasion of Ukraine. Central banks led by the Federal Reserve initially looked through “transitory” inflation, only to see price pressures broaden and accelerate.

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The RBA last year lowered Australia’s potential growth rate to around 2% to reflect the economy’s weak productivity performance in recent years. That’s left it more prone to bursts of inflation if economic activity gets too much momentum and starts to run up against capacity limits.

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Hunter pointed to several shocks currently in train:

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“Ultimately, while supply shocks create difficult trade-offs, they do not lessen the importance of maintaining low and stable inflation,” Hunter said. “The board will continue to act as needed to ensure inflation returns to target and the labor market to sustainable full employment.”

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The RBA aims for the midpoint of its 2-3% inflation target.  

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