‘Further easing’ in demand, labour market needed to return inflation to target: Michele Bullock
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The news: Reserve Bank of Australia governor Michele Bullock has said further easing in demand and the labour market is likely needed to return inflation to its target band.
However, she noted it is not clear whether the lagging impact of the interest rate hikes earlier this year “is sufficient to achieve this”.
The context: Bullock’s comments were made in a speech titled ‘Monetary Policy in an Era of Shocks’ at the Anika Foundation Fundraising Lunch in Sydney on Tuesday.
While the inflationary impact of the US-Iran war on “fuel prices and headline inflation has so far been smaller than initially feared”, headline inflation still remains “well above target” and underlying inflation is “still too high”.
She also noted that the housing market has been “weaker than expected” in May, in part due to recent policy developments and a general softening of market sentiment.
Bullock said while the job market has eased more than expected, further easing would likely be required for inflation to return to target.
However, she later concluded that “there’s evidence that domestic demand and labour market conditions have been easing as required to bring the economy back towards balance”.
Low productivity growth is also underpinning inflationary capacity pressures and therefore “sharpening the trade-off between” the RBA’s “dual objectives of price and full employment”.
Bullock noted that monetary policy was better equipped to deal with cyclical supply shocks such as during periods of less volatile shocks between the 1970s and 1980s.
The emerging Chinese economy also previously “represented a large favourable supply shock for the rest of the world”, a circumstance in which the RBA’s objectives “were often complementary, rather than in tension”.
But now, Bullock said “a succession of adverse supply shocks” since the Covid-19 pandemic has “constrained global growth and contributed to higher inflation at the same time”, with “persistently weak productivity” in Australia also contributing.
What they said: “One thing monetary policy can’t do, however, is address the economy’s slow productivity growth. While this persists, the ability of the economy to grow without generating inflation is constrained, and Australians will continue to experience limited growth in real wages,” Bullock said.
“In these circumstances, the best contribution monetary policy can make is to maintain low and stable inflation and support sustainable full employment.
“The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed.”
The source: RBA speech
