RBA Governor Michele Bullock, in a speech, emphasized the changing nature of the inflation challenge facing Australia, noting its increasing shift towards being “homegrown and demand driven.” This distinction is crucial as it significantly influences the central bank’s policy response.

Bullock differentiated between inflation driven by global supply disruptions, over which monetary policy has limited influence, and inflation stemming from domestic demand exceeding the economy’s potential. In the case of the latter, she argues, “a more substantial monetary policy tightening is the right response.”

The Governor also highlighted three key indicators supporting the demand-driven nature of current inflation: Firstly, the broad-based nature of inflation across various sectors; secondly, the underpinning of inflation by domestic demand, particularly in services; and thirdly, the continued limited spare capacity in the economy, as evident in high rates of labor utilization.

Regarding the timeframe for bringing inflation back to the target range, Bullock suggested that while supply-side issues eased relatively quickly, reducing inflation from 8% to 5.5% within three quarters, the demand-driven component would take longer to address. She projected that it might take another two years for inflation to fall below 3%.

Full speech of RBA Bullock here.

RBA meeting minutes from November 7 reveal a decisive step in monetary policy adjustment, with a 25bps increase in cash rate to 4.35%. This move reflects the RBA’s heightened focus on managing inflationary pressures and aligning with its long-term targets.

The members’ discussion was centered around two options: raising the cash rate or maintaining it at its current level. The decision to increase the rate was influenced by the consensus that this was the “stronger” course of action.

Achieving inflation targets by the end of 2025 played a significant role in the decision-making process. RBA members acknowledged an increased risk of not meeting these targets, suggesting the necessity of a prompt policy response.

The minutes also reveal a strategic consideration of future scenarios. Delaying the rate adjustment was seen as potentially necessitating a “larger” policy response in the future, especially if inflation pressures intensify.

Preventing a significant rise in inflation expectations was another critical concern. The RBA aimed to avoid any shift in market sentiment that could destabilize inflationary trends. This is particularly relevant given the Board’s emphasis on “low tolerance” for delayed inflation target achievement.

Also, staff’s inflation forecasts, which anticipated one or two rate rises, further underscored the necessity of the rate hike.

Full RBA minutes here.

RBA Governor Michele Bullock, speaking at the Australian Securities and Investments Commission Annual Forum, emphasized the persistent challenge of inflation for the Australian economy. Bullock forecasted that inflation would remain a “crucial challenge” for the next “one or two years,” highlighting the complexity and longevity of the problem.

Bullock addressed a common misconception about the current inflationary environment, stating, “There is a bit of a perception around that the inflation at the moment really is all a supply driven thing – petrol prices, rents, these sorts of things, energy.” However, she clarified that there is also a significant “demand component” contributing to inflation, which central banks globally are striving to manage.

Governor Bullock also touched upon global issues, noting, “In a world of fragmentation and conflicts … We’re going to see more potential for supply shocks.” She explained the dilemma central banks face regarding such shocks: while the typical approach is to look through temporary supply shocks, a continuous stream of them can lead to entrenched inflation expectations. Bullock warned, “If inflation expectations adjust, then that’s a problem.”