SYDNEY: Australia and the wider world are likely to see more supply shocks such as the energy crisis sparked by the Iran war, a senior central bank official says, reinforcing the need to aim for low and stable inflation.
Sarah Hunter, the Reserve Bank of Australia’s (RBA) 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 more important that such episodes are well understood, prepared for, and responded to in a way that minimises the risk of persistent inflation while supporting sustainable activity, she said.
“Ultimately, though, some economic costs are unavoidable,” Hunter said yesterday in the text of a speech in Canberra.
“All policymakers can do is strike a balance in the face of a worsening trade-off.”
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.
“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.
“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.”
The RBA’s hawkishness this year contrasts with ultra-easy policies pursued by global central banks during the last big supply shock – the Covid-19 pandemic and Russia’s invasion of Ukraine. — Bloomberg
