Bullock – RBA Alert To Upside Price Risks, Covid Savings Buffer Persists

RBA Governor Bullock has just answered questions at the AFSA annual summit panel. She reiterated that the central bank’s focus is on keeping inflation low and stable and that it will bring it back down. In line with the October meeting minutes, the Board is very alert to upside risks to inflation and the de-anchoring of inflation expectations. The conflict in the Middle East is adding to the list of uncertainties but not as big as Ukraine or Covid.

• Bullock noted that inflation needs to come down as the longer it remains above target the greater the risk that expectations are de-anchored and in that case rates will need to rise. Over around a year they remain elevated as consumers react to price changes but over the long term they are anchored at around 2.5%.
• There hasn’t been a shift in the inflation paradigm and so the current 2-3% target is appropriate. The recent episode was not just caused by supply issues but demand played a big part too. If it was changed, then it would make it difficult for economic participants to anchor their inflation expectations. Bullock noted that the RBA has some flexibility and is taking some time to return inflation to target.
• The turn in the housing market was a surprise as Bullock thought the correction would continue for longer than it did.
• There was a lot of discussion around savings. The savings rate has come down but remains positive and the buffers built up during Covid are yet to be run down. It is in the interest of most households to hold onto those savings as a large share is in mortgage offset accounts and so are helping to keep payments down. Bullock commented that the US has rundown its pandemic savings buffer.