Challenge To Reduce Domestic Inflation, Demand Resilience Surprised

RBA Governor Bullock participated in a panel at the HKMA-BIS conference today which included BoT Governor Sethaput, BoE Deputy Governor Ramsden and Bank of Spain Governor de Cos. There were some common themes – commitment to reduce inflation and while policy is restrictive, rates will likely need to remain “higher for longer”, demand has been more resilient to monetary tightening than expected and thus inflation, especially services, has been stickier, but significant uncertainties persist around the outlook.

• RBA’s Bullock reiterated many of her previous comments from this month and so she didn’t alter the view that stronger-than-expected demand and inflation may mean further tightening depending on the outlook. She said that the main challenge for the RBA going forward will be to reduce domestic inflationary pressures.
• Bullock said that more resilient demand had led to second round effects from increased costs related to supply shocks on domestic inflation. Robust demand has enabled businesses to maintain their profit margins and thus pass on higher costs. She noted that while wages haven’t got “completely out of control” yet, the lack of productivity has resulted in strong unit labour cost inflation.
• She said that employment remains the key as jobs enable people to pay higher mortgages and costs. So, the RBA now needs to be “a little bit careful” when setting policy.
• Private and public sector balance sheets in Australia are in a good position. Mortgage arrears remain very low and refis onto higher rates have generally been managed, savings buffers are mainly still intact, government budget is in surplus but it will face higher borrowing costs going forward.