Inflation Main Challenge, Rates Likely To Be “High For Longer”

RBA Governor Bullock has participated in a panel at the ASIC Annual Forum and stated that the biggest challenge facing the economy is inflation. She also pointed out that the current inflation problem is not just due to the supply side but that there are also underlying demand pressures, which the central bank is trying to contain. Her comments were consistent with expectations that rates are likely to stay “high for longer”.

• Bullock said that inflation is going to remain a challenge for the next 1-2 years. In addition, continued global fragmentation could boost inflation expectations, thus supply-side shocks can’t be ignored and are a risk to the long-term price outlook.
• The productivity challenge is a part of solving the inflation problem. The governor admitted that wages growth at 4% is “on the high side” when there is no productivity growth and strong unit labour costs are not helpful for fighting inflation.
• There was a discussion of productivity with the new head of the productivity commission Danielle Wood. She noted that AI is an opportunity to boost productivity especially in services and should also boost innovation.
• Bullock reiterated that monetary policy is restrictive and working as it is dampening spending and not just through mortgage holders. She reminded us that it doesn’t just work through the cash flow channel, i.e. those holding debt, but higher rates encourage people to save and also support the currency.
• The current levels of immigration are a problem because the infrastructure is not yet there but Bullock reminded the audience that it adds to supply as well as demand, thus taking pressures out of the labour market.