MNI: RBA's Bullock Says Inflation Peak Near; More Hikes Coming

Reserve Bank of Australia Deputy Governor Michele Bullock said there are good reasons to believe Australia is "approaching the peak of inflation this cycle" but signalled further interest rate increases were likely, in a speech on Wednesday night.

Bullock noted the number of items in the CPI basket rising above 3% y/y was the highest in decades and that last time a similar pattern was seen "inflation was well above target and the Bank was increasing the policy rate." Australia's CPI rose at a 7.3% y/y pace in the September quarter.

In a speech that largely underscored key elements of last week's Statement on Monetary Policy, she warned that "further increases in interest rates will be required" to return inflation to the Bank's 2%-3% target. The RBA delivered a seventh consecutive hike at its Nov 1 meeting, increasing the Cash Rate by 25bps to 2.85%. Another 25bps is expected at its December meeting. (See MNI RBA WATCH: Hikes 25bp, To Miss Inflation Target Until 2025)

Bullock reiterated the Bank's concerns about the potential shift in inflation psychology should rising prices for non-discretionary goods spark calls for higher wages which are then passed by businesses to their customers. "If this mindset were to take hold inflation will remain high," she said.

Her speech underlined the Bank's upward revision in last week's Statement on Monetary Policy for headline inflation to peak at around 8% later this year and for elevated price pressures to continue into 2023 on higher-than-expected electricity prices. (See MNI BRIEF: RBA Ups Key Inflation Forecast As Energy Costs Soar)

She said the outlook for domestic energy prices and rents were two areas "we are monitoring closely." The RBA calculates the second-round contribution of electricity prices to underlying inflation could be around half a percentage point in 2024. Higher global interest rates were helping moderate global demand pressures, supplier delivery times had shortened, and prices for oil and grains had fallen, she said.

The speech also highlighted the risk to household spending from higher interest rates and inflation, cautioning that the impact on spending from a decline in house prices is difficult to forecast. She said lower-income households, with lower savings buffers, would likely cut back on consumption. The outlook for China's economy was viewed as a "significant concern". "Stress in the property market, one of the engines of Chinese growth in the past, also carries the possibility of a significant downturn in activity," Bullock said.