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Inflation poses challenges for RBA

Inflation poses a significant challenge for the Reserve Bank and Governor Michele Bullock, according to the minutes of the bank’s recent policy meeting, where interest rates were raised. The minutes confirm the decision to increase the cash rate in response to persistent inflation and a stronger-than-expected economy.

The 25 basis-point increase brought the rate to 4.35%, the highest level since late 2011. The minutes also revealed that the bank’s forecasts for inflation to fall within its 2%-3% target range by the end of 2025 depended on one or possibly two more interest rate increases.

The RBA’s aim was to stabilise inflation expectations and steer inflation to its target range of 2% to 3%, as the minutes acknowledged that inflationary expectations in Australia had risen in the past year. Further monetary policy tightening would depend on economic data from Australia.

While there was consideration of leaving the cash rate unchanged due to uncertainties like tensions in the Middle East, the case for raising rates was deemed stronger to avoid prolonged high inflation. Governor Bullock emphasised the challenge of inflation in her remarks at a Melbourne finance conference.

Consumer price inflation currently stands at 5.4%, higher than the central bank’s target range but below the December 2022 peak of 7.8%. Bullock noted that supply pressures and underlying demand both contributed to inflation, and the RBA was working to address them.

She highlighted that while wage growth around 4% in the context of productivity growth wasn’t necessarily problematic, it could pose risks if productivity didn’t improve. The pandemic, supply chain shortages, online demand, and multiple rate hikes have collectively suppressed consumer spending, demand, and productivity, influencing wage trends.

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