Appearing before the Senate economics legislation committee on Thursday (26 October), governor of the Reserve Bank of Australia (RBA) Michele Bullock said she was not surprised by the latest reacceleration in inflationary pressures.
She said the RBA had anticipated a setback in the battle to return inflation to the 2–3 per cent target range.
Both headline and trimmed mean inflation rose 1.2 per cent over the three months to 30 September (Q3), according to the latest consumer price index (CPI).
Markets had forecast trimmed mean inflation of 1 per cent and headline inflation of 1.1 per cent over the quarter.
All four major banks now expect the RBA to resume its monetary policy tightening cycle at the next board meeting on Melbourne Cup Day (7 November).
But Ms Bullock kept her cards close to her chest during her appearance before the Senate, despite recently stating the central bank “would not hesitate” to lift rates again if there was a “material upward revision to the outlook for inflation”.
However, the governor conceded the Q3 result “reinforced” evidence of “persistent” services inflation.
“Consistently, we’re seeing that although services inflation is declining, it’s still higher than we’re comfortable with and it’s also reasonably persistent,” she said.
“So, in a sense, [Q3 CPI data] reinforced all of that for us.
“What exactly this means – we’ve now got to take the information away [and] we’ve got to think about our own forecasts for that.”
The RBA is set to release an update to its inflation forecast in its next statement on monetary policy, which is likely to inform its future monetary policy posture.
“We’re looking at some of the more persistent parts of inflation, and asking ourselves, ‘Are there signs that those might be coming down in the future?’” Ms Bullock told Senate estimates.
“So yes, we are wary and we don’t know if the job is done yet, and we’ve made that very clear, even though we haven’t raised interest rates since our last interest rate rise in June.
“We’ve made it very clear that we might need to go again, we hadn’t, we had not ruled that out and we’re in the same position.”
According to Robert Carnell, regional head of research, Asia-Pacific at ING Economics, current levels of uncertainty over the outlook for monetary policy are unprecedented.
“The debate about monetary policy for most central banks is usually set in the context of a trade-off between squeezing out inflation and the ensuing rise in unemployment that this creates,” he said in an analysis published on Thursday (26 October).
“We can look at historical reaction functions during previous business cycles and try to apply these with tweaks to the current situation.
“However, the current situation is like nothing we have ever seen before, and for this author, that covers a period of over three decades.”
He said the monetary policy debate has increasingly become a “guessing” game for both external observers and central bank officials.
“That makes high-conviction calls on central bank rate policy difficult,” he added.
Nonetheless, Mr Carnell said he expects the cash rate has “not yet peaked” at 4.1 per cent, given evidence of a reacceleration in inflation and continued tightness in the labour market.
“Inflation is no longer falling; even when adjusted for volatile items, it is not falling very fast,” he observed.
“The labour market is not only not slowing enough to bring inflation run rates down, but it is still showing a lot of strength, and parts of the economy, such as housing, are showing much more resilience to rate increases than has usually been the case.
“We think there is enough information right now to justify a further hike to 4.35 per cent at the 7 November meeting.”
He said if the RBA keeps rates on hold in November, a hike would be likely in December if not then, as there is a “good chance” of another upside surprise to inflation for the month of October.
Other observers, like Deutsche Bank economist Phil O’Donaghoe, are projecting rate increases in both November and December.
Ultimately, however, ING’s Robert Carnell said he expects the RBA to commence a monetary policy easing cycle in 2024.
“[Markets] don’t expect any easing until the very end of 2024, while we see a more rapid pace of inflation decline in 2024, making room for earlier cuts,” he said.
“Admittedly, the situation is highly fluid and changes almost by the day.”