The Reserve Bank of Australia (RBA) has repeatedly communicated its readiness to raise interest rates to ensure that inflation returns to target within a reasonable timeframe.
Notably, a number of economists have suggested that the upcoming third quarter consumer price index (CPI) could be the impetus for a November rate hike.
But Christopher Kent, the RBA’s assistant governor of financial markets, has stressed that inflation data is not the sole consideration of the central bank in its rate decisions.
In a Q&A session following the Bloomberg address in Sydney on Wednesday, Mr Kent explained that the CPI is an important measure, particularly given that it provides information on a timely basis in comparison to other measures such as unit labour costs.
According to Mr Kent, inflation data must be looked at in combination with other key areas of concern, including developments in the labour market and the household sector.
“Housing spending is such a large part of total spending in the economy, and that seems particularly weak at the moment. The labour market, thankfully, is easing, and a lot of that’s vacancies coming off,” he noted.
“I don’t like to suggest there’s just one thing and there’s one threshold and it’s a done deal. It’s much more putting the whole picture together with all of our forecasts.”
In its latest forecasts, the RBA said that CPI is expected to enter the target range of 2 to 3 per cent by late 2025. However, Mr Kent acknowledged that it is difficult to predict how inflation will move, especially over the longer term.
“I think we’ve got a reasonable handle on where we are right now, but then by the time you go out that far, there’s a lot of uncertainty,” he said.
“It’s really a matter of just keeping an eye on things as we go. I think in the past, we’ve made it pretty clear we would be not wanting to see inflation take much longer. But you’d have to add up a lot of different factors that would all move in one direction, and it’s possible if that were to happen, for the board to want to react.
“They’ve said they may need to raise interest rates in the future to bring inflation down. I think that’s a reflection of the fact that we wouldn’t want it to be much slower.”
Among the issues that may pose a challenge to the RBA’s inflation outlook is a resetting of inflation expectations if further significant upward shocks were to occur.
“[There are] lots of possibilities but I think I would be the first, and that’s what I used to do when I was chief economist, to emphasise just how wide those bands of uncertainty are,” said Mr Kent.
“It just means it’s a constant job of just looking, monitoring, trying to sort things, but it’s not one thing that will do it. It’s a mix of things that would set you off course either way.”
RBA in ‘wait and see’ phase
Reflecting on the RBA’s interest rate decisions to date and looking ahead to where rates may be headed, Mr Kent broke down the central bank’s mindset into three phases.
“The first part was a quick, very quick, and strong recovery in demand following the pandemic that was accompanied by some pretty severe supply shocks,” he said.
“That led to very high inflation and demand well in excess of supply. So that was a story of taking away the very stimulatory monetary policy settings and raising rates quickly.”
The second phase, Mr Kent suggested, was when the RBA was lifting rates at a slightly slower pace in an attempt to get rates into restrictive territory, which he believes has been achieved.
“We know demand growth is slowing, inflation is falling, labour market conditions are easing. Lags in policy … mean there’s still some further effects,” Mr Kent continued.
“Now, I think it’s possible, having done that to be in this third phase, where we have an opportunity to see how the economy and how the data is evolving.”
In this third phase, Mr Kent indicated that the RBA board will be focused on global developments, trends in household spending, and developments in the labour market as well as the outlook for inflation and economic activity.
“They’ve noted after the most recent meeting, some further rate rises might be needed,” he said.
“I think it’s important to recognise, because inflation is such a problem, high inflation, for all Australians, it’s important to try and get inflation back into the target in a reasonable timeframe.
“We’ve made quite a bit also of the fact that the board is mindful of trying to retain as much of the employment growth as possible, because that’s really critical.”
The Q3 CPI will be released by the Australian Bureau of Statistics on 25 October, with the RBA’s next rate decision taking place on 7 November.
