The Reserve Bank doesn’t currently expect inflation expectations to become de-anchored in the near term, the bank’s assistant governor for economics said at an event on Wednesday, but it is watching for any signs of this risk materialising in the future.
Pointing to internal research, Sarah Hunter said short-term inflation expectations “appear” to be converging towards long-term expectations, which have “remained anchored through the recent past”.
“There’s no evidence of expectations being more persistent than normal,” Hunter said.
Well-anchored inflation expectations, she explained, are a key prerequisite for consistently achieving low and stable inflation. Citing Turkey as an example, Hunter said de-anchored expectations can cause significant damage.
“Given the enormous damage that such de-anchoring can cause, and that policy can be enacted more flexibly while expectations remain anchored, the RBA Board is constantly alert for signs that this risk might emerge here in Australia,” Hunter said.
“It does that by tracking a range of inflation expectations measures, including multiple financial market measures, and surveys of households, unions and professional forecasters. That analysis indicates that inflation expectations have not become de-anchored through the current high-inflation experience”.
Regarding financial markets, Hunter said they “efficiently” incorporate signals about the likely future direction of inflation into market prices.
“From these prices, we can discern whether their short- and long-term expectations remain anchored to the RBA’s inflation target,” she said, adding that the RBA also tracks how households and unions form their expectations.
Why expectations matter in regards to economic outcomes, Hunter said, is because “people don’t just make decisions based on what is happening today, they also factor in what they think will happen tomorrow”.
“In other words, inflation expectations are at least partly self-fulfilling. For example, our decision over how much to save for retirement today is determined by how much income we think we’ll need once we stop working, and this is partly influenced by what we think will happen to prices between now and then”.
The RBA has stressed that returning headline inflation back to its 2 to 3 per cent target range is its primary goal, and that monetary policy will need to remain restrictive enough to ensure this happens in a timely manner.
At the moment, the bank expects inflation to reach the target band by late 2026, with governor Michele Bullock reinforcing earlier this month that there will be no rate cuts in the near term.
The RBA is next due to meet on 5 November. Regarding market pricing, as at the 15 October, the ASX 30 Day Interbank Cash Rate Futures November 2024 contract was trading at 95.69, indicating a 14 per cent expectation of an interest rate decrease to 4.10 per cent in November.
