On Tuesday, the head of the central bank in Australia issued a warning that there was a possibility that inflation may prove more resistant than predicted and that interest rates could need to be raised even more to bring it under control.
Michele Bullock, Governor of the Reserve Bank of Australia (RBA), made these remarks while speaking at a conference on global markets. She noted that the bank’s policy board was conscious that previous rate rises were still flowing through the economy and was eager to preserve full employment.
“Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing,” according to Bullock.
“It is possible that this can be done with the cash rate at its current level, but there are risks that could see inflation return to target more slowly than currently forecast.”
The cash rate is now at 4.1%, having been raised by 400 basis points since May 2022. The RBA’s most recent estimates predict inflation returning to its 2-3% target zone by 2025. Four hundred basis points have raised the cash rate since May 2022. The RBA’s next Board meeting is scheduled for November 7. Bullock said that these in-house projections will be revised to incorporate data on inflation for the September quarter, which is expected to be released this week. These updated predictions would be ready in time for the RBA’s meeting. “The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” according to Bullock.
According to the projections of market analysts, consumer prices increased by 1.0% during the third quarter, bringing the annual pace to 5.3% from 6.0% during the previous quarter.
Core inflation is anticipated to rise by around 1.1% for the quarter and by 5.0% for the year. If this occurs, it will be considerably higher than the RBA anticipated a few months ago. The possibility of an unexpected increase in inflation has caused financial markets to price in around a 30% likelihood that the Reserve Bank of Australia would raise interest rates to 4.35% in the following month.
The importance of maintaining stable inflation expectations was emphasized by Bullock, who noted that this may be jeopardized if inflation remained unacceptably high for an inordinately long period. “The Board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected,” added the representative.
Turning to the Australian dollar, which has lately reached a low point not seen in 11 months compared to its equivalent in the United States, Bullock pointed out that it has been generally steady in trade-weighted terms for about the previous two years.
She stated that this was why the currency exchange rate had not “played a large part” in recent choices about monetary policy.
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