Social Navigation

Interest rates: ‘Bumpy’ road ahead on inflation, senior Reserve Bank official warns


Bringing soaring price pressures to a heel may take longer than expected and could be “bumpy”, a senior Reserve Bank official has warned.

At an address to banking executives on Monday, Marion Kohler, the central bank’s acting chief economist, also cautioned that employees may not be able to work as much as they would like despite the jobless rate remaining at near record lows.

While promising headway had been made in curbing the costs of goods as global supply chain pressures had eased, Dr Kohler said services inflation – which closely accounts for energy, rents and labour costs – remained stubborn because of strong domestic demand.

“By contrast, domestically sourced inflation – in particular, services price inflation – has been widespread and slow to decline,” she said.

Last Tuesday, new RBA governor Michele Bullock oversaw her first rate hike at the helm of the nation’s central bank. The cash rate now sits at 4.35 per cent after the RBA raised rates for a 13th time.

Updated forecasts, also released by the central bank last week, revealed inflation was expected to be 3.5 per cent. Inflation will not return to the RBA’s target band of 2 to 3 per cent by the end of 2025.

Speaking at the UBS Australasia Conference, Dr Kohler said that despite progress made so far – annual headline inflation fell from 7.6 per cent in December to 5.4 per cent in September – it may not fall as rapidly in the months ahead.

“The next stage in bringing inflation back to target is likely to be more drawn out than the first. This has been the experience of some other advanced economies that have been a little ahead of Australia in this inflation cycle,” she said.

“The recent increase in fuel prices is also a timely reminder that upside surprises from supply shocks could affect headline inflation. All to say, the road ahead could be bumpy.”

Ahead of fresh wages figures, to be released on Wednesday, which are expected to show a rise in workers’ pay packets due to the government’s intervention in the award and minimum wage determination, Dr Kohler said wages growth would ease in the coming years.

“Wages growth has also picked up over the past year but now appears to have broadly stabilised and is forecast to decline gradually over the next couple of years as labour market conditions ease,” she said.

Despite its punishing round of rate hikes, the RBA expects unemployment will not rise as much as previously anticipated. The updated forecasts show the unemployment rate will increase from 3.6 per cent to 4.25 per cent by the end of 2025.

The acting assistant governor told the conference that a weakening of the jobs market would likely reduce average hours worked rather than increase the unemployment rate.

“This reflects a longer-run structural shift in the way the labour market adjusts during periods of slow growth,” she said.

“Broader labour under utilisation rates are also expected to rise gradually as the labour market moves into balance.

“We currently expect a further gradual easing in the labour market resulting from a period of below-trend growth in aggregate demand for goods and services.”

Reserve Bank

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.