Yesterday, as we know, the RBA raised the Australian cash rate to 4.6%. The RBA believed that the problem they had was one of excess demand. However, our Treasurer, Jim Chalmers, believes that inflation in Australia is entirely caused by high oil prices resulting from the Middle East conflict. I was therefore most interested to see what Reserve Bank Governor Michelle Bullock would say at the press conference following yesterday's RBA meeting.
Michelle Bullock said there was a need to slow the economy and return inflation to target. She said that unemployment was still low by historical standards, and added, "we think the labour market is a little bit tight". She also spoke about the need to balance supply and demand in the economy.
She said the real problem was that productivity was doing very little, and that the supply side of the economy needs to grow more before demand can also be allowed to grow. The demand side cannot grow unless supply has already grown. That means demand must grow more slowly for a period.
She said financial conditions need to be tight enough so that, looking forward, inflation pressures ease. She hoped that the interest rate rises already implemented, including yesterday's increase, would be enough. She made these comments in response to a question about the market view that rates may rise further. She believed that the rate increases already delivered would be sufficient. She also said, "we think financial conditions are restrictive."
She was asked to what degree the Middle East conflict led to yesterday's decision. She replied that this was not about the Middle East conflict. The RBA had started from a position of excess demand anyway, which is why it began raising interest rates before the conflict started.
She said there were three risks. First, the risk that the Middle East conflict would continue for longer. Second, that the AI boom could have a major effect on Australian demand, adding further demand pressures.
Third, capacity issues in the economy - was the labour market still too tight
As she noted in closing, "we started from a place of excess demand". She then went on to discuss the effects of interest rate increases and how they work.
One aspect she found particularly interesting was the foreign exchange effect. She noted that rising interest rates can strengthen the currency and reduce import prices.
For now, the RBA believes it has done enough, and that monetary conditions are restrictive.
When asked specifically about further rate hikes that the market was forecasting, she did not think they would be necessary .
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DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.
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