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RBA warns supply shocks are harder to dismiss as policy pauses
The RBA’s assistant governor said dual-mandate central banks may face tighter policy trade-offs when capacity is already tight, with Q2 CPI flagged as critical.
A week of central bank messaging focused on how supply-side shocks, including the Middle East conflict, can be harder to “look through” when an economy’s capacity is already tight, according to analysis from Action Forex. RBA Assistant Governor (Economic) Sarah Hunter reiterated that when firms can pass through costs quickly or inflation expectations de-anchor, the shock can feed into broader inflation dynamics.
Action Forex also noted the RBA’s concern is tied to recent data, particularly in the construction sector, and that this is why the RBA’s June decision left rate hikes “on the table” even after pausing following three consecutive hikes. The pace and scale of any future tightening will depend on how risks around capacity, cost pass-through, and inflation expectations evolve in coming months, the analysis said.
In Australia, Action Forex highlighted that the Q2 CPI release is expected to be pivotal for judging the best course of action. Separately, it said the RBNZ raised New Zealand’s cash rate by 25 basis points in July to 2.50 percent, citing concerns that financial conditions would have eased further if the OCR was unchanged.
Looking to the US, Action Forex pointed to the minutes of the June FOMC meeting, which showed participants saw a high degree of uncertainty and wanted to weigh a wide range of incoming information over successive months before adjusting policy. It said the minutes also indicated that while members leaned toward rising price risks and reduced labour-market uncertainty since April, energy prices later jolted lower and nonfarm payroll growth moderated again, with a growing gap between payrolls and the household survey.