Reserve Bank chief economist Sarah Hunter says global supply shocks appear to be occurring more frequently and the RBA will try to adjust to the new reality. She said the RBA was investing in new economic models, research, and frameworks to deal with the new problems. “These sharp adverse supply shocks have become more frequent, meaning the Monetary Policy Board and the RBA have had to navigate the policy trade-offs repeatedly,” Hunter said. “And we could see this continue going forward; economic spill-overs from rising geopolitical tensions, trade fragmentation, and the increasing prevalence of extreme climate events are just some of the shocks we are now experiencing.” Her speech in Canberra to the Economic Society of Australia laid bare the challenges facing monetary policy in an era of heightened global uncertainty.
“That means the RBA, and the economy more broadly, may have to face these trade-offs, and the costs that come with them, more often in the years ahead,” Hunter said. “To help us navigate through these complexities, the RBA is investing in our knowledge, people and frameworks.” Hunter made her comments in a speech in Canberra to the Economic Society of Australia. Only hours earlier, the world learned that the United States had launched fresh missile strikes against Iran, in the latest tit-for-tat assaults between the two countries that are again threatening to choke off the flow of shipping traffic through the Strait of Hormuz. That geopolitical flashpoint has already sent oil prices higher, adding to inflationary pressures globally.
Hunter said the prevailing wisdom was to look through short-term supply or relative price shocks, relying on the assumption that the shock and its impacts would be relatively temporary. However, if the shock was expected to be more persistent and create greater risks of inflation expectations shifting higher, the central bank would need to respond by raising interest rates. In recent years, the RBA had consciously poured more resources into understanding what a world of increasing supply shocks may look like for inflation targeting central banks. The traditional approach of ignoring first-round effects is no longer adequate when shocks cascade through multiple sectors and persist for quarters rather than weeks.
