The head of the Reserve Bank of Australia is alert to the conflict in the Middle East adding to other shocks already pushing up the cost of living.

In her first public appearance as governor of Australia’s central bank, Michele Bullock said the bank was concerned about the potential inflation implications of another conflict.

“Typically, when we think about shocks to supply that increased prices, you think, well, that’s probably ‘OK, it’ll wash out’,” she said at the Australian Financial Security Authority summit in Sydney.

“But the problem is that we’ve just got shock after shock after shock.

“And the more that that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking, and the more people adjust their inflation expectations, the more entrenched inflation is likely to become.”

Ms Bullock said it was unclear how the developing situation in the Middle East would affect prices but it had initially pushed up oil prices, which were already elevated and flowing through to higher prices at the petrol pump.

On the other hand, she said ongoing conflict and instability could slow growth across the globe, which would also be challenging.

“So it’s really a bit of a balancing act.”

The central bank has been on hold for four months in a row as it monitors the impact of its 12 interest rate hikes already delivered.

In the minutes from the most recent board meeting, the RBA noted inflation was coming down but warned of risks threatening its plan for bringing prices back within the target band by late 2025.

Speaking on Wednesday, Ms Bullock said Australia was still on its narrow path to bring inflation back to the two to three per cent target range while keeping the economy growing and preserving strength in the jobs markets.

The challenge was bringing inflation down quickly enough to avoid inflation expectations becoming de-anchored.

Inflation expectations in the near term were running at an elevated level, reflecting the hard-to-ignore surge in prices for things like petrol, rent and food, but over the longer term remained “reasonably anchored”.

“The longer inflation stays above target, the more people observe it happening in their day-to-day lives, the harder it will be (to bring inflation down),” Ms Bullock said.

The minutes flagged slow progress on services inflation and higher petrol prices as risks to the inflation outlook, as well as the recovering housing market.

Ms Bullock said movements in the housing market had come as a surprise, and said she would have expected existing housing stock to further decline as interest rates remained high.

She said there were several factors at play, including the rising cost of construction nudging more people to buy an existing home rather than build one.

The hawkish tone of the October board meeting minutes was observed by several economists though many still believe the central bank has reached its peak.

But a worrying set of inflation and jobs data between now and the November cash rate meeting could be enough to trigger another interest rate hike.

The Deloitte Access Economics team said inflation was following a downward trend and any further interest rate hikes were likely to increase the chance of recession.

“And despite some upward pressure on inflation from higher oil prices and the weaker Australian dollar, the RBA’s current tightening cycle should be at an end,” the economists wrote in a report.

Poppy Johnston
(Australian Associated Press)