Australia’s central bank continues to face work to reduce inflation, the Reserve Bank of Australias deputy governor said, even as officials take note of favourable moves in global energy markets that could ease price pressures.
Speaking on the Phillips curve - the framework linking inflation and unemployment - Deputy Governor Andrew Hauser explained how that relationship informed the boards policy choices this year. He said the board chose to commence tightening monetary policy in February because it judged that demand in the economy was outstripping supply by more than expected, pushing inflation into the steeper portion of the Phillips curve and warranting higher interest rates to cool prices over time.
Hauser said this steeper portion of the curve offers a potential benefit: timely policy steps can lower inflationary pressures while producing a relatively smaller rise in unemployment. "But this is where being on the steeper part of the Phillips curve has a potential silver lining," he said. "It also implies that timely policy steps to reduce inflationary pressures, of the kind we have taken, should also have a proportionally smaller unemployment cost."
The RBA has implemented three rate increases this year, moves the bank said were intended to head off a war-driven energy shock and that fully reversed the amount of policy easing from 2025. Recent inflation data show headline consumer price inflation slowed to 4.0% in May, while the trimmed mean measure- a preferred gauge of underlying inflation- rose to 3.6%, remaining above the RBAs target band of 2% to 3%.
Labour-market signals are beginning to soften, Hauser noted, with the unemployment rate edging up to 4.5% in April, a 4-1/2-year high. That trend provides some indication of cooling but, in Hausers view, is not sufficient on its own to declare the inflation problem solved.
Since May there have been additional economic developments that could influence the outlook. In particular, Hauser pointed to the prospect of a possible resolution to the Middle East conflict. He said lower global oil prices tied to a potential resolution of the U.S.-Israeli war on Iran would be a welcome development because they could help lower and flatten the Phillips curve. "By itself, lower global oil prices would be a welcome development, helping to lower and flatten the Phillips curve somewhat," Hauser said.
He was careful to stress the uncertainty surrounding that scenario: "But a full resolution is not yet assured and we still have work to do to reduce inflation here in Australia, which remains far too high." The central banks stance, as outlined by Hauser, is that continued policy focus will be needed until inflation is firmly on a path back to the 2% to 3% target band.
Contextual notes
- The RBA began raising rates in February after concluding demand pressures were stronger than expected.
- Headline inflation fell to 4.0% in May; the trimmed mean rose to 3.6%.
- Unemployment increased to 4.5% in April, marking a 4-1/2-year high.