Australia is in a “very good position” on inflation but there are signs financial markets are being complacent about the geopolitical risks, the central bank boss says.
Reserve Bank governor Michele Bullock painted a rosy picture of Australia’s economic outlook on Monday, as she fronted a parliamentary grilling for the first time since the federal election in May.
A bunch of fresh faces on the new-look Standing Committee on Economics were given a crash course on Australia’s inflation environment.
Pleasingly, underlying inflation is back in the RBA’s two to three per cent target band and forecasts are for it to keep easing towards the midpoint.
Michele Bullock says the RBA is alert to inflation risks but Australia is well-positioned. (Mick Tsikas/AAP PHOTOS)
“So I think we’re in a very good position in terms of inflation,” Ms Bullock said.
Pandemic-era supply chain issues have eased, while higher interest rates have put a dampener on demand following a post-COVID surge.
“But again, we do have to be alert, because there’s risks on both sides of this.”
The world was seeing a “really marked step change” in the global trading system, and it could take years for the implications to become clear, Ms Bullock said.
The RBA was focusing on the impact Donald Trump’s tariffs would have on Australia’s largest trading partner – China.
Tariff wars and military conflicts have the potential to derail the global economy, the RBA says. (Darren England/AAP PHOTOS)
“There’s all the geopolitics going on, of course,” she said, adding cyber risks were quite important.
“The potential impacts of that – it usually crops up in energy prices – but it could crop up in other ways: the spread of wars.”
But there was little sign “sanguine” markets had priced these risks into equity valuations, meaning the economy could be in for an unpleasant correction if things went south.
“Certainly, high credit risk companies don’t seem to be observing high risk in their borrowings,” she said.
“There’s a slight concern that if things quickly turn in a bad direction, that the markets might react quite badly, and that might not be good for financial stability.”
Analysts expect only a small fall in inflation, lessening the likelihood of a September rate cut. (Joel Carrett/AAP PHOTOS)
The RBA had room to move to respond to any geopolitically-induced financial crisis, given the cash rate was still at 3.6 per cent, Ms Bullock said.
Markets have all but ruled out another reduction in September, but are expecting the bank to cut rates at its November meeting.
The monthly consumer price index for August, to be published by the Australian Bureau of Statistics on Wednesday, could tick up above three per cent, due to base effects around the timing of petrol and electricity price changes.
While this won’t help boost the odds for more rate cuts, it is unlikely to deter the RBA from its gradual easing path, given the board is wary of reading too deeply into the volatile headline figure.
But it will provide an early indicator for estimates of underlying price growth in expenditure categories the bank will watching closely, such as electricity prices and new dwelling costs, in the all-important quarterly data released in October.
First home buyers scheme changes may slightly raise prices, RBA assistant governor Brad Jones says. (Mick Tsikas/AAP PHOTOS)
RBA head of financial systems Brad Jones said the Albanese government’s upcoming expansion of the first home buyer deposit scheme would slightly boost dwelling prices, according to the bank’s modelling.
By bringing forward purchases and raising borrowing capacity for first home buyers, overall housing credit could increase by around one to two per cent, the RBA estimates.
“At the very margin, you may see a little more upward pressure on house prices in the short term, recognising that first home buyers account for about 20 per cent of the flow of new housing credit,” Dr Jones said.