{"id":565572,"date":"2026-07-29T17:38:27","date_gmt":"2026-07-29T17:38:27","guid":{"rendered":"https:\/\/www.newsbeep.com\/il\/565572\/"},"modified":"2026-07-29T17:38:27","modified_gmt":"2026-07-29T17:38:27","slug":"monetary-policy-in-an-era-of-shocks-speeches","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/il\/565572\/","title":{"rendered":"Monetary Policy in an Era of Shocks | Speeches"},"content":{"rendered":"

\t\t\t\t\tWatch video: Speech delivered by Michele Bullock, Governor, Anika Foundation Fundraising Lunch, Sydney<\/a><\/p>\n

I\u0092d like to begin by acknowledging the Traditional Custodians of the land on which we meet and pay my
\n\trespects to Elders past and present. I extend that respect to all Aboriginal and Torres Strait Islander
\n\tpeople joining us today.<\/p>\n

It\u0092s a privilege to be with you again for the Anika Foundation fundraising lunch, my third year
\n\tjoining as Governor. The Foundation\u0092s commitment to advancing youth mental health is making a
\n\tlasting difference in the lives of young Australians and their families.<\/p>\n

A defining and recurring feature of the global economy in recent years has been the increasing frequency
\n\tand impact of supply shocks.<\/p>\n

First, there was the shock associated with the COVID-19 pandemic. Then the
\n\tRussian invasion of Ukraine led to an energy price spike.<\/p>\n

As some of the disruptions associated with these earlier adverse shocks began to recede, new risks have
\n\temerged. The conflict in the Middle East is disrupting energy markets, severe weather events have
\n\taffected production and trade around the world, and continuing trade tensions add further ambiguity.<\/p>\n

The outlook can change quickly, and uncertainty can re-emerge even as earlier risks begin to ease.<\/p>\n

Today, I will discuss how recent global developments are affecting Australia and place them in historical
\n\tcontext by looking back to the oil shocks of the 1970s.<\/p>\n

The world has been more shock-prone in recent years, but the economy is more resilient than it was in the
\n\tpast. The adoption of credible inflation targets by central banks \u2013 to keep inflation low and
\n\tstable \u2013 has played a key role in our improved resilience.<\/p>\n

This doesn\u0092t mean we\u0092re immune from adverse supply shocks. They can constrain growth, reduce
\n\treal incomes and add to inflationary pressures. In this environment, our job is to keep inflation
\n\texpectations anchored and make sure that shocks don\u0092t lead to lasting increases in inflation.<\/p>\n

With inflation and capacity pressures already elevated, recent shocks have added further to the inflation
\n\timpulse.<\/p>\n

That is why we tightened monetary policy earlier this year and why we remain focused on returning
\n\tinflation sustainably to target.<\/p>\n

How is the Australian economy faring?<\/p>\n

Before turning to current conditions, I want to reflect on the inflation challenge we have faced in recent
\n\tyears.<\/p>\n

Following a once-in-a-century pandemic, economies around the world experienced inflation outcomes that few
\n\tcurrent central bankers had encountered in their professional lives. Australia was no different. Demand
\n\tand employment outcomes remained strong. Our challenge was to bring inflation down while preserving as
\n\tmany of the gains in the labour market as possible.<\/p>\n

In Australia, inflation declined significantly from its peak and underlying inflation also moderated in
\n\t2024 and 2025. Our forecasts at the time suggested inflation would return sustainably to target over
\n\ttime. This marked important progress in restoring price stability after a period of global disruption. \n<\/p>\n

Inflation has since increased and is now above target. Indeed, it was rising and above target even before
\n\tthe recent oil price rises. This means that we haven\u0092t yet achieved our objective of returning
\n\tinflation sustainably to target.<\/p>\n

Higher inflation isn\u0092t just a statistic. It strains household budgets, complicates business planning,
\n\tand weighs on confidence. Many Australians are again feeling this pressure; indeed, we recently published
\n\tsurvey evidence showing that inflation is the single most pressing economic concern for Australians. The Monetary
\n\tPolicy Board is acutely aware of the impact of this high inflation.<\/p>\n

Let me now turn to how we\u0092re assessing the impact of this year\u0092s conflict in the Middle East,
\n\tand the evidence so far on how the Australian economy is responding to recent increases in the cash
\n\trate.<\/p>\n

Five months have passed since the conflict began. While there are now some signs of the impact of the
\n\tconflict on inflation and activity, recent developments in commodity markets are a reminder that
\n\tconditions can change quickly and that it remains too early to assess the full economic effects.<\/p>\n

In this environment, the outlook remains uncertain. Ongoing commodity price volatility seems likely, which
\n\tmakes it even more difficult to assess the ultimate effect on inflation and activity.<\/p>\n

Likewise, because monetary policy operates with a lag, the full effects of this year\u0092s cash rate
\n\tincreases are yet to be felt.<\/p>\n

Since the outbreak of the conflict, oil prices have been highly volatile and, as recent days and weeks
\n\thave demonstrated, conditions can change quickly. While the effect on fuel prices and headline inflation
\n\thas so far been smaller than initially feared, headline inflation remained well above target at
\n\t4\u00a0per\u00a0cent in May (Graph\u00a01).<\/p>\n

More importantly, underlying inflation \u2013 a better guide to the inflation impulse that abstracts from
\n\tmore volatile prices \u2013 has evolved broadly as we expected back in May. But it is still too high. \n<\/p>\n

\t
\n\t\t <\/p>\n

Graph 1<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

Elevated underlying inflation is consistent with ongoing capacity pressures in the domestic economy, which
\n\thad re-emerged before the conflict in the Middle East. It also reflects some pass-through of earlier
\n\thigher fuel costs to other prices. For instance, new dwelling inflation picked up noticeably in the May
\n\tCPI data, partly reflecting higher fuel and construction costs.<\/p>\n

We\u0092re also hearing from our business and community liaison program that non-labour cost pressures
\n\thave continued to pick up, and more firms are looking to pass these costs on.<\/p>\n

Demand growth appears to be moderating broadly as expected in the May baseline forecasts, helping bring
\n\taggregate demand closer into line with the economy\u0092s supply potential. So far, there\u0092s limited
\n\tevidence of a large effect of the spike in oil prices on household spending, in part reflecting temporary
\n\tpolicy measures such as the reduction in fuel excise.<\/p>\n

Consumer sentiment remains very weak, though it has recovered somewhat from its trough in April. While
\n\thouseholds remain cautious, spending has been more resilient than sentiment alone might suggest.<\/p>\n

Timely indicators, including liaison, point to moderate growth in consumption over the June quarter,
\n\tbroadly as expected. Household saving rates also appear to have been relatively stable.<\/p>\n

Business confidence fell sharply at the start of the conflict but has rebounded somewhat over recent
\n\tmonths. The decline in business conditions and capacity utilisation has been less pronounced. Business
\n\tinvestment has been stronger than expected, largely driven by investment in data centres.<\/p>\n

One sector of the economy that has been weaker than expected is the housing market. We had expected
\n\tconditions to ease in response to the changed outlook for monetary policy and the rise in the cash rate
\n\tearlier this year.<\/p>\n

But the housing market has eased by more than we had anticipated in May. This appears to reflect a range
\n\tof factors, including recent policy developments affecting the housing market, and a general softening in
\n\thousing market sentiment.<\/p>\n

Even so, the easing in established housing prices has so far been modest, following a period of strong
\n\tgrowth. Price declines have been concentrated in the Sydney and Melbourne markets, but prices in these
\n\tmarkets remain around where they were before interest rates started to rise in February this year
\n\t(Graph\u00a02).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 2<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

Furthermore, the most recent data suggest that, notwithstanding the price falls, negative equity remains
\n\tvery limited, affecting less than 1\u00a0per\u00a0cent of borrowers (Graph\u00a03).<\/p>\n

Of that small group, our estimates suggest that only a small share of borrowers are facing severe
\n\tdifficulty with
\n\ttheir loan repayments. This is not to downplay that this would be stressful for those affected. But it
\n\tdoes indicate that financial stability risks are contained, and borrowers, in aggregate, have built up
\n\tconsiderable savings buffers over recent years.<\/p>\n

\t
\n\t\t <\/p>\n

Graph 3<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

While we expect housing prices to be affected when interest rates rise, monetary policy doesn\u0092t
\n\ttarget housing prices. Rather, what matters for monetary policy is how changes in housing prices affect
\n\thousehold spending, investment decisions, and, ultimately, inflation.<\/p>\n

The labour market has also eased a bit more than expected over recent months, moving it a little closer to
\n\tbalance relative to its tight starting point. The unemployment rate has risen by somewhat more than
\n\texpected, but other indicators, such as job advertisements, have remained more resilient. Recent
\n\tintelligence from our liaison program suggests that some firms paused hiring in the early stages of the
\n\tconflict, but some hiring activity seems to have resumed more recently.<\/p>\n

Overall, we continue to assess that some further easing in labour market conditions will likely be
\n\trequired to bring inflation back to target.<\/p>\n

As we prepare our updated forecasts for August, we\u0092re considering how the key judgements and
\n\tassumptions underpinning the May forecasts have evolved.<\/p>\n

We\u0092re assessing how recent developments, including higher input costs and geopolitical tensions, will
\n\taffect inflation. Domestic demand has eased broadly as expected and labour market conditions have
\n\tsoftened somewhat. But with continued weak productivity growth, the economy can\u0092t grow strongly
\n\twithout putting pressure on inflation. This is a fundamental challenge for the Australian economy over
\n\tthe next few years.<\/p>\n

The supply side matters<\/p>\n

To understand current circumstances better, it is useful to step back and consider how the supply side of the global
\n\teconomy has evolved over time.<\/p>\n

This year\u0092s oil supply shock has been challenging for households, businesses and the economy. But, as
\n\tI noted in my opening remarks, it\u0092s best understood as the latest in a series of adverse supply
\n\tshocks affecting the global economy, beginning with the pandemic. These shocks have taken a wide range of
\n\tforms and, at times, have interacted in compounding ways, amplifying their effects on inflation and
\n\teconomic activity.<\/p>\n

Global supply chains \u2013 particularly during the pandemic \u2013 underscored just how interconnected
\n\tand finely balanced the global economy has become. But despite the scale of the disruption, supply chains
\n\tin many cases adapted more quickly than initially expected.<\/p>\n

In earlier decades, the macroeconomic environment was shaped by a more benign supply side. During the
\n\tperiod often referred to as the \u0091Great Moderation\u0092 from the late 1980s through to the global
\n\tfinancial crisis, fluctuations in output and inflation were much less pronounced relative to today and to
\n\tthe more turbulent period that preceded it in the 1970s and early 1980s (Graph\u00a04). There were still
\n\tshocks in that period, but they were predominantly cyclical demand shocks that monetary policy was better
\n\tequipped to deal with.<\/p>\n

\t
\n\t\t <\/p>\n

Graph 4<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

In part, this stability \u2013 compared with the 1970s and 1980s \u2013 reflected stronger policy
\n\tframeworks and structural reforms that were put in place in response to earlier economic volatility.
\n\tExamples include the adoption of more flexible exchange rates, labour market reforms and the introduction
\n\tof inflation targets for central banks.<\/p>\n

But there was also an element of good fortune. There were fewer severe adverse commodity price and
\n\tproductivity shocks during this period. And the emergence of the Chinese economy represented a
\n\tlarge favourable supply shock for the rest of the world.<\/p>\n

In that environment, monetary policy could focus primarily on managing demand, which, in turn, meant the
\n\tRBA\u0092s objectives of price stability and full employment were often complementary, rather than in
\n\ttension.<\/p>\n

That has changed.<\/p>\n

The pandemic, and a series of major global developments since then, have delivered a succession of adverse
\n\tsupply shocks.
\n\tCollectively, these adverse shocks have constrained global growth and contributed to higher inflation at
\n\tthe same time.<\/p>\n

For Australian households and most businesses, adverse supply shocks that originate overseas represent a
\n\treal income loss. Prices increase, but incomes don\u0092t adjust proportionately, which means people
\n\tcan\u0092t buy as much as they could before and many households are worse off.<\/p>\n

In Australia, these shocks have occurred against a backdrop of persistently weak productivity growth,
\n\twhich has weighed on real incomes and wages for many years. Reversing that is central to improving
\n\tAustralians\u0092 living standards over the longer term.<\/p>\n

Business investment is critical for boosting productivity growth and the economy\u0092s supply capacity
\n\tover time. One element of this that we\u0092re watching closely is investment in new technologies,
\n\tincluding artificial intelligence. Considerable uncertainty remains about the size and timing of these
\n\teffects.<\/p>\n

For monetary policymakers, the implications are significant.<\/p>\n

When the growth of potential supply is constrained, inflation is higher for any given level of demand,
\n\tsharpening the trade-off between our dual objectives of price stability and full employment.<\/p>\n

In a more uncertain and shock-prone world, navigating those trade-offs has become more challenging for
\n\tcentral banks.<\/p>\n

Then and now: Responding to supply shocks<\/p>\n

Structural changes in the global economy, alongside stronger institutional frameworks, have made the
\n\teconomy much more resilient to supply shocks than in the 1970s.<\/p>\n

Being more resilient doesn\u0092t mean supply shocks are costless. It means the economy is better able to
\n\tabsorb and adjust to them.<\/p>\n

The oil price shocks of 1973 and 1979 provide a clear point of comparison. They were highly disruptive for
\n\tthe global economy, including Australia, with oil prices rising two- to three-fold in each episode
\n\t(Graph\u00a05).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 5<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

It wasn\u0092t just the initial price spikes that made this period so difficult. It was also what
\n\tfollowed.<\/p>\n

In Australia \u2013 and many other advanced economies \u2013 higher costs spread through the economy.
\n\tBusinesses passed rising input costs into prices, while workers sought to protect their purchasing power
\n\tby demanding higher wages, increasing costs for firms. Over time, inflation became more broadly based and
\n\tpersistent (Graph\u00a06).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 6<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

Policy responses initially sought to support activity in the face of the shock. But over time, higher
\n\tinflation expectations became embedded in the decision-making of households and firms, making the problem
\n\tself-perpetuating and much harder to resolve. Putting off a period of tight monetary policy today can
\n\tmean higher rates and higher unemployment down the track.<\/p>\n

Bringing inflation and inflation expectations down ultimately required a significant tightening in
\n\tmonetary policy. That came at the cost of severe recessions and high unemployment in many advanced
\n\teconomies.<\/p>\n

The further inflation moves from target, and the more embedded it becomes, the harder it is to reverse.
\n\tCredibility is hard won and easily lost.<\/p>\n

In Australia, inflation peaked at 12\u00bd\u00a0per\u00a0cent in 1982. While it had declined to around
\n\t2\u00bd\u00a0per\u00a0cent by the end of 1984, this came at the cost of a sharp rise in the unemployment rate
\n\tfrom around 6\u00a0per\u00a0cent at the turn of the decade to a peak of 10\u00bd\u00a0per\u00a0cent in 1983
\n\t(Graph\u00a07).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 7<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

The Australian and global economies today are very different from those of the 1970s. This helps
\n\texplain why the recent oil price shock has had a more limited impact on activity.<\/p>\n

First, the economy is less dependent on oil. This means a given increase in oil prices has a less
\n\tdirect and less pervasive effect on inflation today than it would have in the 1970s (Graph\u00a08).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 8<\/p>\n


\n\t\t
\n\t\t\"Line <\/p>\n

Second, monetary policy frameworks have evolved considerably \u2013 partly reflecting the lessons of the
\n\t1970s and 1980s. The widespread adoption of clear and credible central bank inflation targets has helped
\n\tanchor the expectations of households and businesses, reducing the risk that temporary supply shocks
\n\ttranslate into more persistent inflation.<\/p>\n

And third, economies are more dynamic and interconnected. While this can transmit shocks more quickly, it
\n\talso increases the ability of firms and supply chains to adapt.<\/p>\n

While higher energy prices still place real strain on households and businesses, recent experience since
\n\tthe pandemic suggests that individual supply shocks are less likely, on their own, to trigger the kind of
\n\tprolonged high inflation and high unemployment seen in the past.<\/p>\n

However, the outlook becomes more complex when multiple shocks occur in quick succession and interact.<\/p>\n

The greater frequency and diversity of supply shocks in recent years have demonstrated the value of these
\n\tshock absorbers \u2013 including flexible exchange rates and more credible monetary policy frameworks,
\n\tdeeper financial markets, more competitive product markets, and more adaptable labour markets.<\/p>\n

For central banks, this reinforces the importance of conducting policy in a way that maintains public
\n\tconfidence that inflation will remain under control (Graph\u00a09).<\/p>\n

\t
\n\t\t <\/p>\n

Graph 9<\/p>\n


\n\t\t
\n\t\t\"A <\/p>\n

Implications for monetary policy<\/p>\n

Let me conclude with some reflections on the implications for monetary policy.<\/p>\n

The global environment has changed and the outlook is uncertain. While this makes the task of monetary
\n\tpolicy more complex, our objectives haven\u0092t changed. The Board remains focused on delivering price
\n\tstability and full employment.<\/p>\n

The full effects of increases in the cash rate from earlier in the year will take time to materialise. And
\n\teven if the renewed disruption to oil supply abates quickly, underlying inflation is still expected to be
\n\thigher as fuel price rises flow through to other prices.<\/p>\n

It\u0092s also important to remember that inflation and capacity pressures in the domestic economy were
\n\talready too high prior to the recent shock. There\u0092s evidence that domestic demand and labour market
\n\tconditions have been easing as required to bring the economy back towards balance.<\/p>\n

Against a backdrop of ongoing capacity pressures, the Board remains focused on preventing elevated cost
\n\tpressures from entrenching inflation.<\/p>\n

This does mean that some further easing in the growth of demand is likely to be required if we\u0092re to
\n\tbring inflation back down sustainably to target. A key question in the period ahead is whether the
\n\ttightening in monetary policy earlier in the year is sufficient to achieve this.<\/p>\n

While conditions vary across sectors, the economy overall has adjusted gradually and broadly as
\n\texpected. \n<\/p>\n

One thing monetary policy can\u0092t do, however, is address the economy\u0092s slow productivity growth.
\n\tWhile this persists, the ability of the economy to grow without generating inflation is constrained, and
\n\tAustralians will continue to experience limited growth in real wages.<\/p>\n

In these circumstances, the best contribution monetary policy can make is to maintain low and stable
\n\tinflation and support sustainable full employment.<\/p>\n

The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate
\n\tfurther if needed.<\/p>\n


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