The battle against inflation is far from over, according to Reserve Bank of Australia (RBA) Governor Michele Bullock. Speaking at a parliamentary hearing, Bullock highlighted ongoing concerns, including sluggish productivity and geopolitical tensions in the Middle East and Ukraine, as potential catalysts for sustained inflationary pressures. Additionally, fears of a deeper economic downturn loom, driven by a weakening consumer sector and instability in China’s property market.

In response to rising inflation, the RBA initiated a series of interest rate hikes in 2022. Recent economic indicators suggest these measures are taking effect, with a softer inflation figure for the December quarter sparking optimism for a halt in rate increases and shifting focus towards potential rate cuts. However, Bullock emphasised the need for confidence in the inflation trajectory before considering rate reductions, noting that inflation does not necessarily need to fall within the 2-3% target range to commence cuts.

Despite the uncertain economic outlook, the possibility of further rate hikes remains on the table. Bullock acknowledged the International Monetary Fund’s more aggressive stance on interest rates, attributing it to a different assessment of risk priorities and inflation expectations.

The hearing also touched on concerns over sluggish productivity growth, a key factor in the inflation outlook. Without productivity gains, wage increases could lead to higher production costs and upward pressure on prices. Bullock remains hopeful for a rebound in productivity, citing increased business investment and the potential for the pandemic’s impact to fade from long-term trends.

ANZ’s head of Australian economics, Adam Boyton, described the RBA’s recent communications as unexpectedly hawkish, though the bank’s economic forecasts appeared more dovish, anticipating a reduction in the cash rate to 3.4% by the end of 2025. ANZ believes the RBA will seek solid evidence of sustainable inflation reduction before altering its stance.

Bullock also addressed concerns over price gouging in sectors like electricity and aviation, acknowledging the importance of competition in maintaining healthy supply and demand dynamics. While deferring to the expertise of the Australian Competition and Consumer Commission (ACCC), she highlighted the critical role of competition in preventing excessive pricing practices.

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