Reserve Bank governor warns world facing increased supply shocks

The world has become increasingly prone to shocks in recent years, and the latest surge in oil prices presents another challenge for monetary policy, according to Reserve Bank of Australia Governor Michele Bullock. Speaking at the Anika Foundation in Sydney, Bullock highlighted that these recurring shocks occur against a backdrop of persistently weak productivity growth in Australia. This has already been suppressing real incomes and wages for years.

Bullock warned that without stronger productivity growth, Australia's economy cannot achieve robust growth without increasing inflationary pressures. This creates a difficult trade-off between the central bank's dual objectives of price stability and full employment. "When the growth of potential supply is constrained, inflation is higher for any given level of demand, sharpening the trade-off between our dual objectives of price stability and full employment," she stated.

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When the growth of potential supply is constrained, inflation is higher for any given level of demand, sharpening the trade-off between our dual objectives of price stability and full employment.

She emphasized that monetary policy alone cannot solve Australia's slow productivity growth problem. As long as this issue persists, workers are likely to continue experiencing limited growth in their real wages. However, Bullock indicated that if inflation continues to rise, the RBA's Monetary Policy Board would be prepared to increase interest rates further if necessary to meet its inflation mandate.

Despite the challenging global environment, Bullock noted that Australia's economy is more resilient than in previous decades. Key factors contributing to this resilience include the RBA's adoption of a credible inflation target in the 1990s and a reduced dependence on oil compared to the 1970s. "This means a given increase in oil prices has a less direct and less pervasive effect on inflation today than it would have in the 1970s," she explained. Nevertheless, she cautioned that Australia is not immune to adverse supply shocks, which can constrain growth, reduce real incomes, and add to inflationary pressures.

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This means a given increase in oil prices has a less direct and less pervasive effect on inflation today than it would have in the 1970s.