Reserve Bank of Australia Assistant Governor Sarah Hunter said central banks cannot automatically dismiss inflation caused by supply shocks, arguing that persistent disruptions may still require a monetary policy response. “While supply shocks create difficult trade-offs, they do not lessen the importance of maintaining low and stable inflation,” she said, emphasizing that the RBA remains committed to returning inflation to target while supporting sustainable full employment.
Hunter noted that policymakers must distinguish between temporary and persistent supply shocks. If a shock has “a persistent upward effect on inflation,” she said, “some tightening might be called for” to prevent inflation expectations from becoming unanchored. At the same time, she acknowledged the difficult trade-off facing central banks, adding that policymakers would also need to weigh the impact on economic activity and the labour market. Should growth weaken materially, “the bias towards tightening might be more limited.”
Her remarks reinforce the RBA’s message that further policy tightening has not been ruled out despite the recent pause in rate increases. Rather than adopting a mechanical response to higher oil prices or other supply disruptions, Hunter argued for a flexible, data-dependent approach. She reiterated that “the Board will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment,” signaling that the persistence of inflation, rather than the origin of the shock alone, will determine future policy decisions.
