Reserve Bank of Australia Considers Energy Prices Main Concern for Monetary Policy

A power plug is placed into a power socket in Melbourne, Australia, on Oct. 22, 2012. (Quinn Rooney/Getty Images)

The Reserve Bank of Australia (RBA) has singled out volatile energy prices as an uncertain factor making it more challenging for the bank to navigate the current complicated economic climate.

Speaking at the ABE Annual Dinner on Nov. 9, RBA Deputy Governor Michele Bullock said the energy situation in Europe was full of uncertainty.

“While gas prices have declined lately, they are expected to rise again, particularly if there is an unusually cold winter or Russia’s war on Ukraine escalates further,” she warned.

The deputy governor also noted that high global energy prices lifted Australia’s export earnings from coal and gas, but she said they also exerted upward pressure on goods and services prices in the country and added to inflation.

Bullock said that although the RBA had incorporated a considerable increase in energy prices into its economic outlook, there was a risk that the incorporation was inadequate.

“On the other side of the coin, however, global supply chain pressures are easing quite quickly, and that could turn out to be more of a dampening force than we are currently expecting,” she said.

Threats to RBA’s Monetary Policy

Speaking about the RBA’s monetary policy, the deputy governor said there were three sources of uncertainty threatening to derail the bank’s efforts to stabilise the Australian economy: the declining global economy, domestic household consumption behaviours and the threat of a wage-price spiral.

Specifically, Bullock said the downturn in China’s property market was worrying as it could lead to lower demand for Australia’s iron ore, which is a major source of export revenue for the country.

A pedestrian moves past the Reserve Bank of Australia (RBA) building in Sydney, Australia, on Oct. 18, 2022. (Lisa Maree Williams/Getty Images)

In addition, she said there was a concern about signs of domestic wages growing more quickly than what the RBA previously expected.

Since wage growth is an important driver of inflation, as pointed out in an RBA report, the unexpected rises in wages could put more pressure on the consumer price index (CPI).

“Since the middle of the year, close to half of the firms reported realised wage increases of three to five percent, with a further quarter of firms reporting increases above five percent,” Bullock said, citing the bank’s business liaison program.

While household spending remained an uncertain factor in the economy, Bullock said the financial buffers built up during the COVID-19 pandemic were unlikely to keep pushing up consumer spending, which suggests lesser pressure on inflation.

This is because a rise in consumer spending could lead to higher demand for goods and services, which, in turn, provides scope for firms to increase prices, resulting in higher inflation.

“These sources of support are being eroded to some extent by high inflation, rising interest rates and falling housing prices, and this is expected to contribute to a slowing in consumption growth from early next year,” she said.