‘We can’t take it for granted’: RBA not complacent in inflation fight, Hunter says

The Reserve Bank is ‘constantly alert’ for signs that inflation expectations could become untethered, its chief economist Sarah Hunter says.

Reserve Bank chief economist Sarah Hunter said the anchoring of inflation expectations could not be taken for granted. Picture: NewsWire / John Appleyard

The Reserve Bank is “constantly alert” for signs that Australians expect elevated levels of inflation to become entrenched, its chief economist Sarah Hunter has said, though the central bank is confident the public believes prices growth is on track to sustainably fall below 3 per cent.

Dr Hunter on Tuesday said that while the RBA was forecasting the inflation would ease further, a risk to its outlook was if individuals, businesses, and investors believe prices growth would remain higher for longer.

“We can’t take it for granted and we know that there will be other shocks down the track,” Dr Hunter told a conference hosted by financial services conglomerate Citibank in Sydney.

“There are going to be other things that happen that can push inflation out of the [2 to 3 per cent target ] band one way or another … You can’t rest on your laurels.”

The RBA expects headline inflation to sustainably return to its 2 to 3 per cent target band by the end of 2026, according to its internal staff forecasts released in August. However, should inflation expectations rise, they risked resulting in greater economic volatility, warned Dr Hunter, who oversees the central bank’s forecasts in her role as assistant governor.

“Given the enormous damage that such de-anchoring can cause, and that policy can be enacted more flexibly while expectations remain anchored, the RBA board is constantly alert for signs that this risk might emerge here in Australia,” she said,

Pointing to internal RBA research which showed unions and households appeared to “look through” the recent bout of high inflation, Dr Hunter said this “could reflect greater attention to inflation or recognition that the recent episode is temporary.”

“It’s important that we track how they’re evolving and that we understand how expectations are formed, so we can monitor whether there are any signs of this risk materialising in the future,” she said.

Dr Hunter’s address comes as the Reserve Bank continues to rule out a pre-Christmas rate cut, instead opting to keep interest rates at their current 12-year high of 4.35 per cent until it has greater certainty that still-sticky inflation - currently 3.4 per cent on the RBA’s preferred underlying measure - is moving sustainable back towards its target.

That contrasts with a host of peer central banks which have cut rates in recent months as inflationary pressures recede across the world, with monetary policy easing in the United States, Canada, New Zealand, and the European Union where inflation peaked higher and interest rates were raised more aggressively.

Economic pundits expect it will be several more months before the RBA can commence rate reductions. Money markets ascribe a near-90 per cent chance of a quarter point cut by the central at its first two-day board meeting for 2025, scheduled for February 17-18, which would take interest rates to 4.1 per cent.