SYDNEY, July 8 (Reuters) – The recent oil shock has led to falls in Australia’s consumer and business confidence but so far there are few signs of a marked slowdown in activity, a senior central banker said on Wednesday.
In a speech about supply shocks, Reserve Bank of Australia Assistant Governor Sarah Hunter said it was not always correct to look through supply shocks and if inflation expectations started to drift up, some period of low inflation and higher unemployment might be needed.
“While supply shocks create difficult trade-offs, they do not lessen the importance of maintaining low and stable inflation,” Hunter said.
“The Board will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment.”
The RBA has raised interest rates three times this year to 4.35% to head off a global energy shock from the Iran war. It held policy steady in June but warned further tightening cannot be ruled out as policymakers monitored the second-round pass-throughs from higher oil prices to other prices.
However, the possible resolution of the Iran war in June sent oil prices sliding back to pre-war levels and had markets wagering interest rates have likely peaked, with just 15 basis points of tightening priced by the year end.
Brent crude futures, however, hit a high of $76.38 a barrel on Wednesday after the U.S. launched new strikes on Iran following attacks on ships in the Strait of Hormuz.
“If the economy is hit by a supply shock that has a persistent upward effect on inflation… some tightening might be called for,” Hunter said.
“But monetary policymakers would have to weigh this against the softening of economic activity and the labour market. If activity were to be more negatively affected by the shock, the bias towards tightening might be more limited.”
(Reporting by Stella Qiu; Editing by Jamie Freed)
