Inflation Anxiety Spikes: Central Bank Strikes First in "Super Week"

Finance Society, March 18 — (Editor Zhao Hao) The Reserve Bank of Australia (RBA) raised interest rates by 25 basis points for the second time in two months, noting that Middle East conflicts have impacted the bank’s inflation outlook, taking the lead in the “Super Central Bank Week.”

According to the monetary policy statement released by the RBA on Tuesday, March 17, five members voted to raise the cash rate target by 25 basis points to 4.10%, while four members believed it should remain unchanged at 3.85%.

“Higher interest rates largely reflect expectations about the future monetary policy path, which have increased in Australia and most developed economies, due to market expectations that Middle East conflicts will bring inflationary pressures.”

The bank believes that the Middle East conflict presents “significant two-way risks”: if the conflict lasts longer or becomes more severe, it will push up energy prices and temporarily increase inflation; however, long-term uncertainty could dampen economic growth in Australia and its major trading partners.

RBA Governor Michele Bullock stated that she understands Australians wouldn’t welcome rate hikes, as they are struggling with rising fuel prices, but “if inflation becomes embedded in the economy’s structure, the situation will worsen.”

Bullock said, “We don’t want a recession, but if we can’t bring inflation down, we have to face that reality.”

HSBC Australia Chief Economist Paul Bloxham said the RBA might have to argue that controlling inflation requires the country to go through an economic downturn, “The RBA is in a very tricky position right now.”

Following the RBA, this week’s rate decisions include the Bank of Canada, Federal Reserve, Bank of Japan, Swiss National Bank, Riksbank, Bank of England, and European Central Bank.

Industry experts say that faced with inflation threats from Middle East conflicts, many central banks may be forced to delay rate cuts. Currently, markets generally expect the US, Japan, UK, and Eurozone central banks to hold steady.

Deloitte Chief Economist Pradeep Philip noted that although the RBA has responded to the Middle East conflict, the rate hike more largely reflects the “severe domestic supply-side conditions in Australia.”

Macroeconomist Tom Orlik said, “Central banks can set interest rates, but they cannot reopen the Strait of Hormuz.”

Orlik expects Fed Chair Powell, ECB President Lagarde, Bank of England Governor Bailey, and other central bank leaders to send cautious signals, hoping the Middle East war ends soon before it causes another inflation problem they cannot solve.

(Finance Society, Zhao Hao)