Australia may need a period of low inflation and "higher unemployment" to ease inflation expectations back down if they start drifting up, the Reserve Bank of Australia's (RBA) Assistant Governor (Economic) Sarah Hunter said in a speech on Wednesday.
After the COVID-19 pandemic, unemployment fell to very low levels, which contributed to a sharp rise in inflation. But as the economy moved back toward balance, alongside some abatement in supply chain disruption and global inflationary pressures, inflation fell back towards the target range.
Supply or relative price shocks can create a trade-off for monetary policy, and a central bank can only decide how to balance the impact on inflation and activity while ensuring that temporary shocks do not become persistent inflation, Hunter said. Recently, sharp adverse supply shocks have become more frequent.
Hunter highlighted that monetary policy is a demand management tool, and it can't be used to change the economy's trend rate of productivity growth or maximum sustainable employment. Ultimately, structural drivers like demographics and productivity determine trend growth.
Economic outcomes in Australia and globally had been driven more by a number of long-term structural drivers, like slowing productivity growth, Hunter noted.
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