Global shocks likely to drive more frequent interest rate changes, RBA says
Inflation is likely to become more volatile in the future as globalism retreats and climate shocks mount, requiring central banks to adjust interest rates more often, the Reserve Bank governor has said.
Philip Lowe, in a Committee for Economic Development of Australia speech in Melbourne on Tuesday, said the current spike in prices was soon expected to peak at around 8% before declining to “a little over 3%” by the end of 2024. Improving post-Covid supply chains, cheaper commodities and the effects of interest rate hikes – with more possible – would combine to rein in inflation.
The RBA governor said decades of rising global trade and the avoidance of major wars meant an inflation rate of 7-8% had been “widely thought to be consigned to the history books”. The price surge of late had come “as quite a shock”.
However, “looking forward, the supply side looks more challenging than it has been for many years, and it is likely to play a more prominent role in inflation outcomes”, Lowe said.
Factors that had dampened inflation were now in reverse. These include the rise of blocs that reduced the benefits of trade. Working-age populations in many nations, including lately China, were in decline, a shift that would dent output and demand.
Disruptions are also mounting globally as the climate heats up, fuelling wild weather.
“Globally, the frequency of extreme weather and climate events has increased over recent decades and it is likely that this trend will continue,”
Lowe said. “Over the past 20 years, the number of major floods has doubled and the frequency of extreme heatwaves and droughts has also increased significantly.”
“We know this all too well in Australia, where recent floods are one of the factors pushing inflation up at present,” he said.
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The shift away from fossil fuels posed a fourth supply-side risk. Lowe noted investment in new sources of coal or gas had not risen in the wake of record prices. The existing energy kit was also depreciating quickly because of decommissioning or reduced spending as investments shifted to lowcarbon sources.
“[I]t’s probable that the global capital stock that is used to produce energy will come under recurring pressure in the years ahead,” Lowe said. “If so, we could expect higher and more volatile energy prices during the transition to a more renewables-based energy supply.”
Lowe’s comments were echoed earlier on Tuesday by Origin Energy’s chief executive , Frank Calabria. He said the Australian public was not fully cognisant of the magnitude of the transition nor the likelihood of higher gas and electricity bills in the process.
“[T]he scale of the change over this decade is truly staggering,” Calabria told a Ceda lunch in Sydney. By 2030, some $76bn would need to be invested in energy infrastructure in Australia, a pace “akin to the wartime reconstruction effort”.
At least 44 gigawatts of new clean energy would need to be added, with a bit more than a third of that “behind the meter” in the form of rooftop solar. About 15GW of firming of variable renewables would also be needed, most of it as batteries or pumped hydro.
“[G]iven the scale of the investment required, [it] will undoubtedly create upwards pressure on energy bills,” Calabria said. “I fear rising energy prices could erode community support for the transition.”
Meanwhile, the headwinds caused by Russia’s invasion of Ukraine were continuing to drag output in the advanced nations that make up the Organisation of Economic Cooperation and Development.
GDP in the OECD eked out a 0.4% growth rate in the September quarter alone, extending the weak expansion pace for the past three-quarters. The US was one nation to buck the trend, advancing 0.6% after two quarters of contraction.
For Australia, GDP growth will be 4% in 2022 before halving to 1.9% next year and slowing further to 1.6% in 2024, the OECD said.
“Slowing growth, high and persistent inflation, and falling real wages are all wreaking havoc in major economies, leading to a blunt and brutal application of monetary policy by the world’s central banks,” the treasurer, Jim Chalmers, said.
Chalmers said Russia’s war had triggered “the largest energy crisis since the 1970s”. He welcomed, though, “OECD’s support for the government’s investments in cleaner, cheaper and more reliable energy”.
“Inflationary pressures will diminish as the labour market cools and supply chain bottlenecks ease,” it said, adding that more RBA rate rises “will be necessary”. “A stronger than expected decline in house prices is a key risk to the growth outlook.”
In a nod to possible government intervention to curb cost-of-living pressures, any fiscal support “should be targeted and temporary and maintain incentives for energy savings”, it said.
“Reducing greenhouse gas emissions remains a top priority and will require further action, including investment in renewables and in the transmission network, regulatory changes, structural reforms and higher carbon pricing.”