RBA homes in on domestic demand in inflation fight

Consumer prices are not moderating as fast as the Reserve Bank would like although there's still a high bar for more interest rate hikes.

Minutes from the November board meeting, where the board landed on another 25 basis point hike, confirmed the central bank's concerns about sticky inflation.

Among the smattering of new information was a more detailed account of the inflation profile, with the RBA putting more emphasis on domestic demand rather than global supply shocks.

"There was clear evidence – most notably for services price inflation, which was quite brisk – that this owed to domestically generated pressures associated with aggregate demand exceeding aggregate supply," the minutes read.

Westpac chief executive Luci Ellis
Westpac chief economist Luci Ellis says domestic demand has been more resilient than expected.

"This strength in demand was allowing firms to pass on higher costs for labour and non-labour inputs."

Westpac chief economist Luci Ellis, a former assistant governor at the RBA, said domestic demand had been more resilient than expected.

"Though it should be noted that the upside surprise has been outside the consumer sector," she wrote in a note. 

Private and public investment had proved stronger than anticipated, though Dr Ellis said it was unclear if business investment would keep tracking that way.

"Our own forecasts embed a view that some of this surprising strength was a bring-forward of spending to take advantage of tax concessions, as well as some catch-up as supply chain disruptions eased."

The bank's economists believe the RBA is unlikely to lift interest rates again without "further upward surprises on the outlook for demand and inflation".

Reserve Bank governor Michele Bullock appeared on a panel at an ASIC annual forum on Tuesday, saying she was confident of maintaining gains in the labour market as the fight against inflation rages on.

This includes better employment opportunities for young people and women.

Ms Bullock touched on the economic impact of the major rebound in migration post-pandemic, noting it was "ultimately beneficial".

RBA Governor Michele Bullock
RBA Governor Michele Bullock is confident of maintaining gains in the labour market.

"The challenge at the moment is the infrastructure isn't there, the housing market in particular as an example of that," she said.

Ms Bullock said migration added to supply and demand and there was a tendency to hone in on one or the other.

During the pandemic, for example, businesses called for more migration to plug labour gaps, without factoring in that it would add to demand for their goods and services as well. 

"And now we've got the opposite," Ms Bullock said.

Productivity Commission chief executive officer Danielle Wood said the catch up in migration was coinciding with a trend towards smaller household size, which was leading to an increase in domestic demand for housing. 

"The right answer there is, first of all, to improve improve housing supply," she said during the same panel discussion.

She said there was a secondary question to be answered around the policy settings for the temporary migration intake.

Speaking at the same conference, Treasurer Jim Chalmers said the rebound in migration was helping to underpin strength in the services sectors.

"You will understand and appreciate that migration has recovered quite quickly from that big hole," he said. 

"It is helping when it comes to services exports, it's helping when it comes to the budget, but it's putting pressure obviously, on communities as well. We are conscious of that."

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