RBA's Hunter: Supply Shocks Don't Mean Inflation Can Be Ignored

Reserve Bank of Australia Assistant Governor Sarah Hunter said central banks cannot automatically dismiss inflation caused by supply shocks. Persistent disruptions may still require a monetary policy response, she argued.

"While supply shocks create difficult trade-offs, they do not lessen the importance of maintaining low and stable inflation," Hunter said. She emphasized the RBA remains committed to returning inflation to target while supporting sustainable full employment.

Hunter drew a line between temporary and persistent supply shocks. If a shock has "a persistent upward effect on inflation," she said, "some tightening might be called for" to prevent inflation expectations from becoming unanchored. She acknowledged the trade-off facing central banks, adding that policymakers would also need to weigh the impact on economic activity and the labour market. Should growth weaken materially, "the bias towards tightening might be more limited."

Her remarks reinforce the RBA's message that further policy tightening has not been ruled out despite the recent pause in rate increases. Rather than adopting a mechanical response to higher oil prices or other supply disruptions, Hunter argued for a flexible, data-dependent approach.

"The Board will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment," she said. The persistence of inflation, not the origin of the shock alone, will determine future policy decisions.

The RBA held the cash rate at 4.35% at its February meeting, pausing after a 25-basis-point hike in November. Markets are pricing roughly a 50% chance of a cut by August, though Hunter's comments suggest the bar for easing remains high if supply-driven price pressures linger.

For traders watching the AUD/USD profile, the takeaway is straightforward: the RBA is not ready to signal a pivot. Supply shocks from geopolitics or weather that push up import prices or domestic energy costs could keep the board on hold longer than the market expects. The next test comes with the March-quarter CPI print, due April 24.