Global economy ‘on a knife’s edge’ says RBA deputy governor

“The US has excess demand and is trying hard to reduce it. Interest rates will continue to rise sharply. Europe has its own problems – it has inflation, but also a massive energy shock that will affect its production.”

Ms Bullock says the central bank’s main concern over China is the “apparent zero-COVID” approach, which will lead to volatility, disrupting supply chains and driving down demand.

Another big concern is China’s real estate market, which accounts for a “huge” third of economic activity.

“It still hasn’t worked out and I know the government and local governments are trying very hard to support the Chinese real estate market,” Ms Bullock said.

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“It’s very important for a healthy economy, and it’s also important for steel demand and therefore iron ore [Australia’s biggest export].”

While central banks like the Federal Reserve have taken an ultra-hawkish stance on fighting inflation, the Reserve Bank’s rhetoric has been relatively muted.

Federal Reserve Chair Jerome Powell used his August speech in Jackson Hole to allay any market doubts that the central bank was unwilling to fight inflation. In contrast, Reserve Bank Governor Phil Lowe’s Anika Foundation speech two weeks later was interpreted by the market as dovish when he indicated a slowdown in the pace of rate hikes.

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Ms Bullock, speaking at a gathering in Sydney on Wednesday, said there were several reasons why Australia could be seen as a relatively dovish outlier among central banks.

“Firstly, inflation here is not as high as elsewhere. Inflation was much higher in the UK and US,” she said, citing rising energy prices in Europe and excessive demand and stimulus in the United States.

A second factor, she said, is the more muted wage growth in Australia compared to the United States, where wages rose by about 5 to 6 percent.

“There is much more underlying dynamic in the inflationary psychology of these countries. That’s not to say there isn’t a small shift in the psychology of inflation here,” Ms Bullock said.

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Traders are speculating that the Federal Reserve could raise its official interest rate target to over 3 percent at its meeting this week, while in Australia traders are undecided whether the Reserve Bank will raise its interest rate target to 2.6 percent or 2.85 percent.

The deputy governor said concerns about rising inflation expectations in Australia are the reason the central bank is raising interest rates.

“We want to make sure inflation psychology doesn’t kick in. But at the moment we are a bit better off than some other countries in terms of inflation.”

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