RBA chief economist warns of more frequent supply shocks

Reserve Bank chief economist Sarah Hunter says global supply shocks appear to be occurring more frequently and the RBA will try to adjust to the new reality. She said the RBA was investing in new economic models, research, and frameworks to deal with the new problems. "These sharp adverse supply shocks have become more frequent, meaning the Monetary Policy Board and the RBA have had to navigate the policy trade-offs repeatedly," Dr Hunter said. "And we could see this continue going forward; economic spill-overs from rising geopolitical tensions, trade fragmentation, and the increasing prevalence of extreme climate events are just some of the shocks we are now experiencing. "That means the RBA, and the economy more broadly, may have to face these trade-offs, and the costs that come with them, more often in the years ahead. "To help us navigate through these complexities, the RBA is investing in our knowledge, people and frameworks." Dr Hunter made her comments in a speech in Canberra on Wednesday morning to the Economic Society of Australia. Only hours earlier, the world learned that the United States had launched fresh missile strikes against Iran, in the latest tit-for-tat assaults between the two countries, that are again threatening to choke off the flow of shipping traffic through the Strait of Hormuz. Dr Hunter said the prevailing wisdom was to look through short-term supply or relative price shocks. That relied on the assumption that the shock, and its impacts, would be relatively temporary. However, she said, if the shock was expected to be more persistent, and create greater risks of inflation expectations shifting higher, the central bank would need to respond by raising interest rates. Dr Hunter says conventional wisdom is to look through supply shocks, but persistent inflation could require rate rises. (ABC News: John Gunn) RBA pours resources into understanding shocks Back in 2023, when RBA governor Michele Bullock was still the RBA's deputy governor, Bullock warned that more frequent and severe weather events could affect the setting of interest rates and threaten financial system stability. This year, RBA officials have been publicly discussing the risks of de-globalisation and fragmentation and the need to rethink macroeconomic policy frameworks in a shock-prone world. Dr Hunter said in recent years, the RBA had consciously poured more resources into understanding what a world of increasing supply shocks may look like for inflation targeting central banks. "We have launched a number of new initiatives to increase our engagement with the economics and policy community," she said. "These are aimed at strengthening our ties to academia, think tanks and the broader economic community to help us test our thinking, and bring in new cutting-edge knowledge and capabilities. "Additionally, the RBA's 2026 Annual Conference will focus on the topic of trade-offs. It will bring world-leading academics and policymakers to the RBA to discuss these issues, which can help us continue to build our knowledge and frameworks." 'Challenging' 18 months for RBA In the Q&A portion of her speech, Dr Hunter said she thought the inflation targeting framework was still fit for purpose, but increasingly prevalent adverse supply shocks could make things harder for central bankers. The central banker said the past 18 months had been challenging for the RBA, with some events playing out differently to how the RBA had expected. Those events included the United States's "Liberation Day" tariffs in April 2025, and the trade and tariff challenges that followed. "A lot of people were expecting that to have quite a substantial negative impact on the global economy," she said. "In our May 2025 Statement on Monetary Policy, we explored that in a scenario. It was certainly a factor on the Monetary Policy Board's mind if you look at the statements and minutes of that period. "But I think what played out there was actually the world economy, the trade system, was much more resilient. And with tariffs, the actual tariffs ended up being a lot lower than what was initially announced. "So we're doing this in real time. We have the information we have at hand, but it played out differently to what was expected." Dr Hunter said Australia's economy was more robust in the back half of last year than the RBA had been expecting, while major events this year had been impossible to anticipate. "These are very tricky things to forecast," she said. "I'm not sure anybody had their money on — well maybe some people, but not many people — had their money on a war in the Middle East." "That's obviously had implications which have further compounded where we were starting from [at the start of this year]. "When you've got this sort of volatility and uncertainty it's difficult for any framework to navigate through, because innately things are moving that you can't predict." She said the investment boom in AI data centres had also been "spectacular" in the sense that it had been so large and quick. "It's quite hard when something is very new like that," she said. "It is quite hard for the statistical agencies, never mind anyone else, to actually track it. That's been something that's come through that we weren't anticipating 12-15 months ago," she said.