CANBERRA, July 8 (Xinhua) -- The chief economist at Australia's central bank on Wednesday warned that the global economy is facing more frequent supply shocks that have broad spillover effects on activity and demand.
Addressing the Australian Conference of Economists in Canberra, Reserve Bank of Australia (RBA) chief economist and deputy governor for economics, Sarah Hunter, said that sharp adverse supply shocks have become more frequent recently, forcing the central bank to navigate repeated monetary policy trade-offs.
She said older economic models assumed that temporary supply shocks had "small effects" on overall economic activity, but that a "growing body" of recent work shows that sector-specific shocks can have spillover effects on activity and demand in the broader economy.
"As we have seen recently, large economic shocks can create uncertainty, reduce confidence, and for some, constrain spending on other goods and services. In turn, this can dampen household spending, and prompt firms to put investment decisions on hold and reconsider their hiring plans," Hunter said.
Referencing the oil price shock caused by the conflict in the Middle East, she said that some types of shocks will put the RBA's mandate outcomes on monetary policy "into conflict" by pushing up inflation while also weighing on demand and activity, creating a trade-off for monetary policymakers.
"A persistently higher outlook for inflation suggests that interest rates should be raised. But at the same time, weaker economic activity and so more excess supply suggests that interest rates should be cut," Hunter said.
"This trade-off cannot be avoided. A central bank can only decide how to balance the impact on inflation and activity, while ensuring that temporary shocks do not become persistent inflation."
The RBA's Monetary Policy Board in mid-June voted to keep the cash rate target on hold at 4.35 percent following three consecutive increases of 0.25 percentage points each between February and May.
Australia's annual rate of headline inflation eased from 4.2 percent in April to 4.0 percent in May, according to the latest data released in June, but the annual rate of underlying inflation rose from 3.4 percent to 3.6 percent.
The Monetary Policy Board will next meet in mid-August. ■