RBA boss Philip Rowe has delivered a worrying warning there could be more power price spikes on the horizon as energy providers struggle to keep up with global demand and inflation pressures.
While Australia is treading a “narrow path” in bringing inflation down – bolstered by strong labour force participation and the lowest unemployment rate in 50 years – Mr Rowe said it would be easy to get knocked off course.
“It’s taken us decades to achieve,” he said.
The RBA governor made the comments during a panel at the Bank of Thailand’s 80th Anniversary conference in Bangkok on Friday.
He was among several banking leaders across the world discussing growth and inflation dynamics.
Mr Rowe said central bankers will have to deal with “a lot more” variation in inflation from year to year, compared to the last 30 years.
Australia had otherwise “bounced back strongly” from the pandemic with resilient domestic spending and well-placed labour markets. The supply side, however, would be an ongoing challenge for bankers all over the world, he said.
Mr Rowe said a big part of this involved the energy transition and how power providers will adapt to the move to renewables.
“I think we’re going to see more frequent examples of where demand is running up against the ability of a global system to produce power and electricity,” he said.
Mr Rowe said the existing capital stock producing energy was “depreciating very quickly” – either because they were being decommissioned or there was no maintenance.
“It’s going to lead to more price spikes … (with) ramifications right through the production chain,” he explained.
“They know eventually these plants will have to be shut down.”
In another grim prediction, he said spending in Australia could slow by next year from a perfect storm of circumstances – which he attributed to declining housing prices, real incomes and record interest payments amid a “weakening” global economy.
The latest ABS data reveals the monthly CPI indicator rose by 6.9 per cent in the 12 months to October, lower than the 7.3 per cent movement reported in September.
Fellow panellist Agustín Carstens, the general manager for the Bank for International Settlements, said over 90 per cent of advanced economies all over the world had an inflation rate above five per cent.
“We have never faced such increasing global inflation,” he said.
“The simultaneity of it is quite remarkable.”
In his opening address, Bank of Thailand governor Sethaput Suthiwartnarueput said Central Banks were tending to “undershoot” their predictions with the inflation process.
“How do we strike the proper balance of innovation and balance? How do we ensure adequate competition in a situation where data … leads to natural monopolies and less competition?” he asked
Mr Suthiwartnarueput said climate change was also posing a challenge, as central banks’ “toolkit was not fit to purpose” to tackle the global existential threat.
He said the response from banks needs to go beyond the effect of the green transition on inflation.
“The challenges we face are not straightforward, the answers not obvious,” Mr Suthiwartnarueput said.