RBA's Credibility on the Line as Inflation Remains Above Target

The Reserve Bank of Australia (RBA) is facing a credibility crisis as inflation remains above target. The RBA's most valuable asset, its credibility, depends on it being able to control inflation.

A $70 chicken at the local farmers' market has raised questions about how the RBA will fight inflation when price rises are not driven by strong demand. The RBA cannot change agricultural conditions or oil production, but it can curb demand through rate rises.

The RBA has tried a cautious approach with modest rate rises to lower inflation while preserving labour market strength. However, this approach has not worked as core inflation is growing at 3.6% and has been above the 2-3% target for nearly 70% of the time since 2021.

RBA Governor Michele Bullock believes that a higher unemployment rate between 4.5% and 5% may be needed to get inflation under control.