SYDNEY, March 3 (Reuters) - Australia's top central banker said on Tuesday recent data justified the decision to hike interest rates last month, while the conflict in the Middle East was a reminder that geopolitical risks made for an uncertain inflation outlook.
In a speech in Sydney, Reserve Bank of Australia Governor Michele Bullock highlighted the difficulty of setting monetary policy in an inherently uncertain environment, given unexpected developments overseas and fluid judgments on the domestic
economy.
"Events in the Middle East are a timely reminder that in this world of geopolitical uncertainty, things can change quickly," said Bullock. "It’s too early to say what the impact will be, events are moving rapidly and there are different ways this can play out."
Bullock added a supply shock could add to inflation pressures, but a prolonged impact on energy markets could have adverse effects on the global economy.
"Instead, we must ensure we can position monetary policy to respond if needed. With the cash rate currently at 3.85%, and the economy closer to balance than it was a few years ago, we believe we are well positioned for such a response if it were to be required."
Over the weekend, the United States and Israel launched military strikes on Iran that killed its Supreme Leader Ayatollah Ali Khamenei. Iran responded with missile barrages across the region, risking a wider and protracted war.
Bullock spent most of the speech explaining the board's decision to raise interest rates by a quarter-point in February, adding that hot inflation data for January supported the move, while robust job figures pointed to the risk that conditions in the labour market may be tightening.
"When the economy is closer to balance and demand is near its supply potential, it becomes harder to know whether monetary policy needs to shift to bring inflation back to target," said Bullock.
"Most importantly, if it becomes clear that the economy has evolved differently from our earlier expectations, and that difference is likely to endure, then we adjust the stance of policy, as was the case in February."
(Reporting by Stella Qiu; Editing by Jamie Freed)
