speech exchange rates and inflationary pressures christopher kent [ * ] assistant governor ( financial markets ) commonwealth bank global markets conference sydney – 24 october 2022 introduction i ’ d like to thank cba for the opportunity to be here today. inflation is too high in most economies. this reflects disruptions to supply coupled with strong demand. there has been an unprecedented monetary response in terms of the size of policy rate increases, across a wide range of central banks in a short span of time. graph 1 shows the average of policy rates across a selection of central banks covering about 70 per cent of the global economy. if market expectations for policy rates pan out, then by the first part of next year the average policy rate will have increased by an amount comparable to the rise seen through the mid - 2000s – but while that increase occurred over four years, this increase will have taken just four quarters. graph 1 international policy rates * % ppts average level % quarterly change ppts - 1 - 1 - 2 - 2 * central bank policy rates, quarterly data, weighted by june 2021 usd gdp : fed, ecb, boj, boc, boe, rba, pboc. from november 2012 onwards the pboc 7 - day reverse repo rate is used ; the official 1 - year lending rate is used prior to this. projections ( dashed lines ) are based on ois - implied policy rate expectations, except for the pboc where the policy rate is assumed to remain constant. sources : bloomberg ; central banks ; rba ; refinitiv the increase in the reserve bank ’ s cash rate target has also been sizeable and rapid. after raising rates by 25 basis point in may, the board then raised rates by 50 basis points in each of the four meetings between june and september. at its october meeting, the board raised rates by 25 basis points. the board expects to increase interest rates further in the period ahead, given the need to establish a more sustainable balance of demand and supply and in the face of a very tight labour market. while wages growth has picked up in australia from the low levels of recent years, it remains lower than in many other advanced economies. indeed, wages growth is well above levels consistent with inflation targets in a number of these economies. the size and timing of rate increases in australia will depend on incoming data – including the response of household spending to the tightening in financial conditions that is still working its way through the system. rate increases will also depend

after the holiday period, and we are now more than four weeks past the point where the chinese economy is normally back to full - scale production. the straight arithmetic of losing a substantial amount of output over a period of several weeks implies a significant hit to economic activity. the road congestion graph ( graph 2 ) tells a similar story of a protracted period of low output. graph 1 https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 2 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 2 both show that the chinese economy is now only gradually returning to normal. even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains. in the meantime, the virus has spread to other countries. they too are beginning to suffer significant disruptions, the extent and duration of which is unknown at this time. the conclusion is that the global economy will be materially weaker in the first quarter of 2020 and in the period ahead. in terms of the effect on the australian economy, we have estimated the direct impact on the education and tourism sectors in the march quarter. graph 3 shows the normal profile of visitor arrivals into australia. since january, inbound airline capacity from china has declined by 90 per cent, which gives a guide to the size of the decline in arrivals from china. up until recently, tourist arrivals from other countries had held up reasonably well but that may no longer be true. from our liaison with the education sector, including the universities, as well as student visa numbers, we have information on the number of foreign students who have been unable to resume their studies. graph 4 shows the country of origin of foreign students in australia. https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 3 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 3 https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 4 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 4 we have used this information to estimate the impact of the virus in these two sectors of the economy. the estimate is approximate, but at this stage we think the decline in services exports in