and modest, monetary policy should mostly ‘ look through ’ it. by contrast, when the shock has a longer lasting effect on the economy and inflation, or there are a series of supply shocks in one direction, there are stronger grounds for monetary policy to respond. which brings us to the important role of inflation expectations. when households and businesses have a high level of confidence that the board will do what is needed to return inflation to target, we can afford to look through a greater share of negative supply shocks – even those that will last for a lengthy period. of course, there are limits here. the longer a central bank permits inflation to remain outside target, the more likely it is that inflation expectations will shift. and if they do, it will require even higher interest rates and unemployment to bring inflation back to target. given these considerations, the board ’ s approach – when faced with a need to balance its objectives – is to explain how these are being managed and why. over the past year, this has been done through the analogy of aiming to tread a ‘ narrow path ’ in which inflation returns to target within a reasonable timeframe while employment continues to grow. as we have been saying for some time, it might have been possible to get inflation back to target sooner by raising the cash rate more sharply. however, doing so would have caused greater hardship for households and businesses and ultimately higher unemployment. as such, the board judged that, at that time, the costs outweighed the gains from restoring inflation to target quicker. at the same time, the board has been clear that it has a low tolerance for allowing inflation to return to target more slowly than currently expected. accepting this would risk eroding public credibility in our commitment to low and stable inflation. and as i have discussed, the long - term costs to the economy if that were to happen would be considerable. financial stability and the dual mandate a second potential trade - off in monetary policy frameworks is between financial stability and the inflation and full employment objectives. my main observation here is, again, that these objectives are often more complementary than assumed. r e s e r v e b a n k o f au s t r a l i a the rba has long had a mandate to contribute to financial stability. over the past quarter century, this has included working closely with the australian prudential regulation authority ( apra ) and other members of the council of financial regulators to promote stability in the financial system. it is pleasing

speech monetary policy in australia : complementarities and trade - offs michele bullock [ * ] governor 2023 commonwealth bank global markets conference sydney – 24 october 2023 good evening. thank you for inviting me to speak at this event. it is my first speech as governor, and a good opportunity to talk about a topic at the core of the reserve bank ’ s responsibilities : monetary policy and the framework within which it is considered. before i begin, however, i would like to comment briefly on recent monetary policy. as i ’ m sure you are all aware, the reserve bank board decided earlier this month to keep the cash rate target at 4. 1 per cent, where it has been since the most recent rate rise in june. our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing. it is possible that this can be done with the cash rate at its current level but there are risks that could see inflation return to target more slowly than currently forecast. the board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. at the same time, the board is mindful that growth in demand and the rate of inflation have been moderating, and that there are long lags in the transmission of monetary policy. the board will receive several pieces of information before its next meeting that will be important for this assessment. this includes a full update of the staff ’ s forecasts. we will reconsider the outlook for the economy in light of incoming information and will have opportunities to explain our assessment in the media release and statement on monetary policy that will follow the november meeting. the focus of this speech, however, is the broader framework we use when making monetary policy decisions. my remarks are shaped by the fact that, while we target low and stable inflation, there are other objectives that the board considers in formulating monetary policy. in many ways, the board ’ s various objectives complement each other. but there are times when they may seem at odds with one another and the board must consider how to balance its objectives. this potential for trade - offs can arise between our objectives for price stability ( or low inflation ) and full employment, or between those two and our objective of maintaining financial stability. to preface my key observation, while there are sometimes balances to be struck, there are many more ways in which our objectives complement each other. inflation and full employment most of you will be well acquainted with the rb