A lack of cohesion on Australia’s national energy policy over the last decade is posing a serious risk of inflation, according to Guy Debelle, Deputy Governor of the Reserve Bank of Australia (RBA).
The main issue revolves around the general levels of uncertainty caused by different governments and ministers looking to implement various strategies, which has led the central bank to be unsure as to how much this will actually affect inflation.
Debelle outlined the general lack of an overarching structure to define energy policy in his “Low Inflation” speech. He said that the inability to deliver a long-term plan has spiked energy prices at wholesale and for homeowners – and there has not been enough of an additional supply to the grid to help counteract this issue.
The trend has at least tapered in the meantime with the introduction of several new renewable energy generating facilities nationwide, whose input into the national grid has helped reduce energy costs at source.
This would likely help lower inflation for the time being, though RBA is unsure if this trend will sustain over a longer period.
In Debelle’s speech in Brisbane, he said that “high and rising prices” should show a need to put plans in place to increase the levels of supply, but if this does not occur early enough, then the benefits may not come to fruition quickly. This is because “the payoff period for new energy generation assets is long”.
Debelle also confirmed his view that “uncertainty around energy policy has contributed to significant underinvestment in new supply”, which comes at an interesting time in Malcolm Turnbull’s premiership.
With Turnbull’s government currently in turmoil following his failure to push his National Energy Guarantee bill through parliament in full. He had to contend with watering down elements or face complete revolt on the issue.
This corresponds with Debelle’s comments that the lack of a cohesive agreement across the floor is debilitating the economy in many ways, with higher prices affecting consumers and businesses. Uncertainty around new energy builds is also undermining confidence in the construction and engineering sectors.
After a series of power blackouts in the last couple of years, the need to secure a long-term energy strategy came back on the table in earnest. However, some sticking points appear to be major obstacles, particularly the adherence of Australia’s commitment to the Paris climate change accord in 2015.
Debelle said that RBA’s incapability of predicting the current political deadlock and where it is likely to lead in terms of direction for energy policy means “another significant uncertainty for the bank’s inflation forecast”.
Meanwhile, the Deputy Governor also cited other important reasons for the struggle to focus on exact figures for inflation, with a perfect storm of heavy competition in retail, record-low increases in rentals, and slow wage growth being major contributing factors.
Inflation has stayed below the targeted 2-3% by RBA. This has led to the bank dropping interest rates dramatically in 2016 to just 1.5% in the hopes of reviving economic growth and stimulating an increase in investment.
Stating that RBA is aiming “to be more confident that inflation will be sustained at a rate consistent with the target”, Debelle said that while some elements of uncertainty will subside, predicting a timeline for this is a much harder task.