Reserve Bank governor Michele Bullock says the central bank’s concerns over inflation are now being realised, raising the prospect of another increase in interest rates.
Speaking at a parliamentary hearing on Friday morning, Bullock reinforced market expectations that the RBA could deliver its fourth rate rise of the year at its next board meeting in late September.
While inflation remains too high, Bullock said the key issue for the RBA would be whether its three increases so far were sufficient to return inflation to target within a reasonable timeframe.
At its August meeting, the RBA forecast that inflation would move back to the midpoint of its target band by the end of 2027.
However, the bank warned that outcome was not guaranteed, with inflation considered more likely to exceed its forecasts than come in below them.
The RBA board said at the time that further rate hikes could be needed if those risks eventuated.
“Developments since then suggest that, although growth in the Australian economy is slowing, some of these upside risks to inflation appear to be materialising,” Bullock said on Friday.
She said the conflict in the Middle East, the artificial intelligence boom and extreme weather had all increased pressure on energy, food and technology prices.
RBA governor Michele Bullock says risks of higher inflation are materialising in Australia.
Bullock’s inflation warning follows calls from the International Monetary Fund for Jim Chalmers and state treasurers to curb government spending as borrowing costs reach a 15-year high.
‘There is little sign of resolution in the Middle East conflict. Oil and related prices have increased sharply again and will add directly to inflation.’
The benchmark Brent crude price remained above $US104 a barrel, despite a modest sell-off in oil overnight on news that Saudi Arabia plans to bring its East-West pipeline back online in a reduced capacity following attacks by Iran-backed Houthi forces.
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But as businesses increasingly saw no end in sight to the war and price increases, they were growing more inclined to pass on costs to consumers, which risked making inflation more persistent, Bullock said.
After inflation came in hotter than expected in July, money markets have raised the chance for a September rate rise above 80 per cent, with two hikes fully priced in by March 2027.
Higher for longer interest rates and fuel prices would hit economic growth, but that has been swamped by the AI boom, which has pushed up demand in a way the RBA did not foresee.
‘Just back from the US and in addition to … the upside risk of inflation from the Middle East, what is also very striking is how strong the AI and tech boom is and has been,’ said RBA deputy governor Andrew Hauser.
‘That’s not just true in the US; it’s true in the Asia Pacific region as well, who are of course our closest trading partners, and our forecasts for global growth have been repeatedly surprised on the upside.’
Given Australia’s productivity malaise, a period of slower growth was needed to bring inflation down, Bullock said.
The nation’s deepening housing downturn would help take some steam out of the economy, but while prices have fallen in most capital cities, they were still about 50 per cent higher than they were in early 2020.
Bullock’s inflation warning comes as the International Monetary Fund has urged Jim Chalmers and state treasurers to rein in government spending as borrowing costs hit a 15-year high.
‘With public debt and interest costs rising, particularly in some states, a gradual tightening of the fiscal stance would help rebuild buffers,’ the IMF said in its latest report on Australia.
‘Public spending has increased steadily since the global financial crisis, and greater efforts will be needed to contain spending growth by strengthening efficiency and prioritisation.
‘The combined fiscal deficit of the commonwealth and state governments widened over the past two fiscal years, reflecting large infrastructure investment by states, rising social spending, especially healthcare and the National Disability Insurance scheme, and response to the global energy price shock.’