Inflation may stay higher for longer than expected, Reserve Bank of Australia's (RBA) Governor Michele Bullock said on Friday, even as the nation's central bank faces competing pressures to bring price growth under control while also lowering interest rates.
"Developments since [the August meeting] suggest that although growth in the Australian economy is slowing, some of these upside risks to inflation appear to be materialising," Bullock said while speaking in front of Parliament in Canberra.
The governor added that policymakers are still assessing whether current interest rates are restrictive enough to bring inflation back to target. "It may be [that] the same rate is enough to do that," Bullock said. "It may be that it is not, and that is really where we are at the moment thinking about where those upside risks lie and whether or not we have got tight enough policy to deliver inflation back to target."
Upside risks to inflation include the continued conflict in the Middle East and the rapid growth of artificial intelligence. Continued tensions in the region are driving up oil and shipping costs, while strong global demand for AI-related technologies is putting additional pressure on prices in parts of the economy.
"There is little sign of resolution of the Middle East conflict," Bullock said. "Oil and related prices have increased sharply again and will add directly to inflation.
"The global AI boom is driving stronger growth in economies that are key parts of the AI supply chain," she added. "It is also driving higher global prices for some AI-related technologies that are supply constrained."
Bullock's comments come ahead of the monetary board's scheduled meeting on 28 and 29 of September, with markets, including mortgage holders and investors, on edge over potential interest rate hikes. Households and businesses are already facing a number of headwinds, including elevated living costs, tighter borrowing capacity, a revised federal budget and rising unemployment. On Friday, futures priced in a 93% probability of a rate hike at the September meeting.
The nation's central bank has already raised the official cash rate (OCR) three times in 2026, lifting rates to their current level of 4.35%. The board has repeatedly made clear that it will not consider cutting rates again until inflation is back within the target inflation range of 2% to 3%.
July's consumer price index didn't do much to tame market fears. The latest print revealed that inflation, while easing slightly, is still above the target, with headline CPI coming in at 3.5% and trimmed mean at 3.6%.
Another rate hike would likely only slow the economy — and housing market — even further.
"The market's already struggling at the moment, particularly in the investment sector with all the government changes," Chris Brown, managing director and mortgage broker at New Vision Financial in Sydney, told Australian Broker. "We've had costs of living go up; everybody's feeling the pinch. If interest rates do go up — which it's a flip of a coin to be honest — it will slow the market down again, and particularly coming into spring selling season.
"There's already a downturn in the market and house prices and affordability," he continued. "If rates go up, we'll start to see some people are selling to downsize. People are already starting to sell off investment properties. It's just going to stretch their budgets even further."
