Policymakers at Australia's central bank flagged upside risks to inflation in August, and data since then suggests that some of those risks have started to materialize despite a slowdown in the domestic economy's growth, Reserve Bank of Australia Governor Michele Bullock said.
In an opening statement delivered Friday to a House of Representatives standing committee on economics, the central bank chief said global cost pressures have intensified as the Middle East conflict shows little-to-no signs of a resolution.
Bullock reiterated an expectation for inflation to remain elevated for some time, noting that the artificial intelligence boom and extreme weather events are placing upward pressure on a broad range of prices from energy to agriculture.
Many businesses are now passing on higher input costs as oil and related prices have surged again, and remaining capacity pressures risk exacerbating the degree of the pass-through. If inflation proves to be more persistent, it may require "a stronger policy response," the governor said.
The central bank has raised borrowing costs by 75 basis points so far in the year, bringing its official cash rate to 4.35%. As the bank gears up for its next meeting later in September, a key focus will be on determining whether policy is now tight enough to return inflation to the target band, Bullock said.
She added that inflation concerns are not unique to Australia, as many other central banks are reacting to the global inflation shock by increasing rates or expressing a willingness to do so if needed.
"I recognize that higher interest rates are difficult for Australians with mortgages who are also facing cost-of-living pressures," Bullock said. "But reducing inflation is essential."
The US Federal Reserve this week increased its target range on the overnight funds rate to 3.75% to 4% from 3.5% to 3.75% in a unanimous decision, marking its first rate hike since 2023.
BofA Securities expects the Reserve Bank to boost its cash rate by 25 basis points to 4.60% at the upcoming meeting in September, as underlying price growth is accelerating and inflation pressures are becoming increasingly broad-based. A watch tool that tracks the market-implied rate probability currently forecasts an 82% likelihood for a rate increase at the meeting.
