Reserve Bank of Australia Governor Michele Bullock said on Tuesday that upside risks to inflation may be materialising, pointing to energy prices that have stayed high and excess demand at home. The comments cemented market pricing for a rate hike as soon as next week, per Reuters.
Speaking at a business lunch in Sydney, Bullock said she was not signaling what the nine-member policy board will decide when it meets on September 29. She was, she said, highlighting the risks. The distinction did little to move expectations: markets now put a 95 percent chance on a hike to 4.60 percent next week and see rates peaking at 4.85 percent early next year.
“And the question we are asking ourselves, have some of those things materialised?” Bullock said. “The Middle East conflict has gone on now for much longer than people thought it would … and there still seems to be excess demand in the economy.”
The numbers behind the warning
The RBA has raised the cash rate by 75 basis points since February, taking it back to a post-pandemic high of 4.35 percent. That has not been enough. Core inflation is still running at 3.6 percent, well above the bank 2 to 3 percent target range, and the board has grown vocal about the danger of elevated inflation getting baked into price-setting behavior.
Assistant Governor Sarah Hunter had already laid the groundwork earlier on Tuesday, reiterating that interest rates might have to rise for a fourth time this year to make sure inflation is reined in. Bullock added a labor-market dimension: unemployment in a range of 4.5 to 5.0 percent could help restrain inflation, which suggests some rise may be needed from the current 4.5 percent. In plain terms, the RBA is signaling it would accept a somewhat weaker labor market as the price of getting inflation back to target.
| Measure | Level | Context |
|---|---|---|
| Cash rate | 4.35% | up 75 bps since February |
| Core inflation | 3.6% | target range 2-3% |
| Unemployment | 4.5% | RBA sees 4.5-5.0% as helpful |
| September 29 pricing | 4.60% | 95% probability priced in |
Oil and the imported problem
The Middle East conflict sits at the center of the inflation math. Brent crude hovered near $100 a barrel this week after Iran offered to reopen the Strait of Hormuz within seven days if the US starts easing military pressure, an offer traders greeted by selling crude for a fourth straight session. But the de-escalation is unconfirmed, Houthi attacks on shipping continue, and Bank of America analysts wrote last week that a sustained chokehold on traffic could push prices to $95 to $120 a barrel, with damage to major energy infrastructure producing spikes of up to $150.
For an energy-importing economy, that is a direct input into the inflation forecast. Bullock has flagged the same mix before, telling a parliamentary committee on Friday that the Middle East conflict and the AI boom were both putting pressure on prices. The AI angle is less obvious but real: heavy investment in data centers and power infrastructure adds demand in an economy already running hot, and it competes for labor the same way any capital boom does.
Households are already bracing
Consumer sentiment data released Tuesday showed the mood souring ahead of the decision. Australian consumer confidence fell as inflation expectations rose, and Commonwealth Bank reported household spending growth slowed to just 0.1 percent in August as inflation and housing costs weighed on wallets. The bank commentary pointed to broad-based cooling rather than a collapse, but the direction matches what the RBA says it wants to see.
Mortgage holders, who absorbed the first three hikes of this cycle, face another roughly A$90 a month on a typical A$500,000 variable loan if the board moves 25 basis points next week. That is the transmission channel the RBA is counting on. Bullock noted that house prices have fallen in most capital cities but remain about 50 percent higher than in early 2020, and she has argued that a period of slower growth is needed given weak productivity growth. The bank wants demand to cool without a hard landing, and the board has so far judged that modest additional tightening is the way to get there.
What to watch on September 29
The decision itself, due at 2:30 pm AEST, is the near-term event. A 25 basis point hike to 4.60 percent is nearly fully priced, so the surprise would be a hold, and Bullock was careful not to pre-commit. The accompanying statement and the minutes due October 13 will show how the board weighed the energy outlook against softening domestic demand, and whether the language shifts from “risks may be materialising” to a more direct easing-back of stimulus.
Beyond Australia, the RBA is the most hawkish major central bank this cycle, having hiked into a global environment where the US Federal Reserve raised rates again last week for the first time since 2023, its first increase in more than three years, and where the ECB and Fed are both still priced for further increases over the next 12 months. Markets are also watching the Bank of Japan, which meets the same week and is expected to lift its policy rate to 1.25 percent, a reminder that the tightening cycle is still live across developed economies even as oil prices retreat from their highs.
The politics are unavoidable too. An election-cycle economy with rising mortgage costs and cooling spending is a difficult mix for any government, and the RBA independence argument cuts both ways: the more the board signals it will tolerate unemployment rising toward 5 percent, the more the decision becomes a political talking point as well as an economic one.
For now, the message from Sydney is unambiguous. The risks the RBA warned about earlier this year have, in the governor own words, started to show up. The board meets in a week, and markets have already made up their mind.