Australia’s most powerful central banker is warning inflation will stay elevated with key risks now materialising — prompting Westpac to change its forecasts to have the Reserve Bank raising interest rates in just 11 days’ time.
A day after the US Federal Reserve hiked interest rates for the first time in three years, Reserve Bank Governor Michele Bullock told MPs the inflationary effects of the American-led Iran war appeared to be worse than initially expected in late February, with basic unleaded petrol now typically selling for more than $2.30 a litre compared with $2.90 for diesel.
“Some of these upside risks to inflation appear to be materialising,” she told the House of Representatives economics committee on Friday.
Crude oil prices this week hit $US105 a barrel for the first time since early May after an Iran-backed militia group deployed drones on Saudi Arabia’s East-West pipeline, connecting the Persian Gulf with the Red Sea as an alternative to the blockaded Strait of Hormuz.
“Higher oil prices have increased inflation directly through their impact on petrol prices, but it’s also had an indirect impact as many firms have passed input cost pressure, arising from elevated fuel prices, through to the prices of other goods and services,” Ms Bullock said.
“Because of these capacity pressures and the Middle East conflict, inflation is likely to remain elevated for some time.”
The RBA chief strongly hinted another rate rise was likely to stop inflation becoming embedded “now we’ve got this extra impetus from a prolonged Middle East conflict”.
“Inflation is too high. We are focused on getting it back down and making sure that it does not become embedded into price and wage-setting decisions,” she said.
The RBA meets again on September 28 and 29 with the next decision occurring a day before the Australian Bureau of Statistics releases August inflation data, while the November 2 and 3 gathering of the nine-member monetary policy board is taking place after the publication of more comprehensive September quarter inflation figures.
“It is a well-known fact that supply shocks are very difficult for central banks to deal with,” Ms Bullock said.
The Reserve Bank isn’t expecting headline or underlying inflation to fall back within its 2-3 per cent target until mid-2027, by which time the consumer price index would have been above the band for almost two years.
“I would say that we do have some concerns, in talking to businesses in our business liaison program, that there is starting to be a bit of a bubble up of a view that we’re not getting inflation back down under three,” Ms Bullock told independent MP Allegra Spender.
Just three hours after the RBA chief finished giving three hours of evidence, Westpac changed its forecast to have the Reserve Bank raising interest rates this month instead of November.
“That communication has clearly escalated over recent days. In particular, Governor Bullock today flagged that upside risks to inflation appeared to be materialising,” Westpac chief economist and former RBA assistant governor Luci Ellis said late on Friday afternoon.
“We shift the timing of the next rate hike to September from November.
“There is a risk of a follow-up hike. Much depends on the data flow after the meeting.”
Two of Australia’s big four banks — Westpac and NAB — are now predicting a September rate hike while the Commonwealth Bank and ANZ are still expecting the next move to be on Melbourne Cup day.
The futures market is now regarding another hike by Christmas as an 82 per cent chance, that would take the cash rate to a 15-year high of 4.6 per cent and add $120 to monthly repayments on an average, new mortgage of $731,000.
Rate rise expectations are now weighing heavily on the housing market, along with Labor’s Budget tax changes to negative gearing and capital gains tax concessions.
“We normally would expect, as we said, a response to interest rate rises and not just actual interest rate rises, expectations of interest rate rises,” Ms Bullock said in response to a question from Liberal MP Cameron Caldwell.
“We do expect that. How much is due to tax changes and how much is due to interest rates and how much is just due to households being concerned about, worried about the conflict in the Middle East, and what it might mean for other things, is very hard to dissect.”
Ms Bullock’s deputy Andrew Hauser, who is also on the RBA’s monetary policy board, said rate rises were affecting more than just home borrowers.
“Clearly, there is a significant burden on mortgage holders, but monetary policy affects every part of the economy, that’s why it’s effective,” he said.
He added a stronger Australian dollar, this month reaching 72 US cents for the first time in four months to be up 8 per cent since the start of 2026, would also play a key role in alleviating inflation by making imports cheaper, with higher interest rates more likely to see the local currency strengthen against the US dollar.
“The biggest single channel is actually the exchange rate,” Mr Hauser said.
“You might think, ‘Well, exchange rate only affects people who are going overseas’ and say, ‘Great, you get a cheaper holiday, can’t be very important’ — it’s much more pervasive than that.
“Every company importing products, which is almost every company in Australia, gets cheaper products if the exchange rate is higher.”
During the hearing in Canberra, Treasurer Jim Chalmers said the Reserve Bank’s three interest rate rises so far this year were hurting borrowers.
“It is already clear that the interest rate rises in the system are putting a lot of pressure on people with a mortgage,” he told reporters in Brisbane on Friday.
“We do understand that people are under pressure, that’s why we’re rolling out cost of living help and tax cuts.”
High government spending, covering public infrastructure but not welfare payments, is also adding to inflation with the Reserve Bank expecting public demand to grow by 3.1 per cent this financial year, or more than double the 1.5 per cent economic growth pace.
“Aggregate demand is made up of public and private and anything that adds to aggregate demand and keeps it above supply is contributing to that excess demand — it doesn’t matter whether it’s private or public,” Ms Bullock said.
“It is not my job to tell the Government, any governments, how they choose to spend their money.”
Inflation eased marginally in July to 3.5 per cent but it remained above the Reserve Bank’s 2-3 per cent target for the 12th straight month.
“At the moment, we think demand is above supply and we think that low productivity growth means the economy can’t grow very fast,” Ms Bullock said.
Higher interest rates have also pushed Australian Government bond yields to the highest level since 2011, which adds to Commonwealth debt interest payments, which Treasury tips will cost $32 billion this financial year.
“Our yields have moved up as other yields have moved up overseas and reflecting very similar factors - inflation, expected interest rates, the neutral interest rate, I think it’s not unexpected that everything is moving up together,” Ms Bullock said.
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