Key facts
- Australia's central bank governor Michele Bullock warned that upside inflation risks are materializing.
- The Middle East conflict and the global AI boom are cited as factors increasing upward price pressure.
- The RBA's cash rate is currently at a post-pandemic high of 4.35%.
- Markets are pricing in a 93% chance of a rate hike to 4.6% at the RBA's September 28-29 meeting.
- UBS forecasts two additional rate hikes, bringing the cash rate to a peak of 4.85%.
Australia's central bank governor Michele Bullock indicated on Friday that some of the previously identified upside risks to inflation appear to be materializing, citing the Middle East conflict and the global AI boom as contributing factors to upward price pressures. Addressing lawmakers, Bullock stated that a key consideration for the Reserve Bank of Australia's (RBA) upcoming policy meeting would be whether the current interest rate, matching a post-pandemic high of 4.35%, is sufficient to return inflation to the 2%-3% target.
The RBA had previously held interest rates steady for two consecutive meetings in August, but had cautioned that rates might need to increase further, highlighting the Middle East war, a global boom in data center investment, and extreme weather events as significant inflation risks. Bullock noted that despite slowing economic growth, these upside inflation risks seem to be materializing, with no clear resolution in the Middle East conflict leading to a sharp increase in oil prices, and the AI boom driving higher global prices for supply-constrained AI-related technologies.
Financial markets are currently pricing in a 93% probability that the RBA will raise rates for a fourth time this year to 4.6% at its meeting on September 28-29, with expectations of rates reaching 4.85% by early 2027. This shift reflects not only a higher-than-expected July inflation report in Australia but also a broader global repricing influenced by the U.S. Federal Reserve's return to rate hikes. Bullock also mentioned that businesses are increasingly concerned about the RBA's ability to control inflation, with many firms passing on higher costs to consumers, a situation potentially amplified by a tight labor market.
While acknowledging a softening in the housing market that could pose a downside risk to economic activity, Bullock stated that financial stability risks stemming from falling house prices are contained due to borrowers' substantial savings buffers. She emphasized that the impact of housing price changes on economic activity, the labor market, and ultimately inflation is what matters for monetary policy. In light of the central bank's hawkish stance and rising oil prices, UBS economists now anticipate two additional rate hikes, bringing the RBA's cash rate to a peak of 4.85%.