Australia central bank sees inflation risks materializing

SYDNEY, Sept 22 (Reuters) - Australia's central bank governor, Michele Bullock, indicated on Tuesday that risks of inflation rising higher than expected may be materializing, pointing to sustained high energy prices and ongoing excess demand within the domestic economy. These comments have bolstered market expectations for a potential interest rate increase at the Reserve Bank of Australia's (RBA) upcoming policy meeting.

Speaking at a business lunch, Bullock stated that the RBA policy board is concerned about inflation remaining elevated for too long, which could embed into price-setting behaviors. She highlighted the conflict in the Middle East and its impact on energy prices, as well as domestic demand pressures, as key factors contributing to these upside risks.

Bullock also suggested that an unemployment rate between 4.5% and 5.0% could help curb inflation, implying that a rise from the current 4.5% level might be necessary. However, she emphasized that she was not signaling a specific rate decision but rather drawing attention to the inflation outlook.

Earlier on Tuesday, RBA Assistant Governor Sarah Hunter echoed these concerns, stating that interest rates might need to be increased for a fourth time this year to ensure inflation is brought under control. The RBA has already raised its cash rate by 75 basis points since February, bringing it to 4.35%. Despite these hikes, core inflation remains at 3.6%, significantly above the central bank's target range of 2% to 3%.