Oil leads the hawkish read. Bullock tied the deterioration in the inflation outlook directly to re-escalating Middle East conflict and higher energy prices, so further gains in crude feed straight into the case for another RBA hike. By saying inflation will likely exceed the August base case, and asking openly whether current tightening is enough, she leaves the November 2 and 3 meeting live and supports the Australian dollar and front-end yields. Her view that the labour market is tighter than judged, despite unemployment rising, weakens the dovish argument that slowing growth will do the work. Today’s quarterly trimmed mean now becomes the decisive test: a firm print would likely push markets further toward a November hike.
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Bullock told senators that oil, AI-driven cost pressures and a tighter-than-thought labour market have pushed inflation above the RBA’s August track, making next week’s meeting a genuine question of whether 100bp of hikes is enough.
Summary:
- RBA Governor Michele Bullock said inflation will likely be higher than the RBA’s August base case, as some of the upside risks it flagged have materialised.
- Re-escalating Middle East conflict has pushed global energy prices well above August assumptions, which will add materially to inflation directly and through pass-through of transport costs. Short-term inflation expectations are elevated.
- She said the labour market looks a little tighter than previously judged, despite unemployment rising more than expected, with elevated underlying inflation tied to domestic demand.
- Weak productivity growth means a further period of subdued demand growth is needed to bring inflation down sustainably.
- The cash rate is up 100bp this year. The Board meets next week, with a key question being whether tightening to date is enough to return inflation to target in a reasonable time.
- Housing prices have fallen in most capitals but remain around 50% above early 2020 levels. Bullock said the RBA does not target house prices.
Reserve Bank of Australia Governor Michele Bullock said inflation is likely to run higher than the central bank forecast in August, as a renewed surge in energy prices from the Middle East conflict compounds domestic capacity pressures, signalling an open question over further tightening when the RBA Board meets next week.
In her opening statement to the Senate Economics Legislation Committee on Wednesday, delivered shortly before the release of September quarter CPI data, Bullock said some of the upside risks to inflation that the RBA had flagged in August have materialised or are materialising. The RBA’s August forecasts had inflation returning to around the midpoint of its 2% to 3% target only in late 2027.
Energy is the main new source of pressure. Bullock said the conflict in the Middle East has re-escalated and global energy prices are now much higher than assumed in August. She said higher oil and related prices will add materially to inflation, both directly and as businesses facing higher transport costs try to pass them on, and noted that short-term inflation expectations are elevated. She also pointed to the global AI boom and extreme weather as sources of upward pressure on technology and agricultural prices.
Bullock stressed that inflation is not only being imported. Even though unemployment has risen a little more than expected, she said the labour market appears slightly tighter than the RBA had judged, citing elevated underlying inflation in areas that reflect domestic demand. Weak productivity growth means the economy cannot grow strongly without adding to price pressures, a challenge she described as fundamental for Australia and for real spending power over the next few years. She said a further period of subdued growth in aggregate demand is needed to bring inflation down sustainably.
The Board has raised the cash rate by 25 basis points since the committee’s June hearing, taking the cumulative increase this year to 100 basis points. Bullock said the full effects have yet to be felt, with household spending moderating only gradually and business investment picking up strongly on data centres and renewable energy projects. Housing prices have fallen in most capital cities, though they remain around 50% above early 2020 levels, and she said the RBA does not target house prices.
Looking ahead, Bullock said the Board will assess the data and the balance of risks next week, with a key question being whether the tightening so far will be enough to return inflation to target in a reasonable time. She added that higher rates are difficult for households but that high inflation cannot be allowed to persist, noting that central banks in many advanced economies are raising rates or signalling they will if needed.
This article was written by Eamonn Sheridan at investinglive.com.