Reserve Bank Governor Michele Bullock told a parliamentary committee in Canberra on Friday that upside risks to inflation "appear to be materialising", and that the bank's business contacts are reporting that firms are passing higher input costs on to customers.
The wording matters for anyone with a mortgage. When the Monetary Policy Board held the cash rate at 4.35 per cent on 11 August, it said it would consider "increasing the cash rate target further if upside risks materialise". On Friday the Governor told the House of Representatives economics committee that, in her view, they are. The Board meets on 28 and 29 September.
Borrowers have already absorbed three rises this year, in February, March and May, taking the cash rate from 3.60 to 4.35 per cent. Bullock's opening statement put it plainly. "Inflation is too high," she said. "I recognise that higher interest rates are difficult for Australians with mortgages who are also facing cost-of-living pressures. But reducing inflation is essential."
The statement gives the bank's own reading of the numbers. Headline and underlying inflation have run "around or a little above 3 per cent" over the past year, above the 2 to 3 per cent target band the economy sat inside for a period in 2024 and 2025. Unemployment is 4.5 per cent. The bank's August forecasts do not have inflation back near the midpoint of the band until late 2027.
Asked why the bank could not look through the current price pressure, Bullock pointed to how businesses are behaving. "I think there's much more of an inclination to think that we need to pass through these cost increases because it's going to be much more persistent," she told committee chair Ed Husic, according to the ABC. "It's much harder to look through when there are persistent shocks, because of the risk that will flow through to inflation expectations."
She also conceded the ground had shifted. "I think we have to acknowledge that the trade-off has got worse, that this particular Middle East shock has made us poorer, and we can't respond to that by letting inflation get out of control," she said in answer to Wentworth MP Allegra Spender.
Markets moved within hours. Pricing reported by the ABC from LSEG data put the chance of a September rise at 95 per cent, which would take the cash rate to 4.60 per cent. Westpac chief economist Luci Ellis, a former RBA assistant governor, said the bank had shifted "the timing of the next rate hike to September from November". The ASX 200 closed almost flat at 8,731.
Deputy Governor Andrew Hauser told the committee that "interest rates were never going to be zero or near zero for a long while", and asked whether borrowers had adjusted to that. On house prices, which the RBA says remain around 50 per cent above early 2020 levels, Bullock said "monetary policy does not target housing prices".
Her statement also named where business investment is going: "mostly" data centres and renewable energy projects. Weak productivity growth, she said, means "the economy cannot grow strongly without putting pressure on inflation."
One cost change is coming regardless of the rate call. From 1 October, surcharges on debit, prepaid and credit card payments across the eftpos, Mastercard and Visa networks are removed under the RBA's March conclusions, and interchange caps are lowered. The bank said then that small businesses "should benefit the most" from the cheaper acceptance costs. Bullock told the committee the RBA is monitoring how the payments industry implements the change.
The next hard number before the Board meets is the August labour force release on Thursday. The rate decision is due on Tuesday 29 September.
