Australia's Inflation Warning Has Put the RBA Back on the Trigger
Michele Bullock says upside risks to inflation are materialising even as growth slows. The Reserve Bank now faces a choice between another rate rise and a longer inflation hangover.
Australia's central bank has given households a clear warning: the inflation fight is not over. In an opening statement to Parliament on 18 September, Reserve Bank governor Michele Bullock said inflation was around or a little above 3.5 per cent over the past year, above the midpoint of the bank's 2 to 3 per cent target range.
The Reserve Bank has already lifted its cash rate by 75 basis points this year. Bullock said some of the upside risks identified at the August meeting now appear to be materialising. The Middle East conflict is pushing up oil and related prices. Firms are passing higher input costs through to customers. The global AI boom is raising prices for constrained technology supplies, while extreme weather is adding pressure to energy and agricultural markets.
She has done something more useful: she has explained why the option is back on the table.
From the analysisThat combination matters because temporary shocks become expensive when businesses and workers start treating them as permanent. Bullock said the bank is hearing that many firms are passing on higher costs, and warned that embedded price and wage increases would require a stronger policy response.
The uncomfortable part is that demand is already slowing. Bullock said unemployment is 4.5 per cent and labour conditions are close to, but a little tighter than, full employment. Monetary policy works with a lag, so the earlier rate rises have not finished working through mortgages, business finance and investment. The RBA must decide at its 28 to 29 September meeting whether the tightening already delivered will return inflation to target in a reasonable time.
A further rise would hurt borrowers and make it harder for younger Australians to buy homes. Leaving inflation to run would erode wages and savings, then force an even sharper correction later. This is the bill for allowing supply constraints and public spending to run ahead of productive capacity.
The sensible response is not another promise of blanket relief. Canberra should make energy cheaper by approving more supply, keep housing construction moving by removing planning barriers and focus any household support on people who genuinely cannot absorb the shock. The RBA can manage demand, but it cannot drill a well, build a home or repair a supply chain.
Bullock has not announced a September rate rise. She has done something more useful: she has explained why the option is back on the table. Australia now needs policy that expands capacity, because asking interest rates to solve every supply problem is a costly habit.
The Semaform
RBA governor Michele Bullock says upside inflation risks are materialising and the board will assess whether its 75 basis points of tightening is enough at the 28 to 29 September meeting.
Australia needs more energy, housing and productive capacity so interest rates are not forced to carry the whole burden of supply shocks.
Another rate rise may be necessary to keep inflation expectations anchored, and critics can argue that faster tightening is safer than allowing price pressures to become embedded.
Sources
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