August rate decision could hinge on quarterly inflation data due today
Reserve Bank of Australia (RBA) governor Michele Bullock has signalled the central bank remains prepared to raise the cash rate again if needed, as it works to return inflation to target amid persistent productivity weakness and ongoing global supply disruptions.
Speaking at the Anika Foundation fundraising lunch in Sydney, Bullock outlined the bank's current assessment of the economy and reiterated its commitment to its dual mandate of low inflation and full employment.
She acknowledged that economic growth was slowing but framed this as a deliberate outcome of the bank's policy settings.
"There is a lot of commentary like 'oh no growth is slowing' but we assess at the moment that demand has to slow so it is not growing more than supply and generating inflation," Bullock said. "So the point I want people to take away is this is part of the plan. This is what interest rates are designed to do. (Hikes) are designed to slow demand so it is more in line with growth in supply and alleviate those inflation pressures."
The cash rate currently stands at 4.35% following three consecutive increases earlier this year, totalling 75 basis points, reversing the three cuts made during 2025. Each of those 2026 hikes adds approximately $80 per month to minimum repayments on a $500,000 mortgage.
Bullock said the full effect of earlier tightening had yet to flow through the economy and that further softening in demand would likely be necessary.
"Some further easing in the growth of demand is likely to be required if we're to bring inflation back down sustainably to target," she said. "A key question in the period ahead is whether the tightening in monetary policy earlier in the year is sufficient to achieve this."
On the housing market, Bullock noted conditions had cooled more quickly than the bank had expected.
"The housing market has eased by more than we had anticipated in May," she said. "This appears to reflect a range of factors, including recent policy developments affecting the housing market and a general softening in housing market sentiment. Even so, the easing in established housing prices has so far been modest following a period of strong growth."
Productivity was identified as a structural constraint on the economy's capacity to grow without generating inflation. Bullock called it a "fundamental challenge" and warned that monetary policy alone could not address it.
"In Australia, these shocks have occurred against a backdrop of persistently weak productivity growth, which has weighed on real incomes and wages for many years. Reversing that is central to improving Australians' living standards over the longer term," she said.
She also noted that supply shocks were becoming more frequent globally, citing the COVID-19 pandemic and the Russian invasion of Ukraine as prior examples, and acknowledged that the US-Iran conflict had added further complexity.
"While the effect on fuel prices and headline inflation has so far been smaller than initially feared, headline inflation has remained well beyond the target," she said. "Underlying inflation, which is a better guide, has evolved broadly as expected but is still too high."
Despite the cautionary tone, Bullock noted households had shown more resilience than sentiment indicators might suggest. "While households remain cautious, spending has been more resilient than sentiment alone might suggest," she said.
Her remarks came ahead of the release of the Australian Bureau of Statistics quarterly inflation figures later today. Markets were pricing in a trimmed mean inflation rate of 3.7 to 3.8% for the June quarter, in line with the RBA's May forecast and up from 3.5% for the 12 months to March.
Bullock warned of the risks of allowing inflation to remain above target for an extended period. "The further inflation moves from target, the more embedded it becomes and the harder it becomes to reverse," she said.
"Let's hope there are no more shocks. The challenge is that if there is more coming on the oil price side of things, I personally worry things will get ingrained."
The next cash rate decision is scheduled for 11 August.
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