Reserve Bank’s blunt warning just days before next interest rates decision

Reserve Bank governor Michele Bullock has issued a blunt warning that inflation in Australia is too high days before the bank’s board will consider lifting interest rates for the fourth time this year.

Addressing a House of Representatives Economics committee on Friday, Bullock said the Middle East conflict, the AI boom and extreme weather events were pushing up prices.

“Inflation is too high,” she said. “We are focused on getting it back down and making sure that it does not become embedded into price and wage-setting decisions.”

Bullock warned that a series of risks to the inflation outlook previously flagged by the Reserve Bank “appeared to be materialising”, especially the prolonged period of elevated fuel prices caused by war.

“There is little sign of resolution of the Middle East conflict,” she said. “Oil and related prices have increased sharply again and will add directly to inflation.”

Bullock also said the boom in AI-related infrastructure, including the construction of data centres, is “exerting inflationary pressure” by adding to demand for labour in key economic sectors and driving up prices for some AI-related technologies.

“It is important that these effects remain contained and do not become embedded into price and wage setting decisions,” she said.

The RBA monetary policy board has already increased the benchmark cash rate by 0.75 percentage points in three separate increases this year in a bid to reduce inflation.

The board will next meet on September 28 and 29 to consider the level of interest rates.

Bullock said a key question at that meeting will be whether the current level of interest rates “will be sufficient to bring inflation back to target in a reasonable time”.

EY Australia chief economist Cherelle Murphy said Bullock was “putting the case” for why interest rates needed to be lifted.

“There is a lot of evidence that the inflation outlook is worsening,” she said.

On Friday, bond futures traded on financial markets had priced in an 82 per cent chance that the Reserve Bank would lift interest rates by 0.25 of a percentage point this month.

Another interest rate hike would lift the cash rate, now 4.35 per cent, to its highest level in 15 years.