Inflation Risks Keep RBA on Guard: Governor Bullock

The Reserve Bank of Australia said it must rein in demand growth to restore price stability, after delivering its first rate hike in two years earlier this week. Governor Michele Bullock told lawmakers Friday that stronger-than-expected demand and persistent supply constraints risk keeping inflation elevated. She added that while the global economy has shown resilience, significant uncertainties remain amid trade and geopolitical risks. The central bank lifted rates by 25bps to 3.85% after inflation reaccelerated following three cuts last year. Consumer prices have exceeded forecasts for two straight quarters, staying well above the 2%–3% target. Underlying inflation rose to 3.4% in Q4, the highest in over a year, and is projected to peak at 3.7% by mid-year before gradually easing toward target by 2028.

The Reserve Bank of Australia unanimously raised the cash rate by 25bps to 3.85% at its first policy meeting of 2026, in line with market expectations. The decision marked the first rate hike since November 2023, underscoring renewed cost pressures that intensified in H2 2025 amid elevated service expenses and a tight labor market, effectively reversing one of last year’s three cuts. The central bank viewed that inflation is likely to remain above the 2–3% target band for some time, reflecting stronger economic momentum and a healthy job market. The board added that further policy moves will depend on incoming economic data and its evolving assessment of the outlook and risks, including the balance between curbing inflation and sustaining economic growth. While acknowledging progress made in easing inflation over the past year, policymakers stressed that maintaining price stability remains their primary focus, signaling a cautious but data-dependent approach to future tightening.

Australia’s central bank this month considered whether a rise in interest rates might be needed in 2026, given a recent pick-up in inflation, but felt it would take a “little” time to know for sure. The board of the Reserve Bank of Australia (RBA) judged that inflation risks had increased following surprisingly high consumer price readings in October and Q3, minutes from the RBA’s December meeting showed. However, some of the lift in inflation could be due to volatile factors, and it would be important to see the Q4 figures due in late January. “Members discussed the circumstances in which … an increase in the cash rate might need to be considered at some point in the coming year,” the minutes showed. “While recent data suggested the risks to inflation had tilted to the upside, members felt it would take a little longer to assess the persistence of inflationary pressures.” CPI surged to 3.8% in October, while core inflation accelerated to 3.3%, above the RBA’s target band of 2% to 3%.