RBA warns inflation risks are materialising as oil and AI pressures build

Reserve Bank of Australia governor Michele Bullock has warned that upside risks to inflation are beginning to materialise, raising the prospect that interest rates may need to rise again despite signs the Australian economy is slowing.

Speaking before the House of Representatives Standing Committee on Economics on Friday, Bullock said higher oil prices, the Middle East conflict, the global artificial intelligence investment boom and lingering domestic capacity constraints were adding to inflation pressures.

The RBA has already lifted the cash rate by 75 basis points this year to 4.35%, with inflation remaining above the central bank's 2%-3% target range.

Bullock said the key question ahead of the September 28-29 monetary policy meeting was whether the tightening delivered so far would be sufficient.

“It may be that the same rate is enough to do that. It may be that it is not,” Bullock said, adding that policymakers were assessing whether monetary policy was sufficiently restrictive to return inflation to target.

The RBA's latest forecasts had already identified inflation risks as skewed to the upside, but Bullock said developments since the August meeting suggested some of those risks were now becoming reality.

“There is little sign of resolution of the Middle East conflict,” she said.

The central bank is also hearing from businesses that higher input costs are increasingly being passed on to customers, raising the risk that temporary price shocks could become embedded in broader price and wage-setting behaviour.