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Governor admits narrow path is narrowing amid another rate hike consideration

6 minute read

In her most hawkish address to date, Michele Bullock stated, “We are currently at a very complex stage of the economic cycle.”

Similar to the previous month, the governor reiterated that the Reserve Bank board deliberated on an interest rate increase at its recent meeting but opted to keep the rate steady at 4.35 per cent, determining that continuing with its current strategy is prudent.

“Yes, we did discuss the case for increasing interest rates at this meeting. In the end, the board decided that its current strategy of staying the course and trying to bring inflation back down by bringing supply back to demand was the way to go,” Bullock said.

She confirmed that rate cuts were not under consideration and instead adopted a more hawkish stance, cautioning that while the RBA remains on a “narrow path”, that path does seem to be narrowing slightly.


“We need a lot to go our way if we’re going to bring inflation back to the target range,” Bullock said.

“The board does need to be confident that inflation is moving sustainably towards target … We will do what is necessary to achieve that outcome.”

She explained that a few alerts are keeping the central bank vigilant.

“One was the monthly CPI in April. It was a bit higher than expected. It’s only a monthly CPI, doesn’t give you a full picture of things. On consumption, things are a bit on the upside as well.

“As I said, it’s hard to know how to interpret it, but just a few little alerts to suggest we might need to remain vigilant.”

Ultimately, Bullock acknowledged that “we’re at a very complex part of the cycle at the moment”, noting a global deceleration in progress towards inflation targets where Australia is not an exception.

The governor, however, clarified that the argument for a rate hike is not gaining strength.

“What I would say, and I think we’ve tried to reflect this in the statement is that there’s been a few things that have made the board alert to the upside risks,” Bullock said.

“I wouldn’t say it’s increasing the risk of an increase, but it is a bit more focused on that, and I think that reflects the fact that if it looks like inflation is not coming sustainably back in the band within a reasonable amount of time.”

Moreover, Bullock noted that while central banks in Canada and the European Union recently reduced rates, she emphasised the distinct economic contexts that differentiate their situations from Australia’s.

Namely, the governor explained that Canada is easing monetary policies due to factors such as higher unemployment rates and faster declines in inflation, while the ECB’s actions reflect an extended period of weak economic growth.

“I can sort of see why they may be doing things that are slightly different to us,” Bullock said.

“We’re focused on our domestic economy.”

‘Highly uncertain’

In its post meeting statement, the RBA said the economic outlook remains “highly uncertain”, and recent data has demonstrated that the process of returning inflation to target is “unlikely to be smooth”.

“The central forecasts published in May were for inflation to return to the target range of 2–3 per cent in the second half of 2025 and to the midpoint in 2026,” the central bank said.

“Since then, there have been indications that momentum in economic activity is weak, including slow growth in GDP, a rise in the unemployment rate and slower-than-expected wages growth. At the same time, the revisions to consumption and the saving rate and the persistence of inflation suggest that risks to the upside remain.”

The central bank also, for the first time, acknowledged that recent budgets may have an impact on demand.

Addressing this also during her media conference, Bullock said that the board did, indeed, consider the collective impact of the budgets rather than evaluating them in isolation, placing them within the broader context of the entire economy.

Economists react

Economists broadly agreed that the RBA displayed a more hawkish tone on Tuesday.

According to Krishna Bhimavarapu, APAC economist at State Street Global Advisors, the bank was in fact “firmly hawkish”.

“The bank still does not rule anything in or out on rates but recognises the risk of slower consumption growth,” Bhimavarapu said.

“We now expect just one rate cut this year in November and view a rate hike as a policy error.”

AMP’s Shane Oliver said the RBA’s decision to maintain rates clearly reflects ongoing efforts to balance demand and supply. While acknowledging Bullock’s “slightly more hawkish tone”, Oliver said, “We continue to see rates as having peaked”.

“While the risk of another near-term rate hike is significant, inflation will be key,” said the chief economist.

“We have also been seeing a quarterly pattern of higher than expected then lower-than-expected inflation lately, which suggests the June quarter could see lower than expected inflation,” he added.

All up, Oliver said AMP continues to see the trend in inflation remaining down, ultimately helping to avert another rate hike and allowing the RBA to start cutting rates in November or December.

Nevertheless, he said, the path to rate cuts will “likely remain bumpy”.

“While our base case is for the first cut to come at year end, the risk of another rate hike in the near term is material as is the risk of a further delay in rate cuts into next year.

“The next key things to watch regarding the interest rate outlook will be the June quarter inflation data at the end of July, any early reading on the impact of the 1 July tax cuts on consumer spending and any revisions to its economic forecasts in August.”

The RBA’s decision on Tuesday was its fifth consecutive hold decision in seven months. In fact, the cash rate has moved just once in the past year.

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.