Australia faces rising inflation risks as RBA faces further tightening pressure at next week's policy meeting

According to Zhihui Finance APP, Reserve Bank of Australia (RBA) Governor Michele Bullock stated at a Senate committee hearing on Wednesday that some international and domestic upside risks to inflation have appeared or are appearing, which could result in inflation exceeding the central bank’s August baseline scenario. This remark comes less than a week before the RBA’s rate-setting meeting, intensifying market focus on the possibility of further interest rate hikes. Data released the same day showed that Australia’s quarterly CPI accelerated year-on-year to 3.7%, higher than the previous three months’ growth rate and above the median estimate of 3.6%, further reinforcing signs that inflationary pressures remain uncontrolled.

In her opening statement, Bullock said: “Some international and domestic upside risks to inflation have appeared or are appearing.” “Therefore, inflation could be higher than our August baseline scenario.” Immediately after she read her statement, data showed quarterly inflation had accelerated to 3.7% year-on-year, not only faster than the previous three months but also above the market’s median estimate of 3.6%. This suggests that the RBA may have underestimated price pressures in its August forecast, and discussions over further interest rate increases are more likely at next week’s meeting.

Last month, the RBA raised borrowing costs to a 15-year high of 4.6%, marking the fourth rate hike this year. At present, inflation remains above the upper bound of the RBA’s target range, indicating the central bank faces ongoing challenges regarding price pressures. The report pointed out that these pressures existed even before the US–Israel attack on Iran triggered a global energy shock, implying that the energy shock could further compound existing inflationary pressures.

Senior RBA officials, including Deputy Governor Andrew Hauser and Assistant Governor Sarah Hunter, also attended the hearing. Over the past ten days, both have sent hawkish signals to the market, with Hauser stating that the inflation outlook has “significantly deteriorated” compared to the RBA’s August forecast. In her opening statement, Bullock emphasized: “Inflation cannot deviate from the target for long – this is important for the economy,” otherwise the risk is that inflation becomes embedded in expectations and is further transmitted into pricing and wage-setting decisions.

In summary, the upward risk for Australian inflation is shifting from warning signs to data reality, and the RBA faces intensified pressure to raise rates further at next week’s meeting. In the short term, attention should focus on three points: first, whether the RBA will raise rates again next week and the tone of its statement; second, the transmission of subsequent CPI and energy prices to core inflation; third, whether inflation expectations, wages, and pricing behavior show signs of becoming unanchored. If inflation continues to exceed the upper bound of the target range, the likelihood of the RBA maintaining or even increasing tightening measures will rise.

If subsequent inflation data falls back, the impact of energy shocks eases, or the labor market cools noticeably, upward pressure on RBA rate hikes may ease; conversely, if inflation expectations become unanchored or the risk of a wage–price spiral increases, policy tightening could exceed expectations.