Bullock warns Middle East-driven inflation risks now materialising

The RBA Governor's admission that upside inflation risks, which were flagged in August, have become reality rather than just a possibility, carries a hawkish tone with the Board meeting just over a week away. By explicitly linking Middle East oil price increases to both direct and indirect pass-through to inflation, she provided markets with a clearer understanding of why a further rate hike remains on the table, alongside her acknowledgment that Australian growth is slowing. The Australian dollar may gain some support from the hawkish rhetoric, especially the mention that other advanced-economy central banks are also reacting to the same global inflation shock, but the recognition of softening housing and a gradual easing in labour market conditions limits the extent of any repricing. Overall, the testimony appears consistent with the already-priced 70-75% probability of a hike at the 28-29 September meeting, rather than a clear upgrade to it.

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Additional background:

• Preview: Markets focus on RBA Governor Bullock testimony with 70-75% hike chance

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All the above comes from the RBA Governor's prepared remarks. A question-and-answer session is scheduled shortly.

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Bullock stated that the inflation risks highlighted by the RBA in August are now appearing in the data.

Testimony summary:

• Governor Bullock informed the House of Representatives Standing Committee on Economics that inflation has remained above its target since the second half of 2025, with both headline and core metrics at about or slightly above 3.5% over the last year.
• She noted that the upside inflation risks highlighted in the August Monetary Policy Statement are materialising, attributing it to the Middle East conflict, AI boom, and extreme weather, which are driving up energy, agricultural, and tech-related prices.
• Oil prices have surged again, which pushes inflation up directly via petrol costs and indirectly as businesses transmit higher input expenses, a pattern Bullock indicated other advanced-economy central banks are also addressing.
• The jobless rate was 4.5%, with the labour market being near full employment but slightly tighter, and the employment-to-population ratio close to a record peak.
• Bullock stated that domestic demand growth is moderating as anticipated, with the full impact of this year's 75 basis point rate rises still to come, while business investment has strengthened significantly, driven by data centre and renewable energy expenditure.
• She repeated that the Board must decide if the tightening so far suffices to bring inflation back to target within a reasonable period, with the next meeting scheduled in just over a week.

On Thursday, RBA Governor Michele Bullock addressed the House of Representatives Standing Committee on Economics, stating that inflation has stayed above target since the second half of 2025, with headline and core inflation at roughly 3.5% or slightly above over the past twelve months. Bullock attributed the rise partly to capacity constraints in the domestic economy, exacerbated by the Middle East conflict, which boosts inflation directly via petrol prices and indirectly as firms shift higher input costs onto other goods and services. "Inflation is too high," she told the committee, adding that the Board is focused on ensuring it does not become embedded in price and wage-setting behaviour.

Regarding the labour market, Bullock noted that conditions are near full employment but slightly tighter. The jobless rate was 4.5%, historically low, and the employment-to-population ratio is near a record.

Turning to the outlook, Bullock said the RBA's August Monetary Policy Statement had assessed the risks to its inflation forecast, which projected inflation returning to around the midpoint of the target range only by late 2027, as tilted to the upside. She stated that subsequent developments indicate some of those upside risks are now materializing. Global cost pressures have risen, with the Middle East conflict, AI boom, and extreme weather exerting upward pressure on energy, agricultural, and tech-related prices. Oil and related prices have surged again, and the Bank's business liaison program is detecting widespread reports of firms passing on higher costs, a trend Bullock said must remain contained rather than become entrenched in ongoing price and wage decisions. She pointed out that central banks in several other advanced economies are reacting to the same global inflation shock by raising rates or signaling they may need to.

On domestic activity, Bullock said demand growth has slowed in the first half of 2026 largely as anticipated, with the full impact of this year's cumulative 75 basis points of rate hikes still to transmit due to typical monetary policy lags. The effect of the Middle East conflict on activity has been relatively limited so far despite weaker confidence, with household spending growth moderating gradually while business investment has risen strongly, mainly due to data centre and renewable energy spending. Bullock said continued weak productivity growth prevents the economy from expanding strongly without fueling inflation, describing it as a fundamental challenge ahead. She stated that the Monetary Policy Board's meeting in just over a week will consider whether the tightening delivered so far is enough to return inflation to target within a reasonable timeframe.