UBS lifts RBA rate call to 4.85% after Bullock's hawkish comments

This latest round of Q&A answers, which followed earlier testimony from Bullock, reinforces the picture she painted, with the governor stating that inflation risks lean to the upside and that persistent inflationary shocks are difficult to look through. Such language leaves little wriggle room for expecting a hold at the September 28-29 meeting. Her observation that a broad agreement exists on a higher neutral rate carries implications beyond the current cycle, as an elevated neutral rate means the RBA's present policy stance is less restrictive than the headline cash rate would suggest, backing up her earlier point that the Board is debating whether policy is tight enough. Deputy Governor Hauser's comment that the Board is wholly dedicated to achieving the inflation target adds a second voice to that message. UBS's projection of two additional hikes to a 4.85% terminal rate marks a distinctly more hawkish outlook than the near 70-75% odds assigned to a single September move, and if that view picks up momentum it points to additional upside for the Australian dollar and short-end yields in the months ahead.

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Both Bullock and Hauser are signalling that a hike is on the way, and UBS believes it won't be the final one.

Summary:

• RBA Governor Michele Bullock said the decline in housing prices is not particularly significant overall, and that the Board is considering whether its policy setting is tight enough
• Bullock noted a broad consensus that the neutral interest rate has climbed, and that inflation risks are tilted to the upside and hard to look through when they are persistent
• Deputy Governor Andrew Hauser said the Board is completely committed to reaching the inflation target
• UBS anticipates two more rate rises, which would push the cash rate to a terminal level of 4.85%
• These remarks extend Bullock's earlier committee testimony, where she said upside inflation risks flagged in August are now emerging, and her wire comments that the world faces higher for longer oil prices and greater willingness among businesses to pass on costs
• The RBA's next decision is due on September 28-29, with markets already pricing a 25 basis point hike at about 70-75%

Reserve Bank of Australia Governor Michele Bullock kept up a firm stance in additional wire remarks on Thursday evening, building on her earlier comments that the world is facing higher for longer oil prices and that businesses are more ready to pass on cost increases. Bullock described the recent dip in housing prices as not that big in the broader context, and said the Board is weighing whether its policy is tight enough, which directly follows her committee testimony that upside inflation risks identified in August are now materialising.

Later in the session, Bullock went further by saying there is a broad consensus that the neutral interest rate has moved higher. This matters for interpreting her other remarks, because a higher neutral rate means a given cash rate setting is less restrictive on the economy than previously assumed, reinforcing her point that current policy might not be tight enough yet. She also noted that inflation risks are tilted to the upside, and that it is hard to look through inflationary shocks when they are persistent rather than temporary, a stance that clearly keeps the door open to further tightening rather than a pause.

Deputy Governor Andrew Hauser lent his own support to the message, stating that the Board is totally committed to achieving the inflation target. As the RBA's second-ranked official, his comment bolsters Bullock's tone rather than offering any softer view, suggesting Thursday's hawkish lean reflects a broader Board position rather than a solo view from the Governor.

In this context, UBS said it expects the RBA to hike rates twice more, bringing the cash rate to a terminal rate of 4.85%. That projection is notably more aggressive than the roughly 70% to 75% chance currently priced for a single 25 basis point move at the Board's September 28-29 meeting, and suggests the RBA's tightening cycle has further to go beyond whatever is delivered later this month. Overall, Thursday's commentary from Bullock and Hauser, along with UBS's updated call, points to a rate path that markets may still be underpricing.

Deputy Governor Hauser