Australia’s central bank reiterated that it may need to resume monetary tightening if inflation pressures intensify, a senior official said on Wednesday after the Reserve Bank left interest rates unchanged for a second straight meeting.
Reserve Bank of Australia Deputy Governor Andrew Hauser set out three upside risks to the inflation outlook during an event in Queensland. He identified the ongoing Middle East conflict, the global surge in artificial intelligence activity and weak productivity as potential drivers that could push inflation higher.
"If those upside risks to inflation crystallise and we don’t see inflation coming down, we will have to raise interest rates again and we will do so," Hauser said.
The RBA held the cash rate at 4.35% last week. That decision followed a campaign of tightening that has added 75 basis points to borrowing costs since February as the bank seeks to bring down persistent inflation. Officials have stated additional policy tightening remains an option.
Economic indicators point to a slowdown. Inflation readings have arrived below forecasts and the housing market has softened more than the central bank had expected. Hauser said the bank has observed a pullback in consumption and a moderation in employment growth but said more evidence of slowing is required before concluding the adjustment is complete.
"That is not a slump. It is not a depression... but it’s a lot slower than Australia has known in the past and it’s a lot slower than recently," he added.
Market pricing currently assigns roughly a 60% chance of another rate rise to 4.60% by December, a view that has been swayed in part by a rise in oil prices to three-week highs amid the continuing Middle East situation. Investors generally expect that an increase to 4.60% would likely mark the end of this tightening cycle.
Hauser’s remarks underline the RBA’s conditional stance: further increases are not ruled out, but are contingent on upside risks to inflation becoming real and inflation failing to fall. The comments point to ongoing vigilance from policymakers as they weigh the trade-off between containing inflation and allowing the economy time to adjust.