MNI RBA WATCH: Bullock Keeps Hike Prospects Alive Despite Hold

Reserve Bank of Australia Governor Michele Bullock stressed that monthly economic data remain volatile and should not be overinterpreted following Tuesday's decision to leave the cash rate unchanged at 4.35%, warning further rate increases cannot be ruled out.

The largely-expected hold followed a cumulative 75 basis points of tightening this year, fully reversing the easing delivered in 2025. (See MNI RBA WATCH: Board To Hold, Maintain Tightening Bias) Bullock said the Board's decision was unanimous and that members did not actively consider a rate increase, despite concerns about upside inflation risks.

Market participants have increasingly assumed the cash rate has reached its peak, but Bullock pushed back against that view, arguing recent soft monthly data had encouraged some economists to prematurely conclude further tightening would be unnecessary. "I wouldn't be jumping on those numbers quite so firmly... Underlying inflation actually is pretty much dead on where we thought it would be," she said pointing to April's 3.6% y/y. 

"I can't rule out that if inflation doesn't respond in the way we expect it to do, then we might have to do more... I'm just not ruling that out."

Markets see the cash rate peaking at about 4.47%, with a 28% chance of a hike in August. 

LABOUR & INFLATION

Bullock cautioned against reading too much into monthly labour-force figures, noting unemployment data have been volatile throughout the year.

The RBA examines a broad range of labour-market indicators, she said, pointing to a decline in underemployment and stable or improving vacancies and job advertisements as evidence that labour demand remains firm. "The unemployment rate can go up with people still getting employment; it just takes them longer to find a job," she said.

Bullock reiterated that some easing in labour-market conditions is necessary to reduce inflationary pressures. "We think the labour market's a bit tight. We think we've got a bit of excess demand. Those things have to ease if we are going to bring inflation down."

She also highlighted persistently weak productivity growth as a medium-term constraint on the economy, noting that the RBA's assumption of around 0.7% annually implies Australia's potential growth rate is only about 2%. "If productivity isn't growing very quickly, demand can't grow much faster than 2%, and wages can't rise by very much either," she said.

Policymakers remain concerned about inflation, she continued, adding Australia already faced inflationary pressures before the Iran conflict pushed energy prices higher. The Board is monitoring evidence that higher fuel and commodity costs are feeding into broader prices through second-round effects. Should oil prices stabilise and supply-chain disruptions ease, inflation pressures would moderate.

SLOWER GROWTH

The RBA is not forecasting the economy to contract in the second quarter, but expects growth to remain subdued as demand slows toward the economy's limited supply capacity, Bullock said. 

However, slower growth should not alarm households or businesses, because it is a necessary part of returning inflation to target. "Unless demand grows more slowly than the supply side of the economy for a time, we're not going to get inflation down," she added.

Bullock suggested the RBA would not necessarily wait for inflation to return fully to target before eventually considering policy easing, noting that monetary policy must be forward-looking. "If you wait until you've got all the evidence and you're looking in the rear-view mirror, it's probably too late," she said.