RBA Economist Warns Interest Rates May Need to Rise Again Amid Inflation Risks

The Reserve Bank of Australia's (RBA) chief economist, Sarah Hunter, has warned that interest rates may need to rise again as inflation risks remain tilted higher. In a recent podcast interview, Hunter pointed to two main sources of upside risk: higher energy costs stemming from the Middle East conflict and domestic capacity constraints.

Higher energy costs are feeding through to petrol prices and indirectly affecting the cost of transporting goods such as food, according to Hunter. This is adding pressure to inflation, which remains above the RBA's 2-3% target range at 3.6%. Markets have priced in a 95% chance of a further rate hike to 4.60% at the September 29 meeting.

Hunter also addressed common assumptions about monetary policy, stating that higher rates work through the exchange rate, spending and saving incentives, and the housing market more broadly. She emphasized that inflation responds to interest rates rather than causing them, citing a shock such as higher oil prices pushing inflation up first before the RBA raises rates in response.

Hunter reassured listeners that there are no systemic signs of mortgage distress, with negative equity lower than pre-pandemic levels and over 40% of households two or more years ahead on their mortgage repayments. However, she cautioned that a further cash rate rise remains possible if current upside risks materialise.