RBA Sounds Alarm on Inflation Risks Amid AI Boom and Middle East Conflict

Australia's central bank governor, Michele Bullock, warned that inflation risks are materializing due to several factors, including the Middle East conflict and the AI boom. Speaking to lawmakers, Bullock stated that some upside risks to inflation flagged by policymakers appear to be coming to fruition.

The Reserve Bank of Australia (RBA) has been closely monitoring these risks, particularly the impact of the conflict on oil prices, which have increased sharply again, adding directly to inflation. The RBA also noted the global AI boom driving stronger growth in key economies and higher prices for AI-related technologies that are supply-constrained.

Bullock emphasized that a still-tight labor market could amplify the pass-through of rising input costs into prices, which may require further rate hikes. Despite this, the central bank's hawkish tone is not expected to lead to a drastic change in monetary policy, with markets implying a 93% chance of another rate hike this year and reaching 4.85% by early 2027.

UBS economists agree that the RBA will likely hike rates twice more to 4.85%, citing the surge in oil prices as a key driver of headline inflation, which could reach 3.8% year-on-year in the third quarter.