RBA Warns Inflation Risks Materializing Amidst Middle East Conflict and AI Boom

Australia's central bank chief Michele Bullock warned that inflation risks are materializing due to the ongoing Middle East conflict and the AI boom. The Reserve Bank of Australia (RBA) is considering whether three interest rate hikes this year, from a cash rate matching a post-pandemic high of 4.35%, will be enough to bring inflation back to the 2-3% target.

Bullock stated that 'it may be the same rate is enough to do that,' but also noted that 'it may be that it is not, and that is really where we are at the moment thinking about where those upside risks lie and whether or not we have got tight enough policy to deliver inflation back to target.'

The RBA held interest rates steady for a second meeting in August, but warned rates could go higher due to key risks to inflation. Bullock mentioned that developments since then suggest some of these upside risks appear to be materializing, with little sign of resolution to the Middle East conflict and oil prices increasing sharply again.

The global AI boom is driving stronger growth in economies that are key parts of the AI supply chain, as well as higher global prices for some AI-related technologies that are supply constrained. Markets imply a 93% chance the RBA will lift rates for a fourth time this year to 4.6%, and reach 4.85% by early 2027.

Bullock acknowledged that the housing market has softened more than expected, but stated that financial stability risks from the drop in house prices are contained as borrowers have built up considerable savings buffers.