Reserve Bank of Australia Governor Michele Bullock has reinforced the central bank’s inflation warning just one week before a widely expected increase in interest rates, telling a Sydney business audience that global supply shocks must not be allowed to become embedded in Australian prices.
Speaking during a Committee for Economic Development of Australia fireside chat on Tuesday, Bullock addressed the cost-of-living squeeze, weakening housing market and implications of artificial intelligence for employment, demand and productivity.
Her appearance came ahead of the RBA Monetary Policy Board’s September 28–29 meeting, with Commonwealth Bank and Westpac now forecasting a 25-basis-point increase that would lift the cash rate from 4.35% to 4.60%.
Financial markets are pricing in about a 90% probability of an increase, according to Commonwealth Bank.
Inflation and mortgage costs are different
Bullock pushed back against the perception that higher interest rates themselves create inflation.
While rate rises increase mortgage repayments and therefore add to the cost of living for indebted households, inflation measures the broader increase in prices across the economy.
Reducing inflation also does not necessarily mean prices return to previous levels. Instead, it means the rate at which prices increase slows, leaving households facing permanently higher costs for many goods and services.
The RBA has increased the cash rate by 75 basis points during 2026. Its August projections indicated inflation would not return to around the midpoint of the 2%–3% target range until late 2027, with risks tilted towards further price pressure. RBA monetary policy statement
Supply shocks complicate policy
Bullock said monetary policy was being complicated by repeated supply shocks, including wars, trade disruption, extreme weather and higher energy costs.
The central bank cannot increase the supply of oil or other constrained goods, but it can act to prevent the initial price shock from spreading into broader pricing and wage decisions.
Higher fuel costs are already being passed through by some businesses, increasing the danger that temporary price increases become more persistent.
Artificial intelligence presents another uncertainty. Heavy investment in data centres and related infrastructure is adding to near-term demand, while the potential productivity benefits may take longer to emerge. Bullock also acknowledged that AI could displace some roles while creating different employment opportunities.
Banks bring forward rate-rise forecasts
Commonwealth Bank has brought its expected rate increase forward from November, citing higher oil prices, stronger inflation data and increasingly hawkish RBA commentary.
Westpac has also made a September increase its base case, although it expects the decision may produce a split vote. Both banks see a risk of another increase if inflation remains elevated.
For investors, a higher-for-longer rate environment would maintain pressure on property, consumer discretionary companies and other highly valued growth stocks. Banks could benefit from higher lending rates, although weakening credit demand and rising borrower stress may offset that advantage.
The Australian dollar and short-term bond yields are also likely to remain sensitive to expectations surrounding next week’s decision, with inflation data and movements in global oil prices carrying particular weight.
