By Peter Hobson and Stella Qiu
CANBERRA/SYDNEY, Sept 18 (Reuters) - Australia's top central banker said on Friday some of the upside risks to inflation flagged by policymakers appeared to be materialising, with the Middle East conflict and the AI boom putting upward pressure on prices.
Addressing lawmakers, Michele Bullock, governor of the Reserve Bank of Australia, said a key question facing policymakers at its policy meeting this month would be whether three rate hikes this year, from its cash rate matching
a post-pandemic high of 4.35%, would be enough to bring inflation back to the 2%-3% target.
"It may be the same rate is enough to do that," said Bullock. "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 as it singled out the Middle East war, a global data centre investment boom and extreme weather events as key risks to inflation.
"Developments since then suggest that although growth in the Australian economy is slowing, some of these upside risks to inflation appear to be materialising," said Bullock.
"There is little sign of resolution of the Middle East conflict. Oil and related prices have increased sharply again and will add directly to inflation."
"The global AI boom is driving stronger growth in economies that are key parts of the AI supply chain. It is also driving 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% when it meets on September 28-29, and reach 4.85% by early 2027. The shift reflects not only a hot July inflation report at home, but also a global repricing led by the Federal Reserve's return to rate hikes after three years.
Bullock said the RBA was hearing renewed concerns from businesses that the central bank might not get inflation under control, with many firms passing on higher costs to consumers. She added that a still-tight labour market could amplify the pass-through of rising input costs into prices.
HOUSING NOT A CONCERN YET
Bullock acknowledged that the housing market has softened more than expected, which could be a downside risk to economic activity, but financial stability risks from the drop in house prices are contained as borrowers have built up considerable savings buffers.
"What matters for monetary policy is how changes in housing prices affect economic activity, the labour market and, ultimately, inflation," said Bullock.
The central bank's hawkish tone is one reason that UBS now expects the RBA to hike two more times to 4.85%. Its economists added that the surge in oil prices could boost headline inflation to 3.8% year on year in the third quarter, picking up from 3.5% in July.
"Global central banks, including the RBA, are now more clearly reacting to inflation, to both past misses, and current upside risks," said George Tharenou, chief economist at UBS.
"Recent events have met our 'triggers' to change our base case. We now think the RBA is more likely than not to raise the cash rate by 25 bps twice more, to a peak of 4.85%."
(Reporting by Stella Qiu; Editing by Tom Hogue and Sonali Paul)
