SYDNEY, July 28 (Reuters) - Australia's central bank chief on Tuesday warned that underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices, saying policymakers were prepared to raise interest rates again if needed.
In a speech in Sydney, Reserve Bank of Australia Governor Michele Bullock said a key uncertainty was whether the three rate hikes already delivered this year were enough to return inflation to its 2%-3% target band.
While the full impact
of those increases has yet to be felt across the economy, Bullock said underlying inflation was still too high and could rise further as higher oil prices linked to the Iran war feed through to broader costs.
"This does mean that some further easing in the growth of demand is likely to be required if we are to bring inflation back down sustainably to target," said Bullock, adding that the labour market also needed to cool further.
"The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed."
The RBA hawkish bias is the key reason that markets continue to fully price in one more rate hike this year, which would take the cash rate to 4.6%, after the central bank's three increases between February and May completely erased the easing delivered in 2025. A move in August is about 30% priced.
Bullock devoted much of her speech to supply-side shocks, arguing that the recent rise in oil prices underscores how premature it is to judge the full economic fallout from the Middle East conflict.
The impact on headline inflation so far has been smaller than initially feared but the central bank is hearing that more firms are looking to pass on higher costs to consumers, she added.
"In this environment, our job is to keep inflation expectations anchored and make sure that shocks don’t lead to lasting increases in inflation."
She said the economy was slowing as expected but the housing market has weakened more than forecast, and the central bank was watching how changes in house prices affect household spending and investment decisions.
(Reporting by Stella QiuEditing by Shri Navaratnam)
