Reserve Bank governor Michele Bullock has stopped short of suggesting Australia is at risk of stagflation or recession, but warns more rate hikes could still be ahead.
Appearing at a scheduled appearance before the Senate Standing Committee on Economics on Thursday, Ms Bullock said domestic inflation was “too high even before the conflict in the Middle East began”.
Both headline and underlying inflation are far above the RBA’s 2-3% target range and not expected to return to under 3% until late 2027.
At the same time, economists warn slow economic growth and a jump in the national unemployment rate in April is bringing the economy ever closer to ‘stagflation’.
The situation, where high inflation and low economic growth come together, significantly heightens the risk of recession.
Despite concerns about stagflation flagged by RBA deputy governor Andrew Hauser last month, Ms Bullock said she would not “use the term” to describe Australia’s current circumstance.
RBA governor Michele Bullock says Australia is not experiencing stagflation. Picture: Monique Harmer
The bank has hiked interest rates three times this year in a bid to tame inflation, reversing its 2025 easing cycle and returning the cash rate to where it was in late 2024.
It’s a double whammy for households already feeling the pinch of rising inflation through increased costs for petrol, good and transport.
Despite the tightening, Ms Bullock warned the bank’s three rate rises will not be able to fix inflation while the Iran War continues.
Markets and economists are largely in agreement that rates will stay on hold this month, though more tightening has long been expected for later in the year.
“Inflation is too high, and the board will do what it considers necessary,” Ms Bullock told the committee. “The outlook is highly uncertain.”
Ms Bullock said the Reserve Bank was continuing to monitor a “wide range of scenarios” for Australia’s economic outlook, with pressures in the Middle East continuing to weigh heavily on prices and consumer confidence.
The bank expects the conflict to weigh “modestly” on growth in the long term, adding the effects in other countries are “less certain” and “expected to vary”.
“This would worsen the trade-off between inflation and economic activity,” she added.
The RBA board will make its next cash rate decision on 16 June. Picture: Hu Jingchen/Xinhua via Getty Images
The governor told the committee she expected it will take one to two years for the three rate hikes to fully flow through the economy.
“These increases have been necessary to tighten financial conditions and slow growth in demand in the economy to ensure we get on top of inflation.
“We’ve already seen some signs that this tightening is starting to work.”
While minimum mortgage repayments for many have risen by hundreds of dollars in the last three months, Ms Bullock said the nation’s $12 trillion property market was faring well.
“Conditions in the housing market have eased in recent months and that partly reflects tighter monetary policy,” she said.
It comes after minutes from the RBA board’s 5 May meeting reveal the housing market has been the first area to feel the effects of rate rises.
National home prices moved lower in both April and May, marking the first drops since late 2024.
"Home price growth has clearly stalled as the effects of this year’s consecutive rate hikes flow through," REA Group executive manager of economics Angus Moore said. "Price falls in Sydney, Melbourne, Canberra and Perth offset modest rises elsewhere."
REA Group executive manager of economics, Angus Moore. Picture: Supplied
Traditionally cheaper regional areas are continuing to outpace capital cities as buyers move to snap up more affordable homes and investment properties as high inflation and interest rates weaken borrowing capacity.
"With at least one further rate hike expected in 2026, and some pullback in investor demand post-Budget, prices are likely to continue to be soft," Mr Moore added.
Home prices in regional areas are 10.5% more expensive than they were 12 months ago, while capital city prices have grown 6.4%.
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