Bullock points to inflation risks amid rising neutral rates

Michele Bullock, the RBA governor, is offering further clues on the central bank's current direction. The message is increasingly being read as a signal that rates will remain higher for longer. She added these observations to her earlier statement:

• Inflation risks are now emerging from both the Middle East and domestic excess demand
• Neutral rates are climbing globally, pushing real bond yields higher
• The Australian dollar's performance is broadly mirroring commodity prices and interest-rate differentials

Her comment on inflation risks should be viewed with caution. The RBA could arguably look past the direct impact of an external energy shock. However, that becomes much harder when domestic demand is already adding to inflation pressures and there is a risk of second-round effects.

This leaves the door open to further tightening after the RBA held the cash rate at 4.35% in August. The next policy decision is on 29 September, and markets are currently pricing in roughly a 95% chance of a 25-basis-point hike. Bullock's comments seem to acknowledge that.

The RBA's forecasts also reflect this, as the bank continues to flag that inflation remains too high. It does not expect inflation to return to the midpoint of its 2-3% target range until early 2028.

Taken together, there is little here to encourage expectations of easier policy. The immediate question is whether the RBA needs to raise rates again. The larger question may be how long rates will stay elevated.