Another rate hike on the cards, RBA chief Michele Bullock warns because of weak productivity

Reserve Bank of Australia governor Michele Bullock has warned her monetary policy board may have to raise interest rates again because weak productivity is keeping inflation high.

Australia’s most powerful central banker has told a Sydney luncheon the RBA’s three rate hikes in 2026, so far, may not be enough to get inflation back to target.

“One thing monetary policy can’t do, however, is address the economy’s slow productivity growth,” she told an Anika Foundation fundraiser on Tuesday.

“While this persists, the ability of the economy to grow without generating inflation is constrained, and Australians will continue to experience limited growth in real wages.”

Ms Bullock suggested another rate rise, that would take the cash rate to a 15-year high of 4.6 per cent, may be needed to bring down headline inflation now at 4 per cent, which is still well above the central bank’s 2-3 per cent band.

“In these circumstances, the best contribution monetary policy can make is to maintain low and stable inflation and support sustainable full employment,” she said.

“The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed.”

The RBA’s three rate rises in February, March and May are expected to still be insufficient to tackle the underlying inflation rate of 3.6 per cent, without volatile price items, which is also above target.

“The full effects of increases in the cash rate from earlier in the year will take time to materialise,” she said.

“And even if the renewed disruption to oil supply abates quickly, underlying inflation is still expected to be higher as fuel price rises flow through to other prices.”

The RBA chief is less worried about house price falls in Sydney and Melbourne leaving recent borrowers owing the bank more than their home was worth, after this year’s rate rises undid the effects of last year’s relief.

“Furthermore, the most recent data suggest that, notwithstanding the price falls, negative equity remains very limited, affecting less than one per cent of borrowers,” she said.

“Of that small group, our estimates suggest that only a small share of borrowers are facing severe difficulty with their loan repayments.

“While we expect housing prices to be affected when interest rates rise, monetary policy doesn’t target housing prices.”

Ms Bullock also admitted the Reserve Bank had to be better at explaining they weren’t to blame for high inflation, after a JWS Research survey of 5440 people they commissioned showed a majority of Australians linked rate rises with inflation.

“I understand that that is the perception, but we’ve got to do better at explaining to people why higher interest rates are not causing inflation, in fact it’s the other way around,” she said.

The futures market isn’t expecting a rate hike at the RBA’s next meeting on August 11 but an increase is still expected by the end of 2026.

Westpac is forecasting June inflation data, due out on Wednesday, to show the consumer price index climbing by 4.2 per cent, up from May’s annual pace of 4 per cent, which would mark the 11th straight month of headline inflation being above target.

This would be despite that period covering a month before the Federal Government’s fuel tax relief was halved from 32 cents a litre to 16 cents a litre.

Westpac is the only big four bank to be forecasting rate rises in August and September this year.