Middle East conflict not the only reason for cash rate hike: Bullock

As expected, the Reserve Bank's monetary policy board raised the cash rate by 25 basis points to 4.6% on Tuesday, its highest level in 15 years.

It was a unanimous decision, with the board also flagging another increase may be necessary.

While higher global fuel prices were widely cited as driving a September increase, Ms Bullock said the ongoing Middle East conflict was not the only reason for the board's decision.

"This isn't all about the Middle East conflict," she told a post-meeting media conference.

"It is making things much worse but we did start from a position of excess demand anyway, and that's why we started raising interest rates even before the conflict started."

Tuesday's cash rate increase is the fourth of 2026, taking the rate a full percentage point higher than it was at the start of the year.

Ms Bullock's view was notably at odds with the federal Treasurer's assessment that higher oil prices from instability in the Middle East were the big driver of inflation in the Australian economy. 

Ms Bullock said domestic spending and AI-related demand had also been stronger than expected.

"Inflation is too high and has been driven by domestic capacity pressures," she said.

RBA powerless on productivity

At her post-meeting media conference, Ms Bullock was quick to point out the central bank is not the institution responsible for boosting productivity.

She said weak productivity is stopping the Australian economy from being able to grow at a faster rate, allowing more Australians to be employed and earn higher wages without fuelling inflationary pressures.

"I'm not the productivity tsar," she said. "Individual productivity policies are not my or the Reserve Bank's bailiwick, and monetary policy can't do anything about productivity."

She also reiterated the board didn't take the decision to raise interest rates lightly.

"There's nothing I can say necessarily to make households feel better in this," she said. 

"I understand that. This is tough... but we have to do it if we are to bring inflation back down.

"That's our mandate and ultimately, in the long run, hopefully in the next couple of years when we get inflation back down, this will all have been worth it."

Bullock no on stagflation, possible on recession

Ms Bullock denied a suggestion Australia was looking at a period of stagflation, characterised by slow growth, high inflation, and high unemployment.

While acknowledging Australia was not hitting its inflation target, she said an unemployment rate of 4.6% was "pretty good" historically.

"We are trying to bring employment to a level which is consistent with low and stable inflation, and we are doing that by raising interest rates," she said.

"Now we can't do it overnight. One option, I suppose, would be to increase interest rates really dramatically and tank everything. That wouldn't be a good outcome."

Prior to the meeting, Ms Bullock had said an unemployment rate between 4.5 to 5% would likely "take enough heat out of the labour market" to ease domestic inflationary pressures.

However, she didn't push back on a suggestion the Reserve Bank could tip the economy towards recession in its fight against inflation.

She said there were possible scenarios "if inflation expectations get away", but recession was not the central bank's base case.

No buy-in on a third rate increase

Ms Bullock downplayed a suggestion the Reserve Bank could raise the cash rate two more times, taking it to 5.1% - in line with financial market forecasts.

She said the three rate rises from earlier this year had not yet worked their way through the economy.

"If it turns out that the restrictiveness that we've introduced by these interest rate rises is enough to bring some of those inflationary pressures back [down], then maybe there doesn't need to be any more interest rate rises," she said.

"I expect the market will adjust as data comes out, just as they think we will adjust."

Wednesday will see the release of monthly CPI data for August, the day after the Reserve Bank was required to make its cash rate decision.

Ms Bullock admitted it was "not ideal" but said it was out of the central bank's control.

She also said it was unlikely key September quarterly inflation data, due the week before the board's November meeting, would provide any information ruling out further lifts to the cash rate.

"All the quarterly numbers in September will be doing is confirming what we already know - that inflation pressures were elevated in the first part of this year," she said.

"The important point is: Have we done enough on interest rates to make sure the inflation numbers another six months out are going to reflect that slower demand relative to supply."