The Reserve Bank of Australia may need to hike interest rates again if its plan to bring down inflation is blown off course, the central bank's governor says, while highlighting the tight financial squeeze on highly indebted borrowers.
In her second public appearance in the top job, Michele Bullock expressed her determination to beat inflation back down to target.
Speaking at the Commonwealth Bank of Australia Global Markets Conference in Sydney, Ms Bullock said it was still possible to pull off a soft landing with interest rates at 4.1 per cent, which is where they have been since June.
Though she recognised the "long lags" between interest rate hikes and their actual impact on the economy, she said there were still threats to the central bank's plan to get inflation back within target by late 2025.
"The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation," Ms Bullock said on Tuesday.
The September consumer price index, due for release on Wednesday, will be a key input into the RBA's upcoming interest rate decisions.
Economists expect September quarter inflation to lift 1.1 per cent over the three months and annual inflation to soften to 5.3 per cent, down from six per cent through to June and well below the 7.8 per cent peak in December.
Ms Bullock declined to comment on what a similar result would mean for the November cash rate call but noted that a lot had changed since the bank released its last set of forecasts in August.
"You've had fuel prices increased more than was sort of expected, at the same time, we've had energy prices not increased by as much as expected, market services may be up a bit," she said in response to questions after her speech.
Worsening economic conditions and higher interest rates have been taking a toll though Ms Bullock said most Australian households and businesses had been coping pretty well.
These pressures had not been felt evenly, however.
The RBA estimates roughly five per cent of all variable-rate borrowers are paying more for essentials and housing than they are bringing in.
This shoots up to 25 per cent for highly leveraged borrowers with loans that are at least four times their income.
Ms Bullock said these borrowers were having to make some "difficult financial decisions", such as eating into savings, working extra hours or even cutting spending on things they would normally consider essentials.
"At the extreme, it could involve negotiating a hardship program with their lender or selling their property."
Tenants have also been under pressure though research by the central bank showed their spare cash flow had actually lifted for this group as high incomes - a product of a tight labour market - offset the higher cost of living and rising rents.
Ms Bullock reiterated the importance of keeping inflation expectations under control or risk a more painful fight to bring prices down.
The longer inflation stays outside the target, the more likely expectations will shift - leading to even higher interest rates and unemployment to bring inflation back to target.
ANZ and Roy Morgan's weekly survey of consumer confidence detected a shift in inflation expectations last week to their highest point since June, in line with higher petrol prices.
