The Reserve Bank governor has denied inflation is “taking off” after new data showed price rises had persisted into 2026 and boosted bets on two more interest rate hikes.
Annual inflation stayed at a high 3.8% in January, as the end of government subsidies drove electricity costs up by 19% in the month and left power bills nearly a third higher than they were a year earlier.
The whiplash caused by the end of the federal and state electricity rebates has largely explained the doubling in the headline rate of inflation in just over six months.
Even after removing these wild swings in prices, however, the latest Australian Bureau of Statistics figures showed the central bank’s preferred measure of underlying inflation climbed to 3.4% in the year to January, from 3.3% in the month before.
The Reserve Bank governor, Michele Bullock, did not raise the alarm when she spoke at a University of Melbourne dinner on Wednesday evening, saying it would take time for the RBA to determine its next move.
“I think we will have to be patient,” she said.
The economy and the jobs market were still a “little bit tight” after interest rates had risen earlier in February but supply and demand were close to balance, Bullock said.
“Inflation is a bit elevated – I don’t think we think it’s taking off again but it’s a little bit elevated,” she said.
Financial markets had upped their bets on rate rises after the inflation data released, according to NAB, with the odds on a rate hike in May rising from 84% to 95% and the chance of a third by the year’s end up from 40% to 60%.
After Bullock’s speech, though, traders were less confident there would be rapid rate rises, with rate-sensitive markets losing close to half the day’s gains.
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Inflation remains strong in areas many Australian households will struggle to avoid.
The ABS figures showed climbing prices for essentials, including a 3.9% rise in rents and a 4.2% jump in medical and hospital services in the year to January.
Already high construction costs continued to climb at a rapid pace, with home building inflation accelerating to 3.5%, from 3% in December.
Stephen Smith, a partner at Deloitte Access Economics, said the ongoing price pressures were “the political payback of a populist policy” by federal and state governments to subsidise energy prices from mid-2023.
The ongoing strength in consumer price growth “means a pre-budget rate rise remains on the table”.
Smith said the combination of relatively soft growth and high inflation were a hallmark of an economy struggling with low productivity growth, and highlighted the urgency of the reform challenge.
“Unless the federal budget meets the moment and outlines significant economic and tax reform, growth will stagnate and inflation will persist for longer than necessary.”
Jo Masters, the chief economist at investment bank Barrenjoey, said there were “warning signals” that inflation would prove more persistent than feared, and pencilled in a rate hike in August, on top of an existing call for a move in May.
That would entirely reverse the monetary policy relief the RBA delivered in 2025 and return the cash rate to its previous peak of 4.35%.
An unemployment rate at a low 4.1%, accelerating domestic demand, high labour costs in the context of low productivity, and evidence that the economy was running beyond its capacity was part of a “broader economic picture” suggesting the central bank would need to hike rates more than previously thought.
However analysts and investors believe a rate hike in March is unlikely.
