Reserve Bank of Australia Governor Michele Bullock stated on Tuesday that supply shocks are difficult for monetary policy to manage directly, emphasizing that policy must address the second-round effects these shocks generate on inflation. These remarks align with the hawkish tone she struck during her parliamentary testimony last Friday, and the Australian dollar briefly rallied from below 0.7100 to near 0.7125 against the U.S. dollar in response.

Supply Shocks Are Hard to Manage, Policy Must Target Second-Round Effects

Bullock noted that supply shocks present a direct challenge for monetary policy, requiring a focus on curbing their second-round effects on inflation. While this statement reiterates a familiar constraint for the central bank, pairing it with an explicit emphasis on second-round effects carries a stronger signal. These effects describe how an initial cost shock, such as a rise in oil prices, gradually transmits through broader wage negotiations and price-setting decisions across the economy, potentially making inflation more persistent. Bullock previously pointed out that persistent shocks cannot simply be looked through, as businesses have become more willing to pass on higher costs to customers. This focus indicates that the RBA remains vigilant about inflation persistence, with policy aimed at preventing shocks from becoming entrenched.

Hawkish Tone Remains Firm, Consistent with Last Week's Parliamentary Testimony

Bullock's comments closely mirror her position before the parliamentary committee last Friday, when she explicitly stated that the upside inflation risks flagged in the August statement were materializing and noted that policymakers generally believe the neutral rate of interest has risen. Although today's remarks offered limited new detail on top of those earlier comments, they align fully with the hawkish tone displayed in her recent public appearances, with no backtracking on last week's stance. This demonstrates a consistent resolve on inflation from the RBA, allowing markets to gauge that the central bank is unlikely to pivot toward easing in the near term.

AI Boom Intensifies Excess Demand in the Australian Economy

Bullock also highlighted that the artificial intelligence boom is exacerbating excess demand within the Australian economy. Data center construction, related infrastructure investment, and rising demand for technical talent are adding to localized capacity pressures. This factor compounds the effects of supply shocks and already-strong demand-side pressures, making it easier for cost increases to translate into broader price adjustments. Bullock stressed that policy must respond to this dynamic, precisely because in an environment where demand is already robust, the second-round effects of supply shocks are more likely to become entrenched, thereby prolonging the period inflation stays above target.

September Meeting Rate Hike Expectation Looks Solid

Bullock's comments come just one week before the RBA's September 28-29 meeting, with markets widely expecting a 25-basis-point increase in the cash rate from its current level of 4.35%. Her remarks so far offer no indication of deviation from this anticipated path. That said, a fireside chat format is less scripted than a formal speech, so more specific commentary could emerge as the conversation continues. Given the limited material released thus far, market pricing for the rate hike path is unlikely to shift materially based on these early remarks, and expectations for a September increase remain elevated.

Summary

Bullock's remarks extend her recent hawkish tone: supply shocks are difficult to manage, and policy must focus on second-round effects to prevent initial price shocks from becoming embedded in wage and price-setting behavior. This is consistent with her parliamentary testimony last week, where she said upside inflation risks were materializing and that the neutral rate had risen. The AI boom is intensifying excess demand, further reinforcing the case for policy vigilance. Expectations for a 25-basis-point rate hike to 4.60% at the September 28-29 meeting remain solid, and any more specific statements from the fireside chat could provide markets with additional clues about the rate trajectory.

At 13:50 Beijing time, the Australian dollar was trading at 0.7121/22 against the U.S. dollar.