Reserve Bank of Australia governor Michele Bullock told the House of Representatives economics committee on Friday that China is a “very pertinent risk” alongside escalating geopolitical tensions.
“China is really important for us because of our trade relationship with China, it’s our biggest trading partner. It’s very important in particular for the prices of the commodities that we export, in particular iron ore. So that is something that we’re watching quite closely,” Bullock said.
Regarding geopolitical tensions, the RBA governor asserted that they could potentially reverse the progress the central bank has made in controlling inflation.
“We don’t know how it’s going to turn out,” she said.
“If the risks there eventuate, they are going to eventuate in supply issues. We already saw that in the big energy shocks a couple of years ago. Energy is critical there, but any supply shocks that influence inflation are going to make it difficult for central banks.
“We would like to look through supply shocks, but if they’re consistent and persistent, it makes it very difficult to just completely ignore them and the potential impact they might have … on inflation expectation and the level of inflation around the world.”
Reflecting on the market volatility that emerged earlier this month, governor Bullock stated that it was not a focus of deliberation at the RBA’s last meeting. She emphasised instead that the recent events serve as a reminder that “markets sometimes react very, very quickly and sometimes quite violently to individual little bits of information”.
“The job of central banks is to try and stand back from individual bits of information and try and think slightly more broadly and longer term.”
Elaborating on market volatility, RBA assistant governor Chris Kent noted that the recent market sell-off occurred in an environment of elevated asset prices.
“Corporate bond spreads were pretty low, and one interpretation of that is that markets were ascribing a pretty high probability to soft landing … So when you see signs of weakness that run a bit counter to that, markets can often correct quite quickly and that’s what happened a couple of weeks ago,” Kent said.
“I think there was an additional force at work here and that is the Bank of Japan. At the same time that people were thinking the Fed is closer to cutting rates … the Bank of Japan came out with another, a small, but another rate increase.”
Kent explained that this divergence in policies led to shifts in exchange rates and the unwinding of the carry trade.
“That’s kind of OK that markets do this, they have to reprice. The thing you have to watch for is that it doesn’t sort of get ahead of steam,” Kent said, adding that bouts of volatility are set to continue because “people aren’t that sure about the path of monetary policies”.
Inflation forecast shifts
Bullock reaffirmed that the RBA no longer expects inflation to return to the midpoint of its 2–3 per cent target band until 2026.
“This is a slightly slower return to target than we were forecasting in May,” the governor said.
“It reflects a judgement that the gap between aggregate demand and supply in the economy is larger than previously thought. That is, even though growth in the economy has been weak, the level of demand for goods and services is still higher than the ability of the economy to produce those goods and services.”
The RBA had previously expected inflation to return to the target range late in 2025.
While acknowledging that “circumstances may change”, Bullock reiterated that based on what the RBA board knows at present, “it does not expect that it will be in a position to cut rates in the near term”.
“I understand that this is not what many households want to hear. Those with mortgages are feeling the squeeze on their cash flows from the increase in interest rates over the past couple of years. Businesses, too, are facing higher borrowing costs. But the alternative of higher inflation for longer is much worse,” Bullock said.
The RBA held rates at 4.35 per cent in August, in line with market expectations, following a softer-than-expected inflation print last week for the June quarter.
![Maja Garaca Djurdjevic](/images/maja-garaca-djurdjevic.jpg)
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.