RBA Hike Spotlights Inflation Pressure Central Banks Can’t Fix

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(Bloomberg) — Australia’s central bank chief Michele Bullock strode into a committee room in Parliament House on Friday morning primed to explain what’s causing the inflation that forced this week’s interest-rate hike — the world’s first of 2026.

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As opposition lawmakers scented an opportunity to land a political blow on the dominant government of Prime Minister Anthony Albanese, she spent much of the morning parrying political questions on the role played by its spending choices.

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What she tried to make clear, however, is that one of Australia’s main inflation drivers is beyond her control at the central bank, even if it’s technically the RBA’s job to tame prices. There are also deeper causes than just Albanese’s fiscal choices.

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The point, she said, is “the extent to which the economy is capacity constrained.”

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That is, an economy like Australia’s facing supply and labor bottlenecks can only grow so fast without fueling inflation.

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The RBA’s rate hike this week highlighted this challenge, which many developed economies now face. As governments push budgets deep into the red to finance support for aging populations, military upgrades and energy transitions, Australia offers a cautionary tale of how inflation drivers can often be beyond the reach of monetary policy. 

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The center-right opposition all week has hammered excessive spending as the reason Australia alone in the world is raising rates. At Bullock’s testimony, they asked whether she was reluctant to comment on fiscal policy because she’d been ordered not to by the Labor government.

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The governor denied that she or the RBA board had faced political pressure. 

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Economic growth began picking up around the middle of last year. While government activity has eased in recent quarters, public spending remains historically high at nearly 27% of gross domestic product.

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At the same time, there are signs of an upswing in the private sector, with most of it focused on artificial intelligence and energy infrastructure. The labor market remains tight as well, with unemployment hovering near a historically low level at 4.1%. 

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Adding further fuel to prices, an upturn in the global economy has boosted prospects for Australia, which is among the top suppliers of iron ore, coal, copper, gold and some critical minerals.

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All that has refueled inflation in an economy that is struggling with some of the weakest productivity in the developed world. Indeed, Australia’s potential growth is so low now that, at 2%, it’s been reached early in the business cycle.

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Inflation last quarter came in at 3.4%, overshooting the top of the RBA’s 2-3% target.

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The government is due to release a budget in May, and pressure is mounting on it to rein in spending and tackle productivity-enhancing measures.