RBA’s Hunter backs more hikes as inflation risks entrench

The Reserve Bank of Australia's Assistant Governor, Sarah Hunter, has indicated that further rate hikes are necessary this year to control inflation. In a recent podcast, Hunter expressed concern that inflation has been persistently high for an extended period, with the risk of it becoming entrenched. She added, "We can see lots of reasons why inflation might be a bit higher than what we currently think."

Since the beginning of the year, the RBA has raised interest rates three times by 75 basis points, bringing the cash rate to 4.35%—a level not seen since before the pandemic. Market expectations are that the RBA will increase rates by 25 basis points at the upcoming meeting on September 29, with a 94% probability according to Prime Terminal.

RBA's primary objective is to maintain price stability, which translates to an inflation rate between 2-3%. One of the tools at their disposal is raising or lowering interest rates, which can strengthen or weaken the Australian Dollar (AUD), respectively. In modern times, moderate inflation is often viewed positively as it can prompt central banks to raise interest rates, attracting global capital inflows and boosting demand for the local currency.