‘Danger’: RBA governor Michelle Bullock defends interest rate hike as ‘least worst’ option

The chief of the Reserve Bank has defended an interest rate hike back in February, warning cash-strapped mortgage holders of the “danger” of leaving the cash rate on hold.

In a speech at the AFR Business Summit, Reserve Bank governor Michele Bullock highlighted an interest rate hike in February was the least worst option for households over the long-term.

“The danger we faced was that leaving interest rates unchanged would risk having inflation above target for longer, ultimately requiring a more aggressive tightening later, and a more costly adjustment in the labour market,” she said.

Ms Bullock says the central bank is “alert” to the risks of higher inflation and is closely monitoring the situation through surveys, business liaison programs and broader financial market-based measures.

Her comments follow the Reserve Bank reversing course after three interest rate cuts in 2025.

The RBA lifted interest rates by 25 basis points following its first meeting of 2026 on February 3.

The official cash rate is now 3.85 per cent.

Interest rates are now back where they were in July 2025.

The RBA boss also pointed out the devastating impact of inflation on Australian families.

“It puts pressure on household budgets, which means people need to spend more time searching for the lowest prices and working out how to make ends meet,” she said.

“This can be stressful and can force some tough decisions.”

“We don’t want families to have to cut back on afterschool activities for their children or delay non-urgent medical care.”

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Headline inflation was 3.8 per cent in the year to January and it will continue to be boosted for a time by the unwinding of electricity rebates.

Meanwhile the all important trimmed mean inflation rate – which strips out volatile items such as energy costs and fuel, came in at 3.4 per cent.

Both of these figures are above the RBA’s target band of a 2 to 3 per cent inflation rate.

Ms Bullock said there is currently a gap between what consumers want to buy and what the economy can supply as well as low productivity is adding to inflation.

“The economy’s supply potential appears to have been somewhat lower than previously assessed,” she said.

“And with our updated Judgement that underlying demand exceeds that supply potential, inflation is likely to remain above target until those pressures ease.”

Geopolitics remains a key risk to inflation

The Reserve Bank governor also pointed to the geopolitical risk which could impact Australia’s inflation rates.

“Events in the Middle East are a timely reminder that in this world of geopolitical uncertainty, things can change quickly,” Ms Bullock said.

“It’s too early to say what the impact will be, events are moving rapidly and there are different ways this can play out. The staff will take some time to make sense of what it could mean for inflation here.”

In a joint operation over the weekend, the US along with Israel launched “pre-emptive strikes” on Iran, including an operation that killed Iranian Supreme Leader Ayatollah Ali Khamenei and at least 40 of his senior officials, according to US President Donald Trump.

The large‑scale US and Israeli attack on Iran significantly raises the risk to global energy supply.

Immediately following the attacks, the price of oil soared, with crude oil jumping 15.13 per cent to $US77.44 ($A108) a barrel.

On Monday it continued to run higher, trading at $US82.37 ($A116) a barrel.

Ms Bullock points out a supply shock, such as the current oil run up can add to inflation.

“And the potential implications for inflation expectations are something we are very alert to,” she said.

“But at the same time, a prolonged impact on energy markets could have adverse effects on global economic activity and result in downward pressure on inflation. It is not obvious how this might play out.”

So as much as I know the public would like more certainty about the direction of interest rates, it would be wrong for us to pretend to have greater certainty than we do.

But that does not mean the Board throws up its hands and says it’s all too hard.