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Australia’s central bank governor delivered a cautionary message on Friday, signaling that achieving the target inflation range of 2-3% still requires considerable effort. Governor Michele Bullock reiterated the Reserve Bank of Australia’s (RBA) stance on interest rates, leaving the door open for potential rate hikes despite market skepticism.

The prospect of another rate increase has prompted financial institutions like UBS and Capital Economics to revise their predictions for the timing of the first rate cut. While economists anticipate the RBA will maintain its tightening bias, the likelihood of immediate rate adjustments has diminished.

Addressing lawmakers, Governor Bullock emphasized the ongoing inflation challenge, underscoring the need for further moderation, particularly in services inflation. Despite positive indications, she stressed that an inflation rate hovering around 4% falls short of the desired midpoint.

“We must ensure sustained alignment within our target range, avoiding erratic fluctuations,” stated Bullock, highlighting the imperative of stabilizing inflation around the midpoint.

Although the RBA has kept the option of additional rate hikes on the table, market sentiment leans toward skepticism regarding imminent tightening measures. Projections for the timing of the first rate cut have shifted, with May’s probability decreasing from 50% to 20%, and September emerging as the favored month for potential easing.

Governor Bullock acknowledged the considerable uncertainty surrounding the RBA’s long-term forecasts, particularly regarding inflation projections through 2026. Despite expectations of inflation converging within the target range by late 2025, achieving stability around the midpoint of 2.5% may extend into 2026.

“Even under the central economic scenario, we anticipate inflation remaining outside the target range for an extended period,” Bullock cautioned.

Bullock’s hawkish remarks, coupled with global central banks’ resistance to early rate cut speculations, prompted UBS to delay their forecast for the first rate cut to November instead of August. Capital Economics similarly adjusted their prediction to August from May.

Meanwhile, across the Tasman Sea, the likelihood of further rate hikes from the Reserve Bank of New Zealand is diminishing. ANZ’s call for two rate increases in February and April has tempered market expectations, with around a 38% chance of a hike at the upcoming policy meeting on Feb. 28, compared to negligible odds just a week prior.