Central Banks Signal Rate Hikes Amid Middle East Inflation

Central banks in Australia and the United States are signaling further interest rate hikes as persistent inflation and supply shocks from Middle East conflicts drive prices higher. Michele Bullock, Governor of the Reserve Bank of Australia, testified in Canberra that upside risks to inflation are materializing and appear worse than August expectations. She noted that reducing inflation is essential to avoid a worse overall economic outcome, even if it requires unemployment to rise from 4.5% to a range of 4.5% to 5.0%.

In Australia, markets have priced in a 95% probability of a rate hike to 4.60% at the September 29 meeting. Major lenders, including Commonwealth Bank of Australia and Westpac, have already implemented fixed-rate mortgage hikes of up to 0.48 percentage points in anticipation. RBA Assistant Governor Sarah Hunter added that domestic capacity constraints in cities like Brisbane and Perth are further fueling inflation, which currently stands at 3.6%.

Similarly, Federal Reserve officials are preparing for additional tightening. Boston Fed President Susan Collins supported a recent increase to approximately 3.9% and anticipates one more hike in 2026, citing a risk that inflation could become stuck above 2%. Chicago Fed President Austan Goolsbee warned that supply shocks from the Iran war and tariffs leave the bank with little choice but to raise rates, despite potential pain for employment. In New Zealand, Governor Anna Breman reported that higher oil prices are expected to push near-term inflation above previous assumptions ahead of an October 28 policy decision.