RBA flags interest rate rise, as Michele Bullock defends monetary policy

Ms Bullock told a business forum that monetary policy was in "a restrictive phase" and was working to dampen spending, but highlighted concerns about the nation's poor productivity performance.

In remarks that highlighted the risk of more rate rises, the governor said current annual wage growth of around 4 per cent was "on the high side" unless weak productivity improved.

Data released last week showed that wages grew at an annual rate of 4 per cent in the September quarter, a rate the central bank boss said was "not inconsistent" with the RBA's inflation target in a context of average productivity gains.

"[But] we haven't had any productivity growth in Australia for a number of years," Ms Bullock told the ASIC Annual Forum in Melbourne.

"If we don't have any productivity growth [such wage gains] are on the high side."

"They are going to contribute to rises in costs and we know that unit labour costs ... have been rising substantially. That is not helpful for inflation."

Her comments came as the Australian Bureau of Statistics released figures showing the proportion of patients putting off seeking health care because they could not afford it surged last year.

According to the ABS, the percentage of patients who reported delaying seeing a GP or not attending at all because of cost doubled from 3.5 per cent to 7 per cent last financial year.

There was also a near-doubling of those putting off a hospital visit, from 1.8 per cent to 3.2 per cent, and the proportion who delayed filling a prescription climbed from 5.6 per cent to 7.6 per cent. Almost one in five reported not seeking mental health care because they could not afford it.

The findings underline spending data showing that most age groups have wound back their spending, with the deepest cuts among 25 to 29 year olds.

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Delivering a stark assessment of the inflation problem, Ms Bullock said that while headline inflation was easing, poor productivity gains raised the risk that the current rate of wage growth could add to price pressures - remarks seen as raising the prospect of further interest rate increases.

The governor's remarks came as Reserve Bank board minutes show that central bank staff had factored in "one to two increases" in the official cash rate, as well as a lift in productivity, in their forecasts for inflation to drop below 3 per cent by the end of 2025. That includes the November increase.

The revelation underlines the risk of a further rate hike to follow the Melbourne Cup Day increase, possibly as soon as December.

The RBA has not tightened monetary policy as aggressively as many of its peers as it has tried to steer a path to bring inflation down while minimising the hit to the labour market.

But it is worried that the longer inflation remains elevated, the likelier it is that companies and consumer will factor higher prices into their expectations, making it hard to bring inflation down.

The board minutes warned of "growing signs of a mindset among businesses that any cost increases could be passed on to consumers".

Ms Bullock said inflation was "the crucial challenge over the next one to two years".

There have been mounting concerns over the uneven impact of high interest rates on different groups, with evidence that young adults are being hit particularly hard.

But the RBA governor defended the effectiveness of interest rates as a tool to ease price pressures, arguing that while supply disruptions had been responsible for much of the inflation surge, "there is an underlying demand component to it as well".

She said softening demand was "actually something the central bank can do something about".

"Monetary policy actually works. It is in a restrictive phase and it is dampening spending."

Ms Bullock said higher interest rates not only hit the cash flow of borrowers but encouraged greater saving and supported a stronger dollar, which helped lower the cost of imports.

The governor added that it worked best when "fiscal policy...work[s] in the same direction".

The Opposition has accused the government of exacerbating the nation's inflation problem through its spending, and leader Peter Dutton claimed Labor's energy policy "continues to drive up inflation".

But in a statement, Treasurer Jim Chalmers said the claim was at odds with the views of economists and showed Mr Dutton was "out of his depth on the economy".

Dr Chalmers said the government's measures had limited electricity price increases in the September quarter to 4.2 per cent instead of 18.6 per cent and its fiscal strategy had been endorsed by Ms Bullock, the International Monetary Fund and Fitch ratings agency.