SYDNEY (Reuters) – Australia’s top central banker on Friday warned there was still some way to go to meet the midpoint of the inflation target range of 2-3%, reiterating that the bank has not ruled out another rise in interest rates.

The threat of another rate hike has led UBS and Capital Economics to push out the likely timing for a first rate cut, although economists do not expect the Reserve Bank of Australia to deliver on its tightening bias.

Appearing before lawmakers, RBA Governor Michele Bullock said Australia’s inflation challenge is not over, despite encouraging signs of moderation. The central bank left interest rates unchanged earlier this week at its policy meeting.

“An inflation rate with a ‘4’ in front of it is not good enough and still some way from the midpoint of our target,” said Bullock, noting that services inflation still needs to come “quite a bit lower”.

“There is no good to get back in (the band) and then pop out again. We’ve got to be convinced that we’re back in the band around about the midpoint.”

Even though the central bank has retained the option of another rate hike, markets seriously doubt they will tighten, but have nudged out the likely timing of the first cut.

The change of a move in May has declined to 20%, down from 50% early last week. And September is the most likely month for the first rate cut.

Bullock on Friday noted there remained a great deal of uncertainty around the central bank’s forecasts out to 2026. It is expected inflation – which eased to a two-year low of 4.1% in the fourth quarter – will fall to the bank’s target range of 2-3% in late 2025 before meeting the midpoint of 2.5% in 2026.

“Even if the economy evolves along the central path, inflation will still have been outside the target range for four years,” warned Bullock.

The hawkish tilt from Bullock – coupled with pushback from global central bankers to market hopes of early rate cuts this year – led UBS to now expect the first rate cut from the RBA in November, rather than August.

Capital Economics also pushed back their call for the first rate cut to August from May.

Across the Tasman sea, the odds of a further hike from the Reserve Bank of New Zealand are narrowing after ANZ on Friday called for two more rate rises in both February and April.

The next policy meeting is on Feb. 28 and markets have shifted to imply around a 38% chance of a hike then, compared with almost no chance of a move a week ago.

(Reporting by Wayne Cole and Stella Qiu; Editing by Sam Holmes)

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