All four major banks and the bulk of money market traders believe the Reserve Bank will raise interest rates next week and governor Michele Bullock did nothing to dissuade them in her last public appearance before the meeting.
Speaking at a Committee for Economic Development of Australia (CEDA) event in Sydney, Ms Bullock said Australia's jobs market was probably still a bit too tight and putting upwards pressure on wages, business costs and inflation more generally.
"Between 4.5 and 5 [per cent unemployment] will probably take enough heat out of the labour market that eases pressure on inflation," she said.
The latest August unemployment data will be released by the Australian Bureau of Statistics on Thursday and is the last major piece of economic data before the RBA Monetary Policy Board meeting on September 28-29.
Echoing comments she made at a federal parliamentary hearing on Friday, Ms Bullock said it was critical that imported inflation from the global energy price shock was not allowed to translate into rounds of domestic price increases.
"We need to be very careful to ensure that policy is set in a way that minimises the second round and indirect effects which might perpetuate ongoing inflation," she said.
Major banks hike fixed mortgage rates
After Friday's testimony the three major banks that had been forecasting the Reserve Bank would stay on hold in September changed their forecasts to predict a rate hike at the meeting next week.
The economics team at NAB was already anticipating a September move, while CBA and Westpac now expect the RBA to lift rates once more in September, with the risk of a second move in November.
ANZ's economics team has added a September rate rise while maintaining their forecast of a November hike as well, which would take the cash rate to 4.85 per cent, the highest level since late 2008.
Futures pricing on Bloomberg suggests a 90 per cent chance rates will rise next week, with about a 50/50 chance of a follow up hike in November.
The bank and market predictions are already having a real effect on interest rates, with fixed mortgage pricing rising dramatically in recent days.
Today the Commonwealth Bank lifted its two-year fixed home loan rate by 0.48 of a percentage point to 6.82 per cent, and other fixed rates by between 0.15-0.3 of a percentage point.
Comparison website Canstar said that follows similar moves of up to 0.2 of a percentage point by the other three major banks last week.
The lowest one or two-year fixed home loan rates offered by the big four of 6.49 per cent are now noticeably above their lowest variable rates of between 5.99 to 6.25 per cent, indicating an expectation that rates will increase.
AI 'great white hope' or massive financial bubble?
Ms Bullock's wideranging economic discussion also touched upon the issue of artificial intelligence.
She noted that, over the longer-term, as people and businesses found the best uses and workflows for the technology, it would add to productivity, putting downward pressure on inflation.
"AI is the great white hope to improve productivity," Ms Bullock said.
"When I talk to colleagues around the world about this, I think everyone thinks that."
However, that potential longer-term benefit is coming with a short-term headache, as AI providers scramble to build data centres and other enabling infrastructure.
"But I think everyone also agrees that there are very few signs yet that AI is actually influencing the supply side of the economy," Ms Bullock said.
"There's lots of evidence that it's influencing the demand side of the economy.
"So we've got this sort of awkward sequencing event at the moment where, in Australia at least, we are in a situation of excess demand and the AI boom is adding to that demand ahead of any potential supply impacts that it might have going forward."
Ms Bullock also acknowledged the risk that investment enthusiasm and the valuation of companies was running ahead of their realistic earnings potential.
"All central banks are a little bit worried about that," she said.
"And if it unwinds in a disorderly manner, then that could have implications for the financial system and also for the real economies."
She said it was an area the RBA was keeping an eye on, with its twice yearly Financial Stability Review out next week.
"Some people think it's a bubble, some people don't. I don't have a particular view one way or the other, but it's a risk that I think we're watching," Ms Bullock said.
