(Bloomberg) -- Australia’s central bank is grappling with demand in the economy that’s proving “a little bit stronger” than expected and helping to keep inflation pressures elevated, Governor Michele Bullock said.

Monetary policy is unable to impact price rises in areas like property rents and insurance costs, the Reserve Bank chief pointed out in a panel discussion on Tuesday in Hong Kong. She also said that while wage gains aren’t excessive, a lack of productivity growth meant that unit labor costs are climbing.

“What I think we’re starting to observe is second-round effects of some of these costs,” Bullock said. “Businesses are finding that demand is sufficient that they are able to pass those costs through” and as a result services price inflation in particular is “quite sticky.”

Her comments on resilient demand and inflation prompted traders to firm up bets for the RBA to hike rates in the first half of 2024. Meeting-dated overnight indexed swaps show a better than 80% chance that it will raise the cash rate target to 4.6% by May, up from about 70% odds seen earlier on Tuesday.

The RBA this month resumed raising rates after a four-meeting hiatus as the labor market and economy show more resilience than anticipated. The central bank’s latest forecasts increased the inflation and economic growth estimates and lowered the peak unemployment rate. 

Policymakers meet on Dec. 5 for the final decision of the year and most economists expect them to keep the cash rate unchanged at a 12-year high of 4.35%.

“We want to ensure we keep inflation under control and we bring it back down to our band,” Bullock said Tuesday, referring to the RBA’s 2-3% target. “We also need to do that in the context of not imposing on the economy too much and raising the unemployment rate” too high.

“We’re in a period now where we have to be a little bit careful,” Bullock said on the panel co-hosted by the Hong Kong Monetary Authority and the Bank for International Settlements. 

The RBA forecasts unemployment to peak at about 4.25% late next year, from 3.7% now. It expects inflation to return to the top of its target in late 2025.

“Despite upward revisions to the forecasts on the back of stronger domestic inflation pressures than earlier assessed that can justify some further tightening in the policy rate, the RBA does not have a sense of urgency,” said Taylor Nugent, a senior economist at National Australia Bank Ltd. “NAB continues to expect a hike in February.”

The RBA has raised rates by 4.25 percentage points in the current tightening campaign, its most aggressive in more than a generation.

Many economists, including at Commonwealth Bank of Australia, predict that the RBA is probably done hiking, though National Australia Bank and Royal Bank of Canada are among a handful that see at least one more move to 4.6%.

--With assistance from Garfield Reynolds.

(Adds quotes, comment from economist.)

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