SYDNEY The head of Australia's central bank on Wednesday said the domestic economy was in a "challenging" situation with consumption slowing but inflation still elevated, and monetary policy was on a narrow path to balance these forces.

Reserve Bank of Australia (RBA) Governor Michele Bullock said there were signs that inflation might be difficult to suppress, particularly in services where it was proving to be sticky.

She warned that the central bank was very alert to upside risks on inflation and, were it to remain higher than expected, the bank would have to respond with tighter monetary policy.

(Reporting by Wayne Cole; Editing by Christian Schmollinger)