Hybrid – 28 and 29 September 2026
Members participating
Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair), Marnie Baker AM, Melinda Cilento, Renée Fry-McKibbin, Carolyn Hewson AO, Bruce Preston, Iain Ross AO, Jenny Wilkinson PSM
Others participating
Sarah Hunter (Assistant Governor, Economic), Brad Jones (Assistant Governor, Financial System), Christopher Kent (Assistant Governor, Financial Markets)
Anthony Dickman (Secretary), David Norman (Deputy Secretary)
Meredith Beechey Osterholm (Head, Monetary Policy Strategy Department), Sally Cray (Chief Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head, Economic Analysis Department), Penelope Smith (Head, International Department)
Gideon Holland (Deputy Head, Financial Stability Department) for discussion of the item on liquidity operations
Financial conditions
Members began their discussion by noting the increase in market expectations for near-term policy rates in a wide range of advanced economies. Although the scale of the increase had differed somewhat across countries, the pick-up had been underpinned by a range of common factors: resilient economic activity, persistent underlying inflationary pressures and higher oil prices as the Middle East conflict broadened and escalated. Several central banks abroad had already raised their policy rates, and market pricing implied an expectation that monetary policy would be tightened in most major advanced economies over the course of 2026 and 2027.
In Australia, market expectations for the cash rate target had also risen since the previous meeting, though by less than in some other countries. This followed stronger-than-expected data on inflation and activity in Australia, higher oil prices and recent RBA communication. Market pricing implied an expectation that the cash rate target would be increased at this meeting, followed by an additional increase of around 15 basis points by the end of the year and another 30 basis points in the first half of 2027. All surveyed market economists expected an increase in the cash rate target at this meeting and several expected a further increase later in the year.
Longer term government bond yields had increased notably across advanced economies since the previous meeting. Despite the sharp rises in yields, market functioning had remained orderly. Members observed that the rise in longer term bond yields mainly reflected a rise in real yields, rather than higher long-term inflation expectations (which remained broadly consistent with central bank targets). That was consistent with market expectations that monetary policy would do enough to reduce inflationary pressures. Higher longer term real yields in turn appeared to reflect some combination of an increase in expected long-run neutral rates and term premia. Members noted that a rise in term premia may have been due to increased debt issuance by both governments and companies developing artificial intelligence (AI) infrastructure and capabilities, compounded by changes in the investor base for government debt and greater economic and policy uncertainty. They observed that the split between neutral rates and term premia mattered for assessing financial conditions, because, for a given path of short-term rates, higher neutral rates implied looser financial conditions whereas higher term premia implied tighter financial conditions. However, members agreed that it was difficult to assess the split with any accuracy, because estimates of neutral rates and term premia were subject to considerable uncertainty and revision.
Australian government bond yields had also risen materially, reflecting higher real yields and broadly unchanged longer term inflation compensation (which remained consistent with the inflation target). As was the case in other countries, the pick-up in real yields appeared to reflect some combination of higher neutral rates and higher term premia. Members noted that the effect of higher term premia on private domestic financial conditions was likely to be more modest in Australia than in some other countries because of the prevalence of shorter term funding (particularly for the household sector). By contrast, members noted that to the extent bond yields were rising because of a perceived increase in the neutral rate, that would contribute to an easing in financial conditions in Australia if the cash rate were not changed.
Model-based estimates of the neutral cash rate implied that the current stance of policy was somewhat restrictive. The cash rate was around the top of the range of central estimates from these models, while the market-implied future path lay above that range. Members considered the tentative signs that the neutral rate in Australia had again shifted higher, having already moved up materially since the pandemic, to be above where it was when the cash rate was previously at its current level. However, members acknowledged that estimates of neutral were highly uncertain and therefore did not provide a direct guide for monetary policy.
Members discussed the potential implications of a rise in the global neutral rate that was not fully reflected in Australian interest rates. One implication of such a scenario could be downward pressure on the Australian dollar exchange rate. Members noted that this was an illustration of the principle that while a floating exchange rate allows monetary policy to respond independently from other countries, it does not insulate Australia against secular shifts in global equilibrium interest rates.
Consistent with this, the Australian dollar had depreciated a little in trade-weighted terms since the previous meeting. However, it remained around 5 per cent higher since the start of the year, despite a narrowing in Australia’s yield differential with other economies over that period. Members noted that this left the real trade-weighted index of the Australian dollar somewhat above the range of estimates of its longer run equilibrium level, potentially adding a little to the restriction coming from prevailing interest rates alone.
Members then turned to consider broader indicators of the tightness of financial conditions. They noted that corporate funding was still readily available, for firms both in Australia and abroad, despite higher government bond yields and persistent geopolitical risks. Corporate bond spreads and equity risk premia remained low across the world, and global bond issuance had been significant. Business credit growth in Australia remained very strong and broadly based across sectors, though borrowing to fund data centre construction had been particularly strong to date. However, Australian equity prices had declined by around 5 per cent since the previous meeting. This had partly been in response to weaker earnings expectations for key sectors in the Australian index, particularly the banking, real estate and consumer discretionary sectors.
Housing-related indicators suggested financial conditions were fairly tight. Housing prices had declined by more than expected and new housing loan commitments had fallen sharply, led by lending to investors. Tighter monetary policy was contributing to these developments. Scheduled mortgage payments had increased to around 10 per cent of household disposable income, around their 2024 peak, while extra payments into offset and redraw accounts were a little below their longer run average. But weaker housing conditions were also likely to reflect recent tax changes and some reversal of the earlier strong rise in housing prices.
Taken together, these developments led members to judge that Australian financial conditions remained somewhat restrictive. However, the extent of restriction remained uncertain and various indicators of financial conditions provided different signals.
Economic conditions
Members began their discussion of economic conditions by considering how the upside risks to inflation they had identified in August had evolved. These risks included a possible re-escalation of the Middle East conflict, the inflationary impetus from the global AI boom and greater domestic capacity pressures than assumed.
The risk of a re-escalation of the Middle East conflict had since crystallised. Global energy prices were significantly higher than assumed in August, reflecting ongoing disruptions to shipping, damage to refineries and low inventory levels. Higher energy prices had pushed headline inflation up in most economies over preceding months. Although pass-through from higher energy prices to other consumer prices abroad had been limited so far, members noted that underlying inflation in many countries was already above target for other reasons, and higher wholesale energy prices meant it was likely that the indirect effects on consumer price inflation would ultimately be larger than previously thought. The recent and prospective policy tightening by several central banks was in response to concerns that this impetus to inflation could prove to be more persistent than previously thought.
Members discussed the evolving evidence of how the global AI demand boom was influencing prices, which had also previously been identified as an upside risk to inflation in Australia. They noted that the AI boom was driving stronger GDP growth in economies that form key parts of the AI supply chain, particularly Australia’s Asian trading partners. As a result, growth in Australia’s major trading partners had accelerated and been stronger than expected over the preceding year. Members observed that this had occurred despite economic headwinds from the Middle East conflict and ongoing changes to global trade policy. With global demand growing rapidly and supply constrained, prices for some key components in the AI supply chain had risen sharply in preceding months. These price rises had increasingly been flowing into producer and consumer prices in some advanced economies. Members noted that there were also some signs of technology-related price pressures emerging in Australia, including sharp increases in software and other IT costs reported by liaison contacts.
Members turned to the third upside inflation risk, i.e. that domestic capacity may be more limited than assumed.
Although recent data had broadly confirmed the staff’s earlier assessment that growth in demand had eased to below-trend rates in the first half of 2026, GDP growth in the June quarter had been a little stronger than expected. This had been driven primarily by an upside surprise in private business investment, which had increased by more than 10 per cent over the year. Members noted that the strength in investment had been broadly based, though with significant contributions related to the construction of data centres and renewable energy facilities. By contrast, growth in household consumption had slowed in the first half of 2026, as expected, to a below-trend pace. This slowing was consistent with an easing in the growth of household income from previously quite strong rates in early 2025. Members discussed the possibility that consumption growth could remain relatively subdued for some time, given the economy’s constrained supply capacity, the need for a period of below-trend growth in aggregate demand and community expectations for other components of demand to grow. Consistent with that outlook, members noted that the staff expected consumption to grow at a moderate rate in the September quarter, though recent timely indicators had been divergent. Established housing prices had continued to fall more quickly than expected in preceding months, and the staff now assessed that the cumulative fall in housing prices is likely to be greater than had been assumed in the August forecasts. Members discussed the economic effects of falling housing prices, noting that the effects of reduced wealth on consumption tend to be relatively modest.
Labour market conditions had eased gradually since the previous meeting, consistent with the slowing in growth in domestic demand. The unemployment rate had increased to 4.6 per cent in August, alongside a rise in labour force participation. Members noted that considerable caution is warranted when interpreting the current official labour force data, because of methodological changes to the survey. They discussed how to interpret more forward-looking indicators of labour demand; most indicators pointed to stability in labour market conditions but others (such as some measures of job advertisements) appeared to be strengthening a little. Taken together, the staff’s judgement was that these leading indicators pointed to broadly stable labour market conditions in the near term.
Members assessed the signal from the July inflation data, which had been stronger than expected, particularly for market services. Members noted that these data had led the staff to expect higher underlying inflation in the September quarter than had been forecast in August. Domestic petrol and diesel prices were 13 per cent higher than had been forecast in August, driven by higher-than-expected global energy prices. More broadly, the share of items with prices rising by more than 2½ per cent was well above average. While the monthly data can be volatile, the staff’s preliminary assessment – based on sub-components of the consumer price index – was that the upward surprise in underlying inflation was more likely to reflect greater domestic capacity pressures than unexpectedly strong pass-through of cost increases flowing from the Middle East conflict.
Members concluded by discussing what these developments implied for their judgement about domestic capacity pressures and their impact on the inflation outlook. The unemployment rate was now close to the assessment of full employment embedded in the August forecasts, but the staff were increasingly questioning whether the rate of unemployment that is consistent with the inflation target was higher than previously assessed (which would imply greater capacity pressures at present). One indicator consistent with such a hypothesis was that growth in unit labour costs was above what was consistent with inflation being at target. Members noted that this pick-up had been driven by subdued productivity growth rather than particularly strong nominal wage earnings. Another was that business liaison and surveys continued to record widespread reports of elevated cost growth and few expectations that those pressures would ease significantly over the year ahead. Survey measures also pointed to a drift higher this year in short- to medium-term inflation expectations of firms. The staff’s assessment that the stronger-than-expected underlying inflation data in July was likely to be more reflective of greater domestic capacity constraints than pass-through of costs related to the Middle East conflict added to this view. Members discussed the structural factors that could potentially explain lower supply capacity, including the persistent anaemic rate of productivity growth.
Members judged that these domestic and global developments pointed to an increase in the risk of persistently elevated inflation.
Financial stability assessment
Members began their semi-annual consideration of financial stability by observing that the balance sheets of household borrowers generally remained sound. Housing loan arrears rates were low and loan impairments were around historical lows.
Indicators of indebted households’ ability to service their loans remained healthy. The share of owner-occupier borrowers currently facing a cash flow shortfall was estimated to be less than 2 per cent, well below its peak in 2023–2024. Members noted that this share was predicted to remain low even in a scenario involving plausible further increases in inflation, the cash rate target and unemployment. Mortgage borrowers still held substantial savings buffers, with the median borrower holding savings equivalent to just under one year of scheduled mortgage repayments in the lowest income quintile and almost two years in the highest income quintile. The share of borrowers drawing on these buffers was also around its historical average. Most borrowers also retained significant amounts of equity in their home. Members observed that very few borrowers were in negative equity and that staff analysis showed that this would likely remain the case even in a scenario where housing prices fell by 20 per cent.
Members discussed the factors contributing to this resilience. One was that real household disposable income per capita had grown quite strongly since early 2024. Another was a prolonged period of prudent lending standards. However, members acknowledged that some borrowers experiencing cost-of-living pressures were having to curtail discretionary consumption. They also observed that households with mortgages were, on average, financially stronger than others. Low-income households who rent were more likely to be experiencing financial pressure, given they are most exposed to the adverse effects of inflation.
Members considered whether risks in housing lending had transferred to the non-bank sector and concluded this was unlikely. However, non-bank lending to businesses had grown strongly. Part of this reflected private credit, which had increased from a low base. Members noted the issues for market conduct and investor protection that were associated with private credit and which were a focus of attention for the Australian Securities and Investments Commission. Nonetheless, this lending did not yet appear sufficiently large or connected to the broader financial system to pose a material risk to system stability. More generally, business borrowers were assessed as generally being able to manage a period of elevated cost pressures, although conditions were more challenging in certain sectors.
Members turned to discussing the risks emanating from abroad, which were judged to be more material than domestic cyclical risks.
One growing vulnerability related to global government bond markets. The increase in global bond yields had so far been orderly, but the share of price-sensitive investors in these markets had risen over time, alongside growing use of leverage. Such developments were being compounded in some countries by high and rising public debt levels and the absence of credible medium-term fiscal frameworks. The risk of sovereign debt default was judged to be low and members observed that only a small proportion of the rise in interest rates was a signal of sovereign debt concerns. Nonetheless, a more disorderly market adjustment, with adverse consequences for global economic outcomes and/or financial stability, could not be ruled out – although the scale and timing of such an adjustment is difficult to predict. Members noted that the Australian financial system had a good degree of resilience and remained well placed to manage a shock to global bond markets. In particular, there had been a significant decline over time in Australian governments’ and banks’ use of foreign funding, and the RBA had tools available to support liquidity in Australian government bond markets if required.
Low risk premia in major equity and credit markets were another vulnerability for global financial markets, if they were to move sharply higher in response to an adverse shock. One possible trigger for an abrupt repricing in global financial markets could be a shift in sentiment towards the AI boom. AI-related investment was leading to a large accumulation of debt, both to date and prospectively. Some debt-like commitments were also becoming increasingly opaque. Leverage currently remains quite subdued, given strong earnings growth, but members noted that market pricing of some AI-related companies embodied very favourable assumptions about long-run earnings growth that could be difficult to sustain even if the technology were ultimately successful. In considering the potential implications if market-wide asset prices were to decline abruptly, members noted that the superannuation industry is generally well placed to withstand a period of heightened demand for cash. It was nevertheless important that funds continued to strengthen their liquidity risk management practices.
Members concluded their discussion of financial stability by considering the growing operational threats to financial stability, including those associated with geopolitics, and how they might interact with traditional financial risks. Rapid developments in AI were amplifying these challenges, which have been a focus of the Council of Financial Regulators for some time. Members noted that an outage at a common service provider – such as a key financial market infrastructure or technology provider – could have widespread effects on the functioning of the financial system. In this context, it was critical that financial institutions and financial market infrastructures focus on building resilience to operational risk, including through regular testing of contingency and recovery arrangements.
Summing up, members agreed that the considerable resilience of borrowers and financial institutions in Australia implied that financial stability considerations were not currently constraining the setting of monetary policy. At the same time, members observed that threats to global financial stability were mounting, including because of factors emanating from outside the financial system. These threats would have implications for financial stability in Australia were they to materialise.
Considerations for monetary policy
Members began their consideration of the policy decision by noting that inflation remained too high. The forecasts prepared in August were for inflation to return to the midpoint of the target range by around late 2027. That depended on economic growth slowing sufficiently below the growth rate of the economy’s potential supply to create spare capacity, and on assumptions that productivity growth would pick up and inflation expectations would be stable. Members recalled that, at the previous meeting, they had judged the risks around the outlook for inflation to be tilted to the upside. This reflected concerns about the potential for global cost pressures to build if the Middle East conflict persisted and/or pressures associated with the global AI boom widened, and about the limited margin of spare capacity domestically.
Since August, some of these concerns had materialised. The Middle East conflict had broadened and oil prices were now significantly higher than had been assumed in the forecasts. There were also growing indications of intensifying global cost pressures, particularly those associated with the extraordinary demand for AI. And domestically, there had been further evidence that capacity pressures may be greater than previously assessed. The recent inflation outcome had exceeded expectations and liaison revealed widespread cost pressures that firms were either passing into the prices of their goods and services or looking to do so. Short-term measures of inflation expectations remained elevated. And GDP growth had, at the margin, been stronger than expected. The labour market had eased broadly as anticipated but leading indicators were broadly stable.
Members agreed that financial conditions were restrictive but that some indicators could imply that the extent of restriction was only modest. Bond yields had risen sharply over preceding weeks, owing in part to rising term premia but also at least owing in part to market participants’ assessment that the global neutral real interest rate had risen. Several central banks had raised their policy rates and markets expected further increases over the period ahead. Members noted that, while monetary policy in Australia had been tightened earlier than in these other countries, future trends in interest rates in Australia relative to other countries would also have a bearing on the exchange rate, with implications for domestic inflation.
In light of these observations, members considered whether to raise the cash rate target by 25 basis points.
The strongest argument for raising the cash rate target at this meeting was that several of the upside risks identified in August had since materialised or were building.
Members noted that there had been additional signals from the July inflation data that domestic capacity pressures may be more extensive than assumed in the August forecast. That implication was supported by increasingly prevalent messages from liaison about broad-based cost pressures and growth in unit labour costs remaining higher than judged to be consistent with the inflation target (given continued weakness in productivity growth). When combined with the slightly stronger-than-expected growth in GDP and signs from leading indicators that labour demand was proving resilient, it was reasonable to conclude that excess demand in the economy was greater than members had previously assessed.
International developments added to the view that upside risks to the inflation forecast had materialised. The Middle East conflict had escalated and oil prices were substantially above the level assumed in the August forecasts. More broadly, members noted that global cost pressures appeared to be building. Some of this came from the indirect effects of higher oil prices. Another key driver was excess demand for AI-related products. Members noted that there were also pressures from developments in agricultural commodities.
A second argument for increasing the cash rate target at this meeting was that responding in a timely manner to additional cost pressures would best balance the Board’s inflation and full employment objectives. Members acknowledged that waiting for further confirmation of the outlook for inflation could be costly, given that inflation had already been above target for an extended period and there were concerning indications from surveys and liaison of a growing risk that medium-term inflation expectations in the business community may be rising. At the same time, members noted that leading indicators suggested that the risk of a sharp slowing in economic activity in the near term appeared quite low. Household and business balance sheets generally appeared to have scope to buffer the impact of higher interest rates. Business investment was showing considerable resilience and leading indicators showed no signs of any sharp near-term weakening in the labour market. Members also noted that growth in consumption would need to be subdued for some time if inflation was to return to target, given strong growth in demand elsewhere in the economy and the starting position of excess demand.
A third argument to increase the cash rate target was that its current level might not be sufficient to bring the economy back to balance within a reasonable timeframe, even if the identified upside risks to inflation did not materialise fully. Members acknowledged that if the signals from financial markets of a potentially higher global neutral interest rate were correct, it would imply that the current cash rate target of 4.35 per cent was less restrictive that it had been two years earlier. Moreover, if monetary policy in Australia was unchanged, recent and prospective policy tightening by other central banks could cause financial conditions in Australia to loosen via a depreciation of the exchange rate.
Members briefly considered the arguments in support of leaving the cash rate target unchanged. These rested primarily on the possibility that downside risks to activity and employment could prove larger than expected. One reason to assess that was if members judged that falling housing prices could have a larger effect on household spending than assumed. However, scenario analysis suggested that even relatively large falls in housing prices would have only modest direct effects on activity and spending. Another was the potential for heightened uncertainty associated with the Middle East conflict to weigh on demand. And a third was that the effects of the tightening in monetary policy earlier in the year might prove to be larger than factored into earlier forecasts.
Having considered these arguments, all members judged that it was appropriate to increase the cash rate target by 25 basis points at this meeting. They noted that the August forecasts required a number of favourable developments to occur for inflation to return to target within the projected timeframe and that it no longer appeared likely all of these would eventuate. Members expressed their concern that excess demand was greater than previously assessed. And they considered it prudent to reinforce the anchoring of medium-term inflation expectations, given the backdrop of a prolonged period of above-target inflation, the indications from liaison of persistent cost pressures and an economy that, while slowing, continued to display a degree of resilience.
In reaching that conclusion, members acknowledged that the trade-off between inflation and full employment had deteriorated because of global cost pressures. They confirmed that their strategy was still to return inflation to target in a timely manner, while preserving as many of the gains in employment as possible. However, executing this strategy in an environment of more persistent adverse supply shocks would require accepting slower growth in demand and employment than would otherwise be the case. Members added that the Board’s task was to stabilise medium-term inflation at the target even if part of the medium-term persistence in inflation is driven by factors beyond the influence of monetary policy.
Finally, members discussed the challenges of judging how large the upside risks to inflation were or could become. They noted that the outlook for inflation would depend, among other things, on developments in the Middle East, the path of external demand, the extent of domestic capacity pressures and on how that influenced the pass-through of cost shocks and the evolution of inflation expectations. Members noted that it was possible these factors could continue to place upward pressure on inflation. Against that backdrop, members agreed that they would remain attentive to incoming data and the evolving assessment of the outlook and risks when making their decisions. The Board will remain focused on its mandate to deliver price stability and full employment and will continue to do what it considered necessary to achieve that outcome, including increasing the cash rate target further if required.
The decision
The Board decided unanimously to raise the cash rate target by 25 basis points to 4.60 per cent.
Liquidity operations
As a further step in the evolution of the RBA’s liquidity operations framework, members considered a proposal to offer liquidity over longer maturities through regular term repo auctions. Members noted that the proposal reflected work undertaken over an extended period as part of the ongoing enhancement of the RBA’s operating framework. The Board endorsed the establishment of Term Repo Operations to complement the RBA’s existing standard liquidity facilities. Members noted that further information about the purpose and design of Term Repo Operations would shortly be announced.It was envisaged that Term Repo Operations would be operational in 2027.
