The RBA has made one thing clear: it is not done yet. By lifting the cash rate to 4.35%, with the decision backed by an 8–1 majority, and signaling a path toward 4.7% by the end of 2026, the central bank is shifting decisively into a higher-for-longer stance as inflation proves more persistent than expected.
The problem is not just that inflation is high—it is that it is becoming entrenched. The RBA acknowledged that price pressures picked up sharply in the second half of 2025 and are now being reinforced by the global energy shock triggered by the Middle East conflict. Fuel and commodity prices are rising, firms are beginning to pass on costs, and short-term inflation expectations are moving higher.
The updated projections confirm that the situation has deteriorated. Headline inflation is now expected to peak at 4.8% in mid-2026, significantly higher than previously forecast (4.2%), while core inflation remains sticky at 3.5% even by the end of the year. The return to target is delayed, with inflation only easing back toward acceptable levels in mid-2027.
But tightening comes at a cost. Growth forecasts have been cut, with GDP now seen at 1.9% in 2026 and slowing further to 1.3% in 2027. The RBA is effectively acknowledging that restraining inflation will require weaker economic momentum.
The real signal lies in the rate path. A projected cash rate of 4.7% suggests more hikes ahead, and importantly, a prolonged period at restrictive levels through 2028. This is not a quick tightening cycle—it is a sustained effort to bring inflation back under control.
At the same time, risks are rising on both sides. A prolonged conflict in the Middle could push energy prices even higher, driving inflation further up while simultaneously dragging on growth.
In short, the RBA is confronting a more difficult reality: inflation is higher, growth is weaker, and the policy response will need to be stronger and longer-lasting. The shift to a higher terminal rate and extended hold confirms that the fight against inflation is far from over.
