Minutes of the June 2026 Monetary Policy Board Meeting

Minutes of the Monetary Policy Board Meeting

Sydney – 15 and 16 June 2026

Members present

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair),

Notes

Marnie Baker AM, Renée Fry-McKibbin, Ian Harper AO, Carolyn Hewson AO,
Bruce Preston, Iain Ross AO, Jenny Wilkinson PSM Others present Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial
Markets) Anthony Dickman (Secretary), David Norman (Deputy Secretary) Meredith Beechey Osterholm (Head, Monetary Policy Strategy), David Jacobs (Head, Domestic
Markets Department), Michael Plumb (Head, Economic Analysis Department), Michelle Wright
(Deputy Head, Communications Department) Financial conditions Members observed that financial conditions abroad had eased somewhat since the previous meeting, in
response to progress towards resolving the conflict in the Middle East. Expectations for central bank
policy rates had generally declined, oil prices had fallen significantly and equity prices had risen in
many countries. Members acknowledged the indications of a potential resolution of the conflict but noted
the ongoing uncertainty over the final outcome and the implications for energy markets. Even after the recent easing in financial conditions, policy interest rate expectations across many
advanced economies remained higher than before the start of the conflict in the Middle East. Members
noted that the European Central Bank and Norges Bank had both raised interest rates to contain the
second-round effects of higher oil prices and address broader concerns about above-target inflation. The
US Federal Reserve and Bank of England – both of which had been expected by financial market
participants before the conflict to have lowered their policy rates by now – had decided to
maintain their policy rates. Financial market participants expected both to lift these rates later in
2026. More generally, financial markets continued to expect that many advanced economy central banks
would tighten monetary policy before the end of 2026 in response to above-target inflation and concerns
about the inflationary effects of the conflict. Bond yields in many advanced economies, including Australia, had unwound some of their earlier increase
since the previous meeting. These falls were in response to both lower oil prices and the flow of
economic data. However, yields had risen in the United States and Japan, reflecting stronger economic
data. Short-term inflation compensation measures had generally eased but remained higher than before the
onset of the conflict in the Middle East. Longer term market expectations for inflation had remained
generally stable and consistent with central banks’ targets. The Australian dollar had depreciated a little since the previous meeting, in line with a decline in yield
differentials (particularly against the United States) and a modest fall in commodity prices. The
trade-weighted exchange rate nevertheless had remained comparable to its level at the onset of the
conflict and broadly consistent with its estimated long-run equilibrium level. Equity prices had risen in most advanced economies and spreads on corporate bonds had remained tight.
These outcomes had been supported by strong earnings expectations, most notably in the United States. In
contrast, Australian equity prices had remained flat, as they had been for some time, reflecting only
modest upward revisions to the outlook for company earnings. Members noted that this was likely to
reflect a range of factors, including limited productivity growth, recent increases in the cash rate
target, the expected impact of announced tax changes on bank lending and the more limited participation
by Australian companies in the artificial intelligence (AI) boom compared with companies in some other
countries. In China, the household and property sectors both remained weak, which was weighing on household
borrowing. The authorities’ economic strategy appeared to be prioritising strategic sectors,
including AI, rather than providing additional support to domestic activity more broadly. Turning to Australia, members noted that financial conditions had tightened since the start of the year
following three increases in the cash rate target. However, financial market participants’
expectations for the future path of monetary policy had eased noticeably since May in response to lower
global oil prices and weaker-than-expected data for both the labour market and headline inflation in
Australia in April. Members agreed that financial conditions were now probably somewhat restrictive. They discussed updates
made by the staff to some models of the neutral rate, noting that these did not materially alter their
assessment of financial conditions. The cash rate target sat at around the top of the range of these
model estimates, and above the range of market economists’ estimates of the neutral rate. Members
observed that estimates of the real neutral rate had risen over preceding years – consistent with a
global trend, which probably reflected factors such as increased investment in the energy transition,
defence and, more recently, data centres – and were a little higher than when the cash rate target
was previously at its current level. Members nevertheless emphasised that assessments of the neutral rate
are inherently uncertain and do not provide a direct guide for monetary policy. Members continued their assessment of the tightness of financial conditions by considering evidence from a
broader range of indicators. These generally showed that the tightening in monetary policy was starting
to be transmitted to the economy through various channels. Conditions in the established housing market
had softened and housing credit growth looked set to slow in the period ahead. This reflected the
pass-through of monetary policy tightening and, more recently, tax changes for housing investors
announced in the Australian Government budget. Business debt growth had remained relatively strong over
prior months, some of which reflected syndicated lending for the construction of data centres. Banks had passed the higher cash rate through to lending and deposit rates, and scheduled mortgage
payments had risen. Compared with household disposable incomes, scheduled mortgage payments were a little
lower than the previous episode when the cash rate was at current levels, reflecting the fact that growth
in income had outpaced growth in credit in the intervening period. Members discussed how to assess the
net impact on the economy of monetary policy easing in 2025 and tightening in 2026, noting the lags in
the effect of monetary policy. Members noted that the cash rate target was widely expected by market participants to remain on hold at
the present meeting. Market pricing at the time implied a 50 per cent chance of a further
25 basis points increase in the cash rate by the end of 2026, having priced in about 40 basis
points of increase immediately after the May meeting. Some market economists expected the cash rate to be
increased again in 2026 because of ongoing inflationary pressures from both domestic and international
factors. Others expected monetary policy to remain on hold in 2026 and then to be eased from around
mid-2027, given restrictive financial conditions currently, signs of a slowing in aggregate demand and an
anticipated decline in inflation. Economic conditions Members observed that the latest domestic data for the March quarter had confirmed that capacity pressures
remained elevated in that period, albeit at a slightly lower level than previously assessed, and
inflation was still above target. Indicators of economic activity since March had been mixed but appeared
to show the economy easing broadly as expected. Members discussed the March quarter national accounts. As expected, GDP had increased by
2.5 per cent over the year to the March quarter. Underlying momentum in household consumption
had started to ease before the onset of the conflict in the Middle East, and public demand growth had
been weaker than anticipated in the quarter. However, private business investment had been much stronger
than expected, largely driven by investment in data centres. Members discussed the broader implications
of the strength in investment in data centres, noting that such spending can be difficult to forecast and
that in the United States it had repeatedly surprised analysts. Members noted that, while much investment
in data centre requires imported components, it also requires some domestic inputs. They discussed the
potential for continued strength in such activity to exacerbate capacity pressures and skills shortages
in other parts of the economy. Members noted that the national accounts had revealed further weakness in economy-wide productivity
growth. They discussed both the associated measurement challenges and the broader implications for the
supply side of the economy. Regarding wages, members noted that growth in the Wage Price Index had been
in line with expectations. Measures of average earnings from the national accounts had been a little
softer than anticipated, but weak productivity growth meant that growth in unit labour costs remained
above its average over the inflation-targeting period. Members turned to developments in the global economy. The recent announcement of an interim peace
agreement between the United States and Iran was a welcome development but this was only the first stage
of resolving the conflict in the Middle East. The associated decline in global energy prices had left the
oil price futures curve broadly in line with the May baseline forecast assumptions. Members noted that
inventory drawdowns and increased supply from elsewhere had continued to buffer the impact of energy
supply disruptions in the Middle East on global energy markets. Domestic retail fuel prices had been a
little lower than expected, though some of the recent decline would be reversed if the temporary fuel
excise reduction expired on 30 June as currently legislated. Members noted that, even if a lasting
agreement to end the conflict were reached, it would take some time for global production and
distribution of oil and affected commodities to return to more typical levels. Growth in Australia’s major trading partners had been resilient and broadly as expected, supported by
AI-related spending. In China, exports had been resilient but growth in domestic
activity had slowed in April. Higher energy prices had pushed headline inflation up in most countries in
April. Although the extent of the increase varied, in part because of differing policy responses,
inflation was above central bank targets in around two-thirds of countries. Producer prices had generally
increased by more than consumer prices, and surveys suggested some margin pressures for firms. Core
consumer price inflation in most countries had been little changed but was expected to
increase in coming months as cost pressures are passed through. Returning to the domestic economy, members noted that timely data had been somewhat mixed but broadly
consistent with the May baseline forecasts, which incorporated a slowing in demand growth this year. Underlying CPI inflation in April had been consistent with the staff’s earlier expectation for the
June quarter. Within that total, market services, rent and durable goods price inflation were all broadly
in line with expectations, groceries inflation was lower, and new dwellings price inflation was
considerably higher as firms passed on some of the cost impost of higher oil prices. By contrast,
headline inflation had been weaker than expected by market economists, reflecting weakness in
international travel prices and a larger-than-expected decline in fuel prices. Business surveys and
liaison pointed to elevated and broad-based cost pressures, and there were signs that some firms were
passing these on to higher prices of their goods and services. Members noted that short-term inflation
expectations had increased in prior months, notwithstanding a small decrease in the weeks preceding the
meeting; this increase had been larger than would be expected from their past relationship with inflation
and fuel prices. Longer term measures had remained consistent with achieving the inflation target,
although unions’ long-term inflation expectations were an exception, having picked up sharply in
May, as they had in 2022. Members discussed the labour market data for April. Some key indicators had been weaker than expected
(most notably the unemployment rate and total employment), while others (such as total hours worked and
the underemployment rate) pointed to more resilient labour market conditions. Leading
indicators, such as job ads, suggested labour demand had been broadly stable. On balance, the staff
assessed that labour market conditions were a little weaker than had been expected in May but cautioned
against reading too much into monthly data outcomes, which can be volatile. Members also discussed the
Fair Work Commission’s announced increase in all modern award wages from 1 July. Although the
outcome was moderately higher than had been assumed in the staff’s May forecasts, members noted that
the increase applied to the lowest wage earners. Views differed on the extent to which the outcome might
indirectly influence other wage negotiations, but members agreed that this would depend in part on the
tightness of the labour market and expectations for inflation. Members concluded their discussion of domestic economic conditions by considering the momentum in
activity. Despite consumer sentiment remaining very low, household spending growth had not softened
materially; members noted that, historically, the relationship between these two variables was quite weak
and typically close to contemporaneous, suggesting that weak consumer sentiment does not necessarily
signal future weakness in consumption. Likewise, business confidence had been weak but surveyed business
conditions and capacity utilisation had declined only modestly and investment intentions had been revised
a little higher. Recent federal and state budgets had not significantly altered the staff’s outlook
for public demand. However, members noted that conditions in the housing market had eased by more than
expected, reflecting the recent increases in the cash rate, tax changes announced in the Australian
Government budget and the broader economic environment. Considerations for monetary policy Turning to considerations for the monetary policy decision, members noted that information received since
the previous meeting had supported the view that the economy was operating with excess demand and
widespread inflationary pressures. Inflation was still materially above the Board’s target and the
staff’s expectation remained for underlying inflation to increase in the June quarter. Labour and
non-labour cost pressures remained widespread. Consumer and business sentiment remained very weak but
members agreed that the overall data on activity implied that economic growth was easing broadly as
expected. Members acknowledged the emergence of a potential path to resolution of the conflict in the Middle East
but observed that this was still at an early stage. Global oil prices had eased in prior weeks but
remained higher than before the onset of the conflict. Members agreed that even if the resolution proves
enduring, global commodity supply constraints would take some time to resolve. Members judged that Australian financial conditions were now somewhat restrictive, although this remained
uncertain. It would take some time to assess the ultimate impact on the economy of the tightening in
monetary policy since February but, at this stage, it appeared to be having broadly the expected effect.
Housing demand had eased, which also reflected the broader economic environment and recently proposed tax
changes. In light of these observations, members agreed that leaving the cash rate target unchanged at this meeting
would best balance the Board’s inflation and employment objectives. Inflation remained materially
above the Board’s target, and members noted that the staff’s May forecasts (which were based on
available data and conditioned on market expectations for interest rates at that time) envisaged that it
would be a further two years before inflation returned sustainably to target. Against that backdrop,
members agreed that monetary policy needed to remain restrictive to unwind current excess demand through
a period of below-trend growth. While the most recent data and forward-looking indicators suggested
somewhat mixed signals about how quickly momentum in economic activity was slowing, members judged the
easing in growth to be broadly in line with earlier expectations. Members agreed that leaving the cash rate target unchanged was appropriate given the ongoing uncertainty
related to developments in the Middle East. They noted that, if the emerging path to resolution of the
conflict proves enduring, it could reduce the extent to which firms pass on higher costs to consumer
prices. However, they acknowledged that, even in that case, it was still likely that underlying inflation
would increase to some extent in response to recent fuel supply disruptions. Taking these considerations together, members judged that there was merit in using the space provided by
the Board’s earlier decisions to raise the cash rate target to assess how the economy was adjusting
and the impact of disruptions to oil supply. After deciding to keep the cash rate target unchanged at this meeting, members discussed the main risks
that could have a bearing on future decisions. One set of risks related to developments in the Middle East. Members noted that there were still credible
scenarios for the evolution of the conflict that could result in higher inflation and lower activity than
in the May baseline forecasts. Members noted the potential for sustained high oil prices to feed through
more fully into price- and wage-setting behaviour, even if fuel prices subsequently abate. Moreover, they
agreed that it would take considerable time to restore oil supply to its pre-conflict level, even if the
current resolution proves enduring, and noted that demand for oil could be buoyed for a time if countries
seek to rebuild their inventories. These considerations led members to assess that the Middle East
conflict still posed material upside risks for inflation and downside risks for growth. A second set of risks discussed by members was domestically focused. Members noted the implications of
persistently weak productivity growth for the economy’s supply capacity and sustainable growth rate.
While members expressed somewhat differing views about the extent of current capacity pressures, they
agreed that persistently weaker-than-expected productivity growth could impede progress on returning
inflation to target. Members also noted the risks associated with a potentially material weakening in
housing markets, including if this were to inhibit growth in consumption. In finalising its statement, the Board agreed to remain attentive to the data and the evolving assessment
of the outlook and risks when making its decisions. The Board will remain focused on its mandate to
deliver price stability and full employment and will do what it considers necessary to achieve that
outcome, including increasing the cash rate target if necessary. The decision The Board decided unanimously to leave the cash rate target unchanged at 4.35 per cent. Framework for additional monetary policy tools Following discussion and in-principle approval of the framework for additional monetary policy tools at
the previous meeting, and subsequent feedback from the RBA’s Governance Board, the Board approved
the final version of the framework. Members noted that the Governance Board had viewed the governance and
risk elements of the framework as appropriate, while emphasising that the framework and any future advice
to use specific tools should clearly identify the materiality of the use of that tool’s potential
impact on the RBA’s balance sheet. Members approved the framework and agreed to it being published alongside a speech by the Assistant
Governor (Financial Markets) at the end of June. They noted that future work would focus on further
developing aspects related to risk management and operational readiness.