Minutes of the September 2025 Monetary Policy Board Meeting

Minutes of the Monetary Policy Board Meeting

Hybrid – 29 and 30 September 2025

Members participating

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,
Iain Ross AO, Alison Watkins AM, 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), Andrea Brischetto (Head, Financial
Stability Department), Sally Cray (Chief Communications Officer), David Jacobs (Head, Domestic
Markets Department), Michael Plumb (Head, Economic Analysis Department), Penelope Smith (Head,
International Department) Financial conditions Members commenced their discussion of financial conditions by considering policy settings at other
advanced economy central banks. The US Federal Reserve (Fed), the Bank of Canada and the Reserve Bank of
New Zealand (RBNZ) had all reduced their policy rates further since the previous meeting, in large part
because of softening labour markets. In the United States, the softening labour market had led the Fed to
ease policy, notwithstanding some evidence of higher tariffs beginning to be passed through to consumer
prices. Market participants anticipated that the Fed would ease policy further in 2026. Additional easing
by the RBNZ was also anticipated. By contrast, expectations for the path of the policy rate in the United
Kingdom, euro area and Japan had edged higher since the previous meeting. For the United Kingdom, this
partly reflected growing concern about the persistence of inflation. Sovereign bond yields in the United States had declined since the previous meeting, reflecting growing
market expectations for additional policy easing. However, the yield curve had also steepened. Members
noted that there were few signs that this reflected investor concern about external pressure on the Fed.
Most notably, measures of long-term inflation expectations and term premia had been stable, though
members noted that the rapid rise in the gold price and a depreciation of the US dollar were perhaps
indicative of some concern about the pressure on the Fed. Members also discussed the pronounced rise in
30-year bond yields in other countries, including the United Kingdom, Germany, France and Japan. These
moves had occurred amid concerns about long-term public debt sustainability and political uncertainty
about how those concerns might be addressed. Members noted that conditions in global corporate funding markets remained buoyant. Debt and equity
funding were both readily available on favourable terms. Equity prices in many advanced economies had
reached new highs. In part, that reflected strong US company earnings but equity risk premia were also
near multi-decade lows (as were corporate bond spreads). Members noted that low risk premia continued to
suggest that market participants were placing little weight on the potential for adverse outcomes from
trade and geopolitical risks. The Australian dollar had appreciated slightly since the previous meeting. This had been supported by
widening yield differentials between Australia and other advanced economies. In real terms, the
Australian dollar trade-weighted index was close to estimates of the equilibrium level implied by its
long-run historical relationship with the forecast terms of trade and real yield differentials. Members
noted that this suggested the slight appreciation of the Australian dollar was not causing financial
conditions to be any tighter than already implied by the level of interest rates. Domestically, members noted that the Board’s decision to lower the cash rate in August had eased
financial conditions. Reductions in the cash rate had been passed onto bank funding costs and lending
rates, and scheduled mortgage payments had declined. The transmission of monetary policy to financial
conditions had been broadly in line with prior easing phases. Members turned to consider their assessment of the overall level of restrictiveness in financial
conditions. They noted that a range of indicators suggested that financial conditions had been clearly
restrictive in 2024 but these now presented a less clear picture. Members noted that the path for the cash rate implied by market pricing was well within the range of
model-based estimates of the neutral cash rate. They agreed that the estimates from these models were
imprecise and did not provide any direct guide to policy. Australian equity risk premia and credit spreads remained close to multi-decade lows, as in other
countries. Equity prices had been little changed since the previous meeting, partly reflecting mixed
earnings results in Australia, but were still materially higher over the year. Growth in business credit
had exceeded the rate of GDP growth, although measures of aggregate business leverage remained low by
historical standards. Growth in housing credit had picked up further, consistent with the easing in monetary policy since the
start of the year. The pick-up had been driven by growth in lending to housing investors, which was above
its post-2008 average; members noted that housing investors historically had been more responsive to
declining interest rates than owner-occupiers. However, they also observed that, while overall household
credit growth had picked up, household debt relative to household incomes had only just begun to
stabilise following a long period of gradual decline. Households’ mortgage payments, as a share of household disposable income, remained above their
historical average. Members noted that the still-elevated level of extra mortgage payments – which
were running ahead of the pace recorded in 2023 and 2024 – could suggest that households with a
mortgage were still saving at a relatively high rate. Members concluded their discussion of financial conditions by considering market participants’
expectations for the path of the cash rate. They observed that these expectations had moved higher since
the previous meeting in response to some stronger-than-expected data for activity and inflation. Members
noted that market participants had absorbed the Board’s prior communication that it would be guided
by the incoming data and its evolving assessment of the outlook and risks when making decisions. No
change in the cash rate was expected at the September meeting, according to both market pricing and
economists’ expectations. Market pricing was for the cash rate to reach around 3¼ per cent
by the middle of 2026, compared with 3 per cent at the time of the August meeting. Economic conditions Turning to economic conditions, members noted that GDP had increased by slightly more in the June quarter
than the staff’s expectation in the August Statement on Monetary Policy . Growth had
been led by a recovery in household consumption. Public demand had increased in the quarter but by less
than expected, reflecting a decline in public investment. Members noted that these data provided further
evidence that the anticipated shift in the composition of growth from the public to private sector was
occurring. Growth in household consumption in the June quarter had been stronger than expected. Members noted that
this had been supported by some temporary factors (the impact on measured household consumption of
unwinding electricity subsidies, end-of-financial-year promotions and a rebound from weather disruptions
in Queensland and New South Wales in the March quarter). Moreover, the size of the increase in the June
quarter and the fact that consumption had picked up across a wide range of categories over the preceding
year suggested that the recovery in household consumption was likely to persist. This assessment was also
supported by early indicators for the September quarter, including the ABS Household Spending Indicator
for July and information from liaison. Members noted the role of the recovery in household disposable
income in this pick-up. Real disposable income had risen strongly over the preceding year, supported by
ongoing strength in employment, growth in real wages and the Stage 3 tax cuts. In per capita terms,
real disposable income had been back above its pre-pandemic level since late 2024. Despite this, measures
of consumer sentiment remained quite low. Members considered how best to interpret this weakness in
consumer sentiment and the extent to which it reflected the persistent rise in the price level over prior
years, noting that consumer sentiment had been low for some time in many economies. Members considered the impact on the economy of the easing in monetary policy this year. There were signs
that this was contributing to stronger housing market conditions. However, given the lags in policy
transmission, it was too early to have discerned the expected effect on broader private sector activity.
Past reductions in the cash rate would therefore provide further support for GDP growth in the year
ahead, at least partly offsetting the diminishing impetus to growth from the Stage 3 tax cuts and
growth in public demand. Turning to the labour market, members assessed conditions to remain a little tight, though there was
considerable uncertainty around this assessment. The unemployment rate was 4.2 per cent in
August, unchanged from July. The underemployment rate had edged lower while other measures of labour
underutilisation had been broadly stable. Business surveys and liaison suggested that availability of
labour had been little changed. Half of the firms that mentioned the labour market in liaison described
labour availability as tight. Members discussed the signal to take from the slightly larger-than-expected easing in employment growth in
August. While some easing in employment growth had been forecast in August as population growth slowed,
the employment-to-population ratio and participation rate had also edged lower (but remained close to
historical highs). Members noted that most indicators of labour demand had been broadly stable or eased
only slightly, and that leading indicators (such as job advertisements and vacancies) continued to point
to healthy labour demand in the near term. An easing in labour supply may also have played a part, if
some individuals had become less inclined to participate in the workforce as their cost-of-living
pressures became less acute. Members also considered the evolving composition of employment growth. The bulk of employment growth over
the first half of 2025 had been in the market sector, following strong growth in non-market sector
employment in 2024. This was broadly consistent with the shifting driver of momentum in economic activity
more generally. Such a shift, if it persisted, would be consistent with some slowing in overall
employment growth (as had been forecast in the August Statement on Monetary Policy ), given
that the market sector is generally less labour intensive. Members also discussed variations in
employment outcomes across industries and states. Growth in the private sector wage price index had been broadly steady over preceding quarters (after
adjusting for administered decisions). Members noted that preliminary information from liaison, together
with some timely indicators of wages, pointed to a risk that private sector wages growth could ease a
little faster than expected in the near term. However, it was too early to assess the implications of
these indicators for future wages growth, and the staff continued to assess that a material moderation in
quarterly wages growth was unlikely while labour market conditions remained a little tight. Members noted
that growth in unit labour costs remained high, in part because labour productivity growth was still
weak. Turning to prices, recent data suggested that inflation in the September quarter may be higher than had
been expected in the August Statement on Monetary Policy . The monthly CPI indicator for July
and August, while partial and volatile, had pointed to stronger-than-expected outcomes in the September
quarter. Most notably, outcomes for the new dwellings and market services inflation components –
which contain important information for the quarterly outcome – had both been stronger than
expected. Shifts in the timing of electricity rebates were also expected to contribute to
stronger-than-expected headline inflation in the September quarter. More broadly, members observed that
services inflation was proving surprisingly persistent in several other economies, which may hold lessons
for Australia. Members noted that it would be important to see how all these developments are revealed in
the September quarterly data and the implications they hold for their assessment of the supply capacity
of the economy. Turning to the global economy, members noted that risks remained heightened. Higher tariff rates imposed
by the United States were now in effect for many economies, but there was still considerable uncertainty
about their macroeconomic effects (given their scale and potential for further change as the United
States continues negotiations with its three largest trading partners). On the upside, global trade had remained at a high level, in part reflecting significant shifts in global
trade patterns in response to the higher tariffs. GDP growth in Australia’s trading partners had
also remained resilient and stronger than expected in the June quarter. Economic activity in the United
States had been surprisingly robust, though employment growth had slowed over preceding months and GDP
growth was expected to slow as well. Members noted that the slowing in US employment growth could, at
least in part, reflect changes in US immigration policy and measures to reduce the number of federal
government employees. Higher tariffs were also contributing a little to US inflation. In China, growth in domestic demand had slowed by more than expected in July and August. The slowing had
been particularly pronounced for fixed asset investment. Members noted that infrastructure and
manufacturing investment had been affected by the fading impact of supportive policies announced in late
2024, adverse weather conditions, uncertainty over tariffs and a strengthening in authorities’
resolve to curb excess capacity. They also observed that the long-term slowdown in China’s real
estate sector may have accelerated somewhat. Notwithstanding these developments, bulk commodity prices
had increased slightly. Iron ore and coking coal prices had been supported by resilient underlying demand
from Chinese steel mills. The staff’s assessment was still that any material slowing in activity in
China would prompt incremental fiscal stimulus from the authorities to support growth. Financial stability assessment Members turned to considering the staff’s semi-annual assessment of financial stability risks. They
noted that the main risks to financial stability in Australia came from abroad, and discussed ways that
an international shock could spill over to the Australian economy and financial system. Domestically,
credit growth had picked up, but lending standards had remained sound and household indebtedness had
stabilised after a long period of gradual decline. The staff also assessed that the Australian financial
system remains financially resilient and well placed to weather most shocks, including those emanating
from abroad. Overall, therefore, members observed that there were no immediate implications for monetary
policy arising from domestic financial stability considerations. Turning to the considerations supporting this assessment, members discussed several vulnerabilities in the
global financial system that stood out as having the potential to affect financial stability in Australia
significantly. Concerns about fiscal sustainability had become more prominent in several advanced
economies, including because of the absence of credible frameworks to constrain fiscal deficits over the
medium term. Aggregate supply and demand imbalances in key sovereign debt markets also increased the risk
of disruptions in financial markets in periods of stress; these have the potential to be compounded in
the longer run if stablecoin issuance becomes systemically important. Longstanding vulnerabilities in
China’s financial and property sectors have the potential to constrain long-run growth in China,
even in the absence of a discrete shock to the financial system. Members noted again that risk premia in global equity and credit markets had remained low, and sovereign
bond term premia were only around long-term averages, despite these vulnerabilities and a backdrop of
heightened geopolitical tensions. Members observed that any reassessment of the likelihood of key risks
materialising, or of their potential consequences, could cause sharp adjustments in international
financial markets. Highly leveraged trading strategies employed by hedge funds in fixed income markets,
liquidity mismatches among open-ended fixed-income funds, concentration in equity markets, herding
behaviour among passive funds and interlinkages across the global financial system each were judged as
having the potential to amplify any such adjustments. A significant increase in risk aversion in global financial markets was viewed as having the potential to
increase financing costs sharply and constrain access to funds, including in Australia. Members noted the
extent of concentration of ownership in key Australian debt securities markets, as was the case in some
other international fixed income markets, which make it important for these investors to assess carefully
their potential liquidity needs for stress scenarios. At the same time, members noted the reduction over
time in Australian banks’ reliance on offshore funding markets and the steps they had taken to
mitigate their exposure to global shocks, including by building significant liquidity buffers. In considering the financial position of Australian households and businesses, members noted that most
were in a relatively strong financial position. Cash flow pressures for households had eased as real
wages had risen and interest rates had declined. Most households with mortgages had maintained their
repayments and large savings buffers. Most businesses also had solid financial buffers. While the share
of companies entering insolvency remained high in the retail, hospitality and construction industries,
particularly for smaller firms, the insolvency rate across the economy was around its longer run average.
Members also noted that banks remain well placed to continue lending and supporting the economy in the
event of a significant economic downturn. This reflected their ongoing high levels of capital and
liquidity, prudent lending standards and loan loss provisioning. Members discussed the financial stability implications of the recent pick-up in housing credit growth,
particularly for investors. The pick-up to date had been within the range of previous experience in
monetary policy easing cycles. Credit growth in the period ahead would likely be supported to an extent
by the expansion of the Home Guarantee Scheme. Importantly, members also noted that riskier types of
housing borrowing – such as high loan-to-value, high debt-to-income and interest-only lending
– had not picked up. Members noted their earlier observation that business credit had continued to
grow strongly, with banks and non-banks competing vigorously for market share, but that overall corporate
leverage remained low in Australia. Looking ahead, members noted that it was important that lending
standards remain sound for housing and business borrowing, across the bank and non-bank sectors, to
forestall any build-up of vulnerabilities in the financial system. In this context, members noted their
support for the work being done with industry by the Australian Prudential Regulation Authority, as the
macroprudential policy authority, to ensure that a range of macroprudential policy tools could be
deployed in a timely manner if needed. Finally, members discussed the importance of individual institutions, and the wider Australian financial
system, strengthening resilience to geopolitical and operational risk. Advancing digitalisation across
the financial system had increased the prospect that cyber-attacks and operational incidents could have
systemic implications. Members noted the growing risk that financial and operational stress events could
coincide in the future, which would complicate the nature of any crisis response and the scope of
coordination required across regulators, government and industries. Members noted the significant program
of work being led by the Council of Financial Regulators in this area. Considerations for monetary policy Turning to considerations for the monetary policy decision, members noted that the forecasts in the August Statement on Monetary Policy were for inflation to return to around the midpoint of the 2–3 per cent target range and for conditions in the labour
market to be little changed at around full employment over the forecast period. They observed that these
forecasts were based on the technical assumption that the cash rate follows the market path, which at
that time implied three further 25 basis point cuts (including in August) over the year ahead. Since the August meeting, private demand had recovered a little more quickly than expected given outcomes
from the June quarter national accounts and early indicators for growth in demand in the September
quarter. In the labour market, employment growth had slowed in August but the unemployment rate had been
steady, and conditions overall appeared to be little changed. Members judged that the labour market was
still a little tight and noted that forward-looking indicators were not signalling any material change in
the near term. Internationally, there continued to be considerable uncertainty about the outlook. Recent information
suggested that momentum in the Chinese economy had been weak, although the staff’s judgement was
that Chinese authorities would be likely to respond to any persistent weakness with additional fiscal
stimulus. Members also noted that economic activity in the United States appeared to be growing at a
steady rate, despite the softening labour market. The likelihood of higher tariffs having a pronounced
adverse near-term effect on the world economy had diminished since April. Members discussed the implications to be drawn from the monthly CPI indicator outcomes for July and
August. While noting the partial and volatile nature of these data, members observed that the outcomes
for certain components of the indicator – including market services and housing – suggested
that the September quarter inflation outcome might be higher than the staff had expected in August.
Members noted that the combination of potentially higher-than-expected inflation and broadly stable
labour market conditions, if sustained, could imply that the staff’s assumption regarding the
balance between aggregate demand and potential supply was incorrect. They also highlighted the potential
lessons for Australia from the experience of some other countries where services inflation has been
elevated. Members observed that monetary policy was probably still a little restrictive but acknowledged the extent
of restriction was difficult to determine. Financial conditions had eased further with the reduction in
the cash rate target in August, and the pick-up in housing price and credit growth over prior months was
indicative of the easing in monetary policy earlier in the year having an impact. Moreover, it would be
some time before the full effect of the monetary policy easing flowed through the economy. Regarding the risks to the outlook, members agreed that there were still risks on both sides of the
forecast and debated their relative importance. On the upside, it was possible that the August forecasts
had underestimated the strength of the recovery in consumption or had underestimated the extent of
capacity pressures in the economy at present. But, on the downside, it was possible that the forecasts
were not taking sufficient signal from the persistent weakness in consumer sentiment, the recent softness
in employment or some timely indicators of wages growth. Members agreed that financial stability considerations were not a constraint on their monetary policy
decision at this meeting. In light of these considerations, members agreed that it was appropriate to leave the cash rate unchanged
at this meeting. They agreed that the flow of information since the previous meeting, the forecasts from
August and their judgement about the extent of policy restrictiveness collectively implied that there was
no need for an immediate reduction in the cash rate target. Looking ahead, members noted that it was
appropriate for the Board’s decisions to remain cautious and data dependent. In finalising its statement, the Board affirmed the importance of being attentive to the data and the
evolving assessment of the outlook and risks when making its decisions. Members committed to pay close
attention to developments in the global economy and financial markets, trends in domestic demand, and the
outlook for inflation and the labour market. 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. The decision The Board decided unanimously to leave the cash rate target unchanged at 3.60 per cent.