Minutes of the Monetary Policy Board Meeting
Hybrid – 2 and 3 February 2026
Members participating
Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair),
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), Christopher Kent (Assistant Governor, Financial
Markets)
Anthony Dickman (Secretary), David Norman (Deputy Secretary)
Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (Chief
Communications Officer), David Jacobs (Head, Domestic Markets Department), Penelope Smith
(Head, International Department), Tom Williams (Acting Deputy Head, Economic Analysis Department)
Financial conditions
Members commenced their discussion of financial conditions by considering ongoing uncertainty in the
global environment. Members noted that a range of new geopolitical and institutional risks had emerged
since the previous meeting, including military action, tariff developments and new threats to the
independence of the US Federal Reserve. For the most part, these had prompted only modest and short-lived
reactions in financial markets. That said, the US dollar had weakened against a range of currencies
and there had been strong gains in precious metals prices over much of January. Some of these effects had
unwound following the nomination of a new chair of the Board of Governors of the Federal Reserve System,
but the US dollar remained lower and gold and silver prices higher than at the start of the year.
Compensation for risk in financial markets remained very low. Equity prices had risen in most major
advanced economies over prior months, and measures of equity risk premia and expected future volatility
were still near long-term lows. Corporate bond spreads had been little changed or had declined across
advanced economies over that period. Members discussed why markets were demanding little compensation for
risk despite the high level of uncertainty. They noted that this outcome could reflect in part the
resilience of major economies, strong private sector balance sheets and fiscal and monetary easing in
some economies. Market participants might also be finding it challenging to price genuine tail risks,
given uncertainty around the probability, timing and scale of possible adverse events. It was also
possible that market participants were factoring in an expectation of strong global central bank
responses to any sharp downturn. Members nonetheless concluded that, with this starting point, any
crystallisation of downside scenarios could cause a significant tightening of financial conditions.
However, the scale and timing of any adjustment was difficult to predict.
Australian equity prices had underperformed other markets over preceding months, in part because of a
significant rise in expectations for the cash rate and the associated increase in bond yields. That said,
demand for securities being issued by Australian firms had remained strong, including from offshore
investors.
Members noted that financial market participants’ expectations for central bank policy rates in the
United States and the United Kingdom had drifted a little higher over preceding months, though cuts were
still expected in 2026. By contrast, official interest rates were expected to rise – or be little
changed – in a range of other countries. In New Zealand, markets now expected the policy rate to be
increased in 2026, following a significant increase in market pricing in response to stronger economic
data. Market participants also expected that the Bank of Japan would continue to increase its policy rate
from very low levels, amid more durable inflation and expectations of some additional fiscal stimulus. In
Canada and the euro area, where inflation was close to target, market pricing continued to imply only
modest future increases in policy interest rates. Members noted that market expectations were for
noticeably higher interest rates in Australia than in many peer economies. Some of that difference
reflected the higher inflation target in Australia, but also likely a perception that Australia has faced
stronger inflationary pressures.
Longer term government bond yields in the major advanced economies had, for the most part, moved broadly
in line with policy rate expectations since the previous meeting. Yields had risen in Japan and New
Zealand, and were little changed in the euro area and Canada, though they had declined slightly in the
United States and the United Kingdom. Longer term bond yields in Australia had moved higher, reflecting
changed expectations for the cash rate. Members noted that measures of longer term inflation expectations
appeared well anchored and consistent with central banks’ inflation targets. However, measures of
inflation expectations at the two-year horizon had increased, most noticeably in Australia.
In China, authorities had recently extended policies to support lending to targeted business sectors and
there were signs that earlier measures had begun to lift business financing. By contrast, household
demand for credit had weakened further, amid continued declines in property prices and soft labour market
conditions. Total social financing had continued to increase relative to nominal GDP, reflecting strong
growth in government bond issuance.
Members turned their discussion to considering the restrictiveness of financial conditions in Australia.
They noted that the relevant indicators had presented an increasingly mixed picture since mid-2025, and
that there was even less evidence than at the December meeting that financial conditions remained
restrictive.
Several indicators suggested that monetary policy was no longer restrictive. Housing credit growth had
picked up noticeably and now appeared to be growing faster than household incomes, driven by a pick-up in
investor credit. Business debt had also continued to grow at its fastest pace since the global financial
crisis and continued to outpace growth in GDP. Members observed that low risk premia in capital markets
were contributing to favourable financing conditions for large firms, financial institutions and
governments. The pick-up in inflation and steadying of conditions in the labour market had also suggested
that monetary policy was not restrictive overall.
Members also considered the current level of the cash rate relative to various model-based estimates of
the neutral interest rate. They observed that such estimates are inherently highly uncertain, sensitive
to the choice of inputs and model structure, and had provided a misleading signal of the stance of
monetary policy prior to the pandemic. As a result, they had provided no direct guide to monetary policy.
Nonetheless, members noted that the cash rate was below the central estimate of several models but above
the central estimate of others, given reductions in the cash rate in the previous year and a gradual rise
in some model estimates.
By contrast, there were some signs that policy might be slightly restrictive. Households’ required
mortgage payments (as a share of disposable income) were above the historical average and households were
continuing to make larger payments into redraw and offset accounts. This behaviour – amid a high
rate of household savings compared with the preceding few years – could have been consistent with
policy still being somewhat restrictive. However, members also explored whether this additional saving
might instead have reflected unexpectedly strong income growth, which households could, in due course,
choose to spend.
Market expectations of the cash rate had risen noticeably since around August 2025 and were significantly
higher than at the November meeting. These moves had taken place progressively over time, reflecting a
range of stronger-than-expected data over the second half of 2025 and policy communications following the
November and December meetings. Market pricing had implied a 70 per cent probability of a cash
rate increase at the current meeting, with a further increase fully priced by the end of 2026. Most
market economists tracked by the staff had also expected an increase in the cash rate in February, and a
number had expected a second increase later in the year.
The Australian dollar had appreciated noticeably against a wide range of currencies over preceding months.
The trade weighted exchange rate was around 5 per cent higher than at the November meeting.
Members noted that this appreciation was broadly consistent with the pick-up in cash rate expectations
and yields on Australian bonds relative to those in other countries, together with higher commodity
prices; indeed, the exchange rate had still been within the range of model-based estimates of its
long-run equilibrium value. Members noted that the implications of the appreciation of the exchange rate
for financial conditions and the economic outlook would depend on the causes of the appreciation, which
could not be known with certainty. But to the extent to which the appreciation had been in response to
expectations of a higher cash rate path, the implied tightening in financial conditions should be thought
of as consistent with, rather than additional to, the typical effects of the transmission of monetary
policy expectations embodied in the market path.
Economic conditions
Members began their discussion of economic conditions by considering the stronger-than-expected inflation
outcomes in the second half of 2025. Headline and underlying inflation in the December quarter had been
higher than forecast in November, having also exceeded expectations in the September quarter. Inflation
had clearly now exceeded the
2–3 per cent
target range.
Members discussed the likely persistence of the rise in inflation. They noted that inflation in the second
half of 2025 had been broadly based: the share of items in the basket with prices rising by an annualised
rate of more than 2.5 per cent had increased sharply and was high by historical standards. The
breadth of inflation was consistent with the staff’s assessment that economy-wide capacity pressures
– which looked to have increased in the second half of 2025 – had contributed to some of the
recent increase. The staff judged that the larger part of the increase had reflected less-persistent
factors, including price volatility in categories such as electricity, travel and groceries, and some
sector-specific demand and price pressures that had affected prices of new dwellings and durable goods.
Inflation in administered prices (excluding electricity) was only a little above its historical average
and had picked up only modestly.
Members discussed the evidence of an increase in economy-wide capacity pressures that was contributing to
higher inflation. Survey measures of capacity utilisation had increased in the second half of 2025 and
were above their historical average. Model-based estimates had also been revised higher over the second
half of 2025 – indeed they now suggested that there was excess demand in the economy. In the labour
market, there had been ongoing strength in unit labour costs, the unemployment rate had been lower than
expected and measures of underemployment were historically low. The staff’s overall assessment was
that the labour market was a little tighter than consistent with full employment. Collectively, these
observations pointed to a progressive pick-up in underlying inflationary pressure in the economy over the
preceding six months, as had been discussed at the November and December meetings.
Members considered the role that stronger-than-expected aggregate demand had played in adding to existing
capacity pressures. Domestic private demand had been significantly stronger than expected in the
September quarter, across most categories of expenditure. More recent indicators suggested that
consumption growth was robust in the December quarter. While some of the expected strength in consumption
in the December quarter was likely to have been due to households bringing forward spending to take
advantage of sales promotions, the clear upward trend in year-ended consumption growth suggested that
this could not provide the whole explanation. The strength in underlying consumption had also been
underpinned by improving fundamental conditions. Real household disposable incomes had been growing
strongly and recent upward revisions had implied that households were in better financial health than
previously thought. In addition, the easing in monetary policy in 2025 had helped to support household
spending, though the direct cash flow effects on household income growth (via lower net interest
payments) had been small.
Business investment had also been surprisingly strong in the September quarter – particularly
investment in data centres. In addition, firms’ expectations for future capital expenditure had
increased. While part of the pick-up in the September quarter was expected to subside in the December
quarter, the staff’s outlook for investment had risen. Members discussed the extent to which this
increase in investment might support higher productivity growth, thereby expanding supply capacity. They
noted that, while there might be some impact, the link between investment and productivity is not
immediate or strong. A more substantial and sustained increase in investment would likely be needed
before a meaningful effect on productivity could be discerned.
Global economic developments had also supported the domestic economy. Global growth had been unexpectedly
resilient in 2025 and the outlook for major trading partner growth had again been revised up in the
latest forecasts. Members noted that some of this was because the downside risks related to tariffs and
trade policy uncertainty had not materialised, with effective tariff rates lower than initially feared
and global trade flows and supply chains adapting faster than anticipated. Growth in China had remained
in line with the authorities’ 2025 growth target, as strength in exports had offset ongoing weakness
in domestic demand. Another factor was the role of technology-related spending in the global economy.
Members noted that exports from east Asian economies had grown rapidly in response to strong investment
demand related to AI and broader technology. Reflecting all this, growth in Australia’s major
trading partners had picked up through 2025 and commodity prices had risen.
Developments in the labour market also pointed to a stronger Australian economy. Labour market conditions
appeared to have stabilised in the second half of 2025, bringing the earlier period of easing to an end.
Although part of the decline in the unemployment rate in the month of December was likely to reflect
statistical noise, measures of unemployment and underemployment had been fairly steady over the preceding
six months and leading indicators of the labour market suggested this would continue in the near term.
Employment growth had continued to slow, but this was broadly in line with the slowing in labour supply
as population growth eased and labour force participation declined somewhat. Private sector wages growth
had slowed gradually.
While much of the apparent tightening in capacity pressures was likely to reflect stronger-than-expected
demand, members noted that the staff’s assessment of supply capacity had also declined a little. The
staff’s models continued to suggest a risk that there is less supply capacity in the economy than
currently assessed.
Outlook
Members considered what these developments implied for the economic outlook. They noted that the latest
forecasts produced by the staff were materially stronger than those produced in August and November.
The central forecast for GDP growth had been revised up, reflecting stronger consumption and investment,
and was now above assumed growth in supply capacity throughout most of 2026. That implied a further
tightening in capacity pressures in the near term. Under the standard technical assumption that the cash
rate follows the (rising) market path, GDP growth was forecast to slow from late 2026 as the implied
tightening in monetary policy contributed to bringing aggregate supply and demand back into balance.
Members noted that the market path used to condition the latest forecasts implied an increase in the cash
rate of around 60 basis points by the end of the forecast period; this was significantly different
from the assumption in the November forecast, which was for a reduction of around 30 basis points.
The forecasts also accounted for the 5 per cent appreciation of the exchange rate since
November, which was assumed to dampen import prices and net exports.
The labour market was forecast to remain a little tight in the near term, before slowly easing as GDP
growth dipped below its potential. The projections were for the unemployment rate to rise from around
4¼ per cent to around 4½ per cent by the end of the forecast period.
The forecast for inflation had been revised materially higher compared with that in the November
Statement on Monetary Policy
(which itself was higher than in the August
Statement
). The central projection for trimmed mean inflation now peaked at
3.7 per cent in mid-2026, with headline inflation at 4.2 per cent around that time
(reflecting the ending of electricity rebates). Both underlying and headline inflation were projected to
fall to a little below 3 per cent by mid-2027. Beyond that, the forecast was for inflation to
fall to a little above the midpoint of the target range by mid-2028, on the assumption that the cash rate
follows the market path. Members noted that the staff’s judgement about the extent of persistence in
recent demand and inflation outcomes is key to this forecast, with material risks on both sides of the
central projections.
Considerations for monetary policy
Turning to considerations for the monetary policy decision, members highlighted that a wide range of data
received since the previous meeting had been stronger than expected, as had been the case in December.
Broader financial conditions had also eased materially since mid-2025.
Members noted that inflation had picked up in the second half of 2025 and was currently too high. While
the increase in underlying inflation was at odds with the central projection six months prior, it
represented the crystallisation of what had been a growing risk highlighted by the Board, most recently
at the December meeting. Members noted the staff’s judgement that, while the larger part of the
increase probably reflected less-persistent factors that would fade over time, some of it was due to
underlying inflationary pressure that would be likely to persist with current policy settings. In light
of that judgement, the central projection for inflation had been revised materially higher, remaining
above target throughout 2026 and only returning close to the midpoint of the target range around mid-2028
(on the assumption that the cash rate follows the market path).
Members highlighted the significant changes since the November
Statement
of model-based
estimates of the extent of spare capacity in the economy, which were now somewhat closer to independent
measures from business surveys. The staff assessed that aggregate demand now clearly exceeded aggregate
supply and that the labour market remained a little tight. The tightening in overall capacity pressures
over prior months appeared to be mostly a result of stronger-than-expected output growth, something that
was forecast to persist in the coming few quarters. Labour market conditions had also proven a little
stronger than expected, even after discounting the latest monthly outcome to some extent. And global
economic growth had been much more resilient than expected some months earlier, especially in east Asia
and the United States.
Members observed that developments over preceding months had added to their concerns that financial
conditions may no longer be restrictive, even with the rise in market expectations for the cash rate and
the consequent appreciation of the Australian dollar.
In light of these observations, members considered the arguments for leaving the cash rate target
unchanged at this meeting. Doing so would allow the Board to accumulate even more evidence – an
approach that might be appropriate if members judged the increase in inflation to be overwhelmingly
temporary and likely to dissipate quickly. That case might be strengthened if members judged capacity
pressures to be materially weaker than the staff assessed, the momentum in growth observed over the
second half of 2025 as being likely to wane soon, or the pace of productivity growth – and hence
supply capacity – as likely to pick up sharply.
Having considered these arguments, members agreed that there was a stronger case to increase the cash rate
target by 25 basis points at this meeting. This case rested on their judgements that some part of
the rise in inflationary pressures would persist (reflecting greater capacity pressure), that the risks
around both the Board’s objectives (price stability and full employment) had shifted, and that
financial conditions were currently not restrictive enough to bring inflation back to target within a
reasonable period.
Regarding inflation, members judged that, while a sizeable portion of the recent increase was likely to
wane over time, a reasonable portion reflected underlying inflationary pressures that would be likely to
persist without a policy response. They noted that the increase in inflation had been broadly based
across components of the CPI. Members agreed that capacity pressure in the economy was also greater than
they had previously envisaged, reflecting both stronger-than-expected aggregate demand over the second
half of 2025 and more longstanding weakness in the supply capacity of the economy. Members agreed that
the data received since the previous meeting had strengthened their concern that, without a policy
response, inflation could remain persistently above target for too long.
Members also judged that the risks surrounding the Board’s two objectives had shifted materially
since the previous meeting, in ways that warranted tighter monetary policy. Regarding risks to meeting
the Board’s inflation objective, members emphasised that the staff forecast is for inflation to stay
above the midpoint of the target range for at least another two years. This forecast was constructed on
the technical assumption that the cash rate follows the market path, which envisaged two increases in
2026 and a little more thereafter. Members observed that if this inflation outlook proved true, it would
extend the already long period during which underlying inflation had mostly been above the target range.
In relation to risks to the Board’s full employment objective, members agreed that the downside risks
to which they had been alert for some time appeared to have abated. Members noted that the persistent
resilience of the labour market reduced their concern about the likelihood of a sharp deterioration in
the near term. Wages growth had also slowed only gradually, and unit labour costs growth remained high,
supporting the view that the labour market remained a little tight. And members observed that the outlook
for output growth had strengthened over preceding months, which would support employment in the period
ahead. This more positive outlook for near-term growth was underpinned by a strengthening in real
household disposable income growth and a lessening of downside risks to the global economy, at least in
the near term, providing more confidence that the pick-up in growth would be durable.
On financial conditions, members agreed that there had been a material easing since mid-2025. As a result,
they judged that they could no longer be confident that conditions were restrictive. Members observed
that banks were lending freely, and credit was growing strongly, such that credit to households and
businesses had either stopped declining or was rising, relative to relevant metrics of income. The
appreciation of the exchange rate since the previous meeting had offset some part of the easing in
conditions in other markets. However, members noted that this was already incorporated in the
staff’s forecasts and observed that the appreciation had been in response to expectations for
tighter monetary policy, not independent of it.
Collectively, these observations led members to conclude that excess demand was unlikely to be corrected
if the cash rate remained at 3.60 per cent.
In considering what these observations implied for upcoming decisions, members agreed that the prevailing
uncertainties meant it was not possible to have a high degree of confidence in any particular path for
the cash rate. They pointed to risks on both sides of the central projection for inflation. If demand
growth proved weaker, supply capacity stronger, the pick-up in inflation largely a function of
sector-specific shocks or the stance of policy more restrictive than believed, then inflation might abate
more rapidly than projected. However, if demand growth continued to pick up, supply was more constrained
than thought, longer term inflation expectations began to rise or policy was not restrictive, then
inflation might prove more persistent than in the central case. Future policy decisions would need to
respond to these evolving risks. Members noted that it was important to continue exploring what the
incoming data reveal about their judgements in relation to these matters. Members agreed that their
current strategy of seeking to bring inflation back to target within a reasonable timeframe while
preserving as many of the gains in employment as possible is still appropriate. They judged the decision
to raise the cash rate at this meeting to be consistent with implementing that strategy in an economy
where the outlook and risks had materially shifted.
In finalising its statement, the Board agreed to continue to be attentive to the data and the evolving
assessment of the outlook 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.
The decision
The Board decided unanimously to raise the cash rate target by 25 basis points to
3.85 per cent.