Minutes of the May 2026 Monetary Policy Board Meeting

Minutes of the Monetary Policy Board Meeting

Sydney – 4 and 5 May 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 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), Michael Plumb (Head,
Economic Analysis Department), Penelope Smith (Head, International Department) Michelle Lewis (Senior Manager, International Department) for discussion of the framework for
additional monetary policy tools Financial conditions Members commenced their deliberations by discussing the impact of the conflict in the Middle East on
global financial conditions. While riskier asset prices had moved in response to the conflict and the
resultant increases in oil prices, the net change since the onset of the conflict had been modest. Global
equity prices had rebounded from an initial decline, supported by the announcement of a ceasefire and
material upgrades to forecast earnings in some sectors, including semiconductors. Corporate bond spreads
in advanced economies had retraced the rise observed immediately after the onset of the conflict and
remained low relative to history. Measures of expected equity price volatility had increased somewhat but
remained well below the levels recorded during earlier episodes of heightened uncertainty, including the
announcement of higher US tariffs in April 2025. Members discussed the possibility that financial markets were under-pricing downside risks associated with
the conflict, given the contrast between these moves and sharp declines in consumer and business
confidence in many jurisdictions. They noted several possible explanations for this contrast, including:
a possible expectation among market participants that the conflict would be resolved reasonably quickly;
the demonstrated resilience of the global economy in preceding years to a range of significant shocks;
the long-run decline in the oil intensity of global output (which is currently around half the level of
the early 1990s); and ongoing optimism about the impact of the AI boom on corporate earnings in future. The impact of the conflict on interest rate expectations had been much larger. Market-implied paths for
policy rates in advanced economies had shifted materially higher. The extent of the increase in market
expectations for policy rates at the end of 2026 was broadly comparable across several advanced
economies, at around 50–60 basis points (though larger in the United
Kingdom and smaller in Japan). Market participants now expected most advanced economy central banks to
increase policy rates a few times in 2026, except for the US Federal Reserve – which market
participants had previously expected would reduce its policy rate by around 60 basis points but was
now expected to leave its policy rate unchanged. None of the central banks that were expected to increase
policy rates had yet done so. Members noted that, in contrast to Australia, several of these economies
had negative output gaps, which provided greater space for their central banks to assess the implications
of the uncertainty regarding the medium- to long-term economic effects of the conflict in the Middle
East. Government bond yields had also increased, particularly at longer maturities. These increases were largely
driven by higher real yields: longer term inflation expectations had not risen noticeably across advanced
economies, despite the increase in measures of near-term inflation expectations. Members observed that
this evolution in market measures of inflation expectations had been consistent with expectations that
central banks would take the policy decisions necessary to maintain inflation at target in the longer
term. The rise in bond yields over the preceding six months had been more pronounced in Australia than
elsewhere, consistent with the progressive increase in expectations for the future policy rate over that
period. The Australian dollar exchange rate had also appreciated on a trade-weighted basis. It remained
broadly consistent with estimates of its long-run equilibrium level, as the appreciation had been
supported by a widening in yield differentials and higher commodity prices. Members noted that banks had largely passed on the February and March cash rate increases to advertised
lending and deposit rates. Taken together with other developments, this meant financial conditions in
Australia had tightened over the course of the year. Members then considered whether the prevailing cash rate was now restrictive. One approach to this question is to compare the current cash rate with model-based estimates of the
nominal neutral interest rate. The cash rate at the time of the meeting sat within – but near the
top of – the range of model-based central estimates of the neutral cash rate. Market pricing
implied that it would be slightly above current estimates by the end of 2026. Members noted that these
estimates of neutral had generally risen over the preceding year, possibly reflecting some combination of
how the models interpret the rise in domestic inflation over prior months and global trends associated
with very strong AI and green energy investment and rising budget deficits. Whatever the cause, members
noted that model-based measures implied that any given cash rate was, at the time of the meeting,
somewhat less restrictive than a year or so earlier. Assessments of the nominal neutral interest rate
are, however, sensitive to both the measure of inflation expectations chosen to inflate estimates of the
real rate and the extent to which such measures move. Members reiterated that these and other
uncertainties mean model-based estimates of the neutral rate are inherently uncertain and do not provide
a direct guide to the appropriate stance of monetary policy. In light of that conclusion, members considered a broader suite of indicators of the restrictiveness of
financial conditions. Funding had remained readily available for Australian banks, households and
businesses in preceding weeks. Aggregate credit growth had been strong and had not yet slowed in response
to the tightening in policy or the conflict in the Middle East, though it was probably too early to
expect much response. Within this total, business credit growth had remained particularly strong, while
household credit had continued to grow more quickly than household disposable income. Bond issuance had
rebounded after a pause during the initial phases of the conflict and credit spreads remained relatively
low. These observations led members to conclude that it remained unclear how restrictive financial
conditions were at the time of the meeting. Members discussed the timeframe in which monetary policy affects different aspects of financial
conditions, noting that the full effects of the policy tightening in February and March would take time
to flow through the economy. The most immediate effects could be seen in the established housing market,
where conditions had already softened, but these effects would take some time to influence the demand for
credit. Increases in scheduled mortgage payments also tend to take a few months to affect actual mortgage
payments given required notice periods for increasing minimum repayments and the timing of
borrowers’ repayment cycles. Turning to expectations for the Board’s policy decision, financial markets were ascribing around a
75 per cent chance of an increase in the cash rate target at this meeting; an increase was also
widely expected by market economists. Current market pricing implied a total increase in the cash rate of
60 basis points above its current level by the end of 2026. Economic conditions Members began their discussion of economic conditions by considering the state of the economy prior to the
onset of the conflict in the Middle East. Growth in Australia’s major trading partners had been stronger than expected in late 2025. Members
noted the powerful boost to many east Asian economies from the surge in AI-related investment as much of
the electrical componentry for AI systems is manufactured in Asia. This impetus to growth had been a
major reason why global growth had been more resilient to trade policy developments in 2025 than had been
anticipated. Members observed that domestic economic conditions had evolved broadly in line with the February forecasts
and that recent data had confirmed that capacity and inflationary pressures were elevated early in the
year. Underlying inflation had remained high in the March quarter, though marginally lower than forecast
in February. The slightly lower-than-expected result partly reflected outcomes for expenditure categories
that tend to be volatile; inflation in categories that provide more insight into domestic capacity
pressures (such as market services) had been close to expectations. Most indicators of the labour market
had been little changed since the March meeting and had affirmed the staff’s judgement that
aggregate conditions were still a little tight relative to full employment. However, a few indicators had
softened slightly, including liaison measures of firms’ hiring intentions. Members also discussed
data pointing to consumption growth having a little less momentum at the start of 2026 than had been
anticipated. Discussion then turned to the economic effects of the conflict in the Middle East. Energy production and shipping in the region had been severely disrupted, driving sharp increases in the
global prices of oil, liquefied natural gas (LNG) and other key commodities such as thermal coal and some
fertilisers. These disruptions were estimated to have reduced the global supply of oil by around
10 per cent and LNG by around 20 per cent. Even so, the real price of oil was still
well below the levels it had reached on several prior occasions, including following Russia’s
invasion of Ukraine. The rise in fuel prices had already had an impact on inflation and short-run inflation expectations in
Australia. Monthly headline inflation had increased significantly in March, to be 4.6 per cent
in year-ended terms; higher fuel prices had contributed 0.8 percentage points to this total. The
temporary reduction in fuel excise duty from 1 April was expected to have subtracted around
0.5 percentage points from year-ended inflation in April. Members noted that increases in fuel costs would be likely to be passed through to the prices of other
goods and services over time. Many consumer-facing firms in the RBA’s liaison program were reporting
that they had not yet passed through higher costs to their prices, but an increasing share was expecting
above-average price increases over the coming year. This was consistent with the observed increase in
measures of short-run inflation expectations. It was also consistent with staff analysis showing that
pass-through of cost increases to final prices tends to be faster and larger when inflationary pressures
are already high or have been high in the recent past. Measures of long-run inflation expectations
remained consistent with the inflation target, although members discussed the ways in which this could
change. There was little evidence that overall economic activity in Australia had yet been affected significantly
by the conflict in the Middle East. However, survey measures of consumer and business confidence had
fallen sharply since the onset of the conflict, despite a partial recovery. Members discussed the extent
to which this might indicate a materially weaker outlook for activity. They noted that sentiment was
typically only weakly correlated with actual spending and that past research had found only limited
evidence of sentiment being an independent driver of consumption. Members raised the possibility that
particularly large changes in sentiment might have more significant implications if they persist.
However, recent survey and liaison evidence were not yet suggesting a material decline in business
conditions, and timely card-spending data, while volatile, did not yet show a material slowing in
household consumption. Nominal spending at petrol stations had increased sharply but there did not yet
appear to be an offsetting decline in other types of spending. That was consistent with the fact that the
increases in fuel prices so far implied a relatively limited impost on household budgets on average,
though the increases would be quite significant for some households. Economic outlook Members turned to the economic outlook. Given the heightened uncertainty around the duration, severity and
effects of the conflict in the Middle East, the staff had prepared two adverse scenarios to complement
the baseline forecasts. The staff’s baseline forecasts were conditioned on two key assumptions, both derived from financial
market pricing on 29 April: first, that the cash rate would increase by a further 60 basis
points in 2026; and second, that a resolution of the conflict would allow oil prices to recede gradually
over subsequent quarters (albeit to a level well above that prevailing before the onset of the conflict). Under these assumptions, forecast growth in Australia’s trading partners was little changed, as the
drag from global energy supply disruptions was largely offset by the ongoing boost from AI-related
investment (particularly for high-income east Asian economies). Domestically, GDP growth was forecast to
slow materially over the forecast period and be below estimates of potential growth (and below the
forecast in February). Members noted that this forecast slowing reflected the combined effect of weaker
growth in consumption, as higher energy prices squeeze household incomes, and the assumed tightening of
monetary policy. The slowing in GDP growth was expected to result in the unemployment rate rising by more
than expected in the February forecasts, to 4.7 per cent by mid-2028. The staff assessed that
this would leave the labour market with a little spare capacity by the end of the forecast period. Headline inflation was forecast to peak at 4.8 per cent in the June quarter. The baseline
forecast was for it then to ease back to target by mid-2027. However, underlying (trimmed mean) inflation
was expected to remain above 3 per cent at that time and return to 2½ per cent only
in mid-2028. The projections for underlying inflation assumed that fuel-related cost increases were
passed through to other consumer prices over time but that gradually easing capacity pressures (because
of tighter monetary policy) would progressively reduce inflationary pressures. Members noted that, while output growth fell well below estimated potential growth in the baseline
forecast as the conflict in the Middle East and higher oil prices bore down on real incomes, it
nevertheless remained positive (troughing at 1.3 per cent in six to 12 months’ time).
They acknowledged several reasons why the impact of the conflict might be somewhat cushioned, including:
the shock to energy prices in the baseline forecasts was assumed to be partly temporary; the oil
intensity of production in Australia had declined over prior decades; trading partner growth would be
materially supported by AI-related investment; Australia’s national income would benefit from higher
export prices for LNG and thermal coal; and the relatively healthy state of household balance sheets in
Australia would permit many households to smooth their consumption by drawing on savings, if desired. However, there was considerable uncertainty around the possible impact of the conflict on output growth,
particularly given the sharp falls in sentiment. In light of this heightened uncertainty, members also
considered the two adverse scenarios prepared by the staff, in which a longer lasting conflict in the
Middle East results in more significant disruption to global energy supply. The increase in energy prices
in these scenarios is considerably higher and more persistent than in the baseline forecasts. In both
scenarios, this results in the projection for inflation being higher over the year ahead than in the
baseline forecasts. In the first scenario, underlying inflation remains higher than in the baseline
forecasts for the entire projection. However, in the second scenario, underlying inflation moves lower
than in the baseline forecasts by 2028, reflecting an assumption in this scenario that a prolonged
conflict could also be associated with an additional deterioration in global and domestic confidence.
That additional adverse effect on confidence is assumed to flow into materially weaker demand and a more
significant easing in capacity pressures in Australia than in the baseline forecasts. Members noted that
neither scenario includes long-lasting reductions in potential supply in the Australian economy; if these
were to occur, the conclusions would alter. Considerations for monetary policy Turning to considerations for the monetary policy decision, members noted that inflation had been well
above target in the months prior to the onset of the conflict in the Middle East, reflecting capacity
pressures in the economy and a range of temporary factors. The labour market was still assessed as being
a little tight. The data received since the previous meeting had been broadly in line with the near-term
outlook considered in February and did not materially alter the assessment of the economy prior to the
conflict. The conflict had, however, resulted in a pronounced effect on the economic outlook. Headline inflation had
risen materially in the month of March, because of sharply higher fuel prices, and was expected to rise
further in the June quarter. The staff’s baseline forecast was for underlying inflation over the
subsequent two years to be higher than previously expected, remaining above 3 per cent until
late 2027. Conditional on various assumptions, underlying inflation was projected to return to
2½ per cent only in mid-2028. At the same time, the conflict in the Middle East and associated rise in fuel prices had contributed to a
sharp decline in consumer confidence, consistent with a higher cost of living. And financial conditions
had tightened since the start of the year, given the Board’s decisions to raise the cash rate target
in both February and March and a resulting appreciation in the exchange rate. Risk premia in financial
markets had, however, remained low despite the heightened global economic and political uncertainty. In light of these observations, members considered whether to raise the cash rate target by 25 basis
points at this meeting or to leave it unchanged. The case to raise the cash rate target by 25 basis points at this meeting centred on the outlook for
inflation. Members noted the staff’s assessment that capacity pressures remain tight and financial
conditions may not be sufficiently restrictive to return inflation sustainably to target if the cash rate
was held at its present level. Against that backdrop, an increase in the cash rate could provide greater
confidence that underlying inflation would return to 2½ per cent within the forecast period. Members observed that the case to raise the cash rate target would be strengthened if they formed the view
that the risks surrounding the outlook for inflation lay to the upside. One reason to form that view was
if members placed reasonable weight on the prospect of a prolonged conflict in the Middle East and judged
that the potential impact on aggregate demand from that scenario would be insufficient to overwhelm the
inflationary impetus it would impart. Members agreed that monetary policy could not prevent a near-term
increase in the price level as higher fuel prices worked their way through to final prices. However,
monetary policy could limit the risk that this cost shock resulted in a broader and sustained lift in
inflationary pressure, by bringing aggregate demand into closer alignment with aggregate supply and
ensuring medium- to longer term inflation expectations remained anchored. In considering that judgement,
members acknowledged the information from liaison that some firms were actively considering whether to
raise prices and that some expected workers would begin to seek higher nominal wages. Members also observed that their judgement about whether medium- and long-term inflation expectations were
at risk of becoming de-anchored was a consideration in the case to raise the cash rate target. They
discussed the risk of longer term inflation expectations rising, and acknowledged that the prolonged
period over which underlying inflation had been above 3 per cent may add to the risk that
longer term expectations could become de-anchored. Finally, members considered how an increase in the cash rate target to contain inflation might also
balance the risks to the Board’s employment objective. They agreed that the conflict in the Middle
East was likely to see economic activity and labour demand soften somewhat, worsening the short-term
trade-off between the Board’s inflation and employment objectives. The questions were how large this
softening would be and what would be required to bring inflation back to target in a timely way. The case to keep the cash rate unchanged at this meeting centred on different judgements about the extent
of capacity pressure and how restrictive financial conditions were, how a prolonged conflict in the
Middle East would affect the Board’s objectives and the extent to which longer term inflation
expectations remained anchored. Members noted that it would be appropriate to keep the cash rate target unchanged if they assessed that
capacity pressures were not extensive or that financial conditions were already sufficiently restrictive
to return inflation to target should there be a swift resolution of the conflict in the Middle East.
Members observed that the forecasts prepared in February, prior to the onset of the conflict, saw
inflation declining to just above the mid-point of the target range on a conditioning assumption of a
little more than two increases in the cash rate in 2026. They noted that the Board had already raised the
cash rate target twice this year, and considered it was therefore possible that financial conditions were
already close to being sufficiently restrictive to address the excess demand prevailing before the onset
of the conflict. This view might be supported by a judgement that the data received since the February
meeting had indicated either less excess demand or less strength in the economy than previously assessed,
or at least alleviated earlier concerns that the labour market may be tightening. An additional, or alternative, argument for leaving the cash rate target unchanged at this meeting would
be if members judged that the impact on aggregate demand of a prolonged conflict in the Middle East would
be sufficient to outweigh the inflationary impetus it would impart. Members noted that this view could be
strengthened if the sharp falls in consumer and business sentiment proved to be indicative of future
spending, to the extent that those households with relatively strong balance sheets prove reticent to use
them to sustain their spending. In light of this considerable uncertainty about the potential effects of
the conflict, and given monetary policy had already been tightened twice in 2026, waiting for a clearer
assessment of how the conflict might affect economic activity could be an appropriate course of action.
Members noted that several other central banks had chosen to hold their policy rates unchanged pending
greater clarity on the likely effects of the conflict. Finally, members noted that the case to leave the cash rate target unchanged at this meeting would be
strengthened if they formed the view that medium- and long-term inflation expectations would remain well
anchored even if policy were not tightened. They noted that evidence for this view could come from
inflation expectations having remained well anchored earlier in the decade, even as inflation reached
almost 8 per cent (though monetary policy was being tightened at that time). Having considered these various arguments, most members judged that the case to raise the cash rate target
by 25 basis points at this meeting was the stronger one. They emphasised that underlying inflation
was projected to be above target for an extended period across a range of scenarios for how the conflict
in the Middle East might develop. Given this outlook, these members determined that the risks to
achieving the Board’s inflation objective had risen and judged that they were not confident that, at
4.1 per cent, the cash rate would be sufficient to mitigate these risks. Most members also judged that an increase in the cash rate target at this meeting would best balance the
Board’s two objectives, accepting that the shorter term trade-off between these had worsened. For
these members, while capacity pressures in product and labour markets were likely to ease over the
forecast period, some additional loosening was appropriate to respond to the more adverse outlook for
inflation. They noted that if demand were to slow by more than expected, it would see a more rapid return
of inflation to target than projected by the staff; on the other hand, if the cash rate target were left
unchanged and the economy proved to be stronger than forecast, it would extend the already long period
over which inflation had been above target. By contrast, one member placed more weight on the arguments for leaving the cash rate target unchanged,
judging that capacity pressures prevailing before the conflict were somewhat less than the staff had
assessed. This member also assessed the risk of a prolonged conflict that weighed more heavily on demand
to be higher. Taken together, this led the member to expect inflation to be likely to return to target in
an appropriate timeframe without additional tightening of monetary policy. Finally, the member in the
minority judged that there was not yet sufficient evidence to be concerned about longer term inflation
expectations becoming less anchored, particularly in view of the Board’s commitment to its inflation
objective having been demonstrated by the 50 basis points of tightening already delivered this year.
On the basis of these considerations, the member judged that holding the cash rate target unchanged,
while awaiting additional evidence on how the Australian economy would respond to the conflict, would
best balance the risks to the Board’s two objectives. The member noted that this approach was
consistent with that adopted by other central banks. Having decided by majority to raise the cash rate target by 25 basis points, members considered what
their deliberations implied for upcoming decisions. Members judged that, while it was still uncertain,
financial conditions would probably be somewhat restrictive after this decision. They therefore agreed
that the decision would give the Board space to see how the conflict in the Middle East develops and
Australian households and businesses respond. They also agreed that any assessment of how the incoming
data could change the outlook should acknowledge that monetary policy could not alter the near-term
trajectory of inflation and, additionally, that output growth would likely be lower than potential growth
for some time. 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. The decision The Board resolved by majority to raise the cash rate target to 4.35 per cent. Eight members
voted in favour; one member voted to leave the cash rate target unchanged at 4.10 per cent. Framework for additional monetary policy tools Members discussed the framework for additional monetary policy tools being developed in response to
Recommendation 3.3 of the Review of the Reserve Bank of Australia. The aim of the framework is to
bolster the RBA’s readiness for conducting monetary policy if interest rates fall to very low levels
again. The framework builds on a range of inputs, including work discussed by the Reserve Bank Board in
2019 on unconventional monetary policy, past research, insights from peer central banks and external
expertise. Members noted that the framework comprises three parts: principles outlining the Board’s
intended approach to the design and potential use of additional tools; a decision-making process to
identify the key judgements and decisions the Board would likely need to make; and a suite of potential
tools with practical guidance about how each might align with the stipulated principles, including in
terms of risk and governance. Members agreed that the proposed framework covers the right matters and would equip the Board well if
additional monetary policy tools were needed. They commended the extensive review and challenge process
adopted to develop the framework, including close engagement with external experts. Members agreed to
seek feedback on the governance and risk aspects of the framework from the Governance Board at its next
meeting prior to granting their formal approval. They supported publication of the framework in due
course.