Minutes of the Monetary Policy Board Meeting
Hybrid – 28 and 29 September 2026
Members participating
Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair),
Marnie Baker AM, Melinda Cilento, Renée Fry-McKibbin, Carolyn Hewson AO,
Bruce Preston, Iain Ross AO, 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 Department), Sally Cray (Chief
Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head,
Economic Analysis Department), Penelope Smith (Head, International Department)
Gideon Holland (Deputy Head, Financial Stability Department) for discussion of the item on liquidity
operations
Financial conditions
Members began their discussion by noting the increase in market expectations for near-term policy rates in
a wide range of advanced economies. Although the scale of the increase had differed somewhat across
countries, the pick-up had been underpinned by a range of common factors: resilient economic activity,
persistent underlying inflationary pressures and higher oil prices as the Middle East conflict broadened
and escalated. Several central banks abroad had already raised their policy rates, and market pricing
implied an expectation that monetary policy would be tightened in most major advanced economies over the
course of 2026 and 2027.
In Australia, market expectations for the cash rate target had also risen since the previous meeting,
though by less than in some other countries. This followed stronger-than-expected data on inflation and
activity in Australia, higher oil prices and recent RBA communication. Market pricing implied an
expectation that the cash rate target would be increased at this meeting, followed by an additional
increase of around 15 basis points by the end of the year and another 30 basis points in the
first half of 2027. All surveyed market economists expected an increase in the cash rate target at this
meeting and several expected a further increase later in the year.
Longer term government bond yields had increased notably across advanced economies since the previous
meeting. Despite the sharp rises in yields, market functioning had remained orderly. Members observed
that the rise in longer term bond yields mainly reflected a rise in real yields, rather than higher
long-term inflation expectations (which remained broadly consistent with central bank targets). That was
consistent with market expectations that monetary policy would do enough to reduce inflationary
pressures. Higher longer term real yields in turn appeared to reflect some combination of an increase in
expected long-run neutral rates and term premia. Members noted that a rise in term premia may have been
due to increased debt issuance by both governments and companies developing artificial intelligence (AI)
infrastructure and capabilities, compounded by changes in the investor base for government debt and
greater economic and policy uncertainty. They observed that the split between neutral rates and term
premia mattered for assessing financial conditions, because, for a given path of short-term rates, higher
neutral rates implied looser financial conditions whereas higher term premia implied tighter financial
conditions. However, members agreed that it was difficult to assess the split with any accuracy, because
estimates of neutral rates and term premia were subject to considerable uncertainty and revision.
Australian government bond yields had also risen materially, reflecting higher real yields and broadly
unchanged longer term inflation compensation (which remained consistent with the inflation target). As
was the case in other countries, the pick-up in real yields appeared to reflect some combination of
higher neutral rates and higher term premia. Members noted that the effect of higher term premia on
private domestic financial conditions was likely to be more modest in Australia than in some other
countries because of the prevalence of shorter term funding (particularly for the household sector). By
contrast, members noted that to the extent bond yields were rising because of a perceived increase in the
neutral rate, that would contribute to an easing in financial conditions in Australia if the cash rate
were not changed.
Model-based estimates of the neutral cash rate implied that the current stance of policy was somewhat
restrictive. The cash rate was around the top of the range of central estimates from these models, while
the market-implied future path lay above that range. Members considered the tentative signs that the
neutral rate in Australia had again shifted higher, having already moved up materially since the
pandemic, to be above where it was when the cash rate was previously at its current level. However,
members acknowledged that estimates of neutral were highly uncertain and therefore did not provide a
direct guide for monetary policy.
Members discussed the potential implications of a rise in the global neutral rate that was not fully
reflected in Australian interest rates. One implication of such a scenario could be downward pressure on
the Australian dollar exchange rate. Members noted that this was an illustration of the principle that
while a floating exchange rate allows monetary policy to respond independently from other countries, it
does not insulate Australia against secular shifts in global equilibrium interest rates.
Consistent with this, the Australian dollar had depreciated a little in trade-weighted terms since the
previous meeting. However, it remained around 5 per cent higher since the start of the year,
despite a narrowing in Australia’s yield differential with other economies over that period. Members
noted that this left the real trade-weighted index of the Australian dollar somewhat above the range of
estimates of its longer run equilibrium level, potentially adding a little to the restriction coming from
prevailing interest rates alone.
Members then turned to consider broader indicators of the tightness of financial conditions. They noted
that corporate funding was still readily available, for firms both in Australia and abroad, despite
higher government bond yields and persistent geopolitical risks. Corporate bond spreads and equity risk
premia remained low across the world, and global bond issuance had been significant. Business credit
growth in Australia remained very strong and broadly based across sectors, though borrowing to fund data
centre construction had been particularly strong to date. However, Australian equity prices had declined
by around 5 per cent since the previous meeting. This had partly been in response to weaker
earnings expectations for key sectors in the Australian index, particularly the banking, real estate and
consumer discretionary sectors.
Housing-related indicators suggested financial conditions were fairly tight. Housing prices had declined
by more than expected and new housing loan commitments had fallen sharply, led by lending to investors.
Tighter monetary policy was contributing to these developments. Scheduled mortgage payments had increased
to around 10 per cent of household disposable income, around their 2024 peak, while extra
payments into offset and redraw accounts were a little below their longer run average. But weaker housing
conditions were also likely to reflect recent tax changes and some reversal of the earlier strong rise in
housing prices.
Taken together, these developments led members to judge that Australian financial conditions remained
somewhat restrictive. However, the extent of restriction remained uncertain and various indicators of
financial conditions provided different signals.
Economic conditions
Members began their discussion of economic conditions by considering how the upside risks to inflation
they had identified in August had evolved. These risks included a possible re-escalation of the Middle
East conflict, the inflationary impetus from the global AI boom and greater domestic capacity pressures
than assumed.
The risk of a re-escalation of the Middle East conflict had since crystallised. Global energy prices were
significantly higher than assumed in August, reflecting ongoing disruptions to shipping, damage to
refineries and low inventory levels. Higher energy prices had pushed headline inflation up in most
economies over preceding months. Although pass-through from higher energy prices to other consumer prices
abroad had been limited so far, members noted that underlying inflation in many countries was already
above target for other reasons, and higher wholesale energy prices meant it was likely that the indirect
effects on consumer price inflation would ultimately be larger than previously thought. The recent and
prospective policy tightening by several central banks was in response to concerns that this impetus to
inflation could prove to be more persistent than previously thought.
Members discussed the evolving evidence of how the global AI demand boom was influencing prices, which had
also previously been identified as an upside risk to inflation in Australia. They noted that the AI boom
was driving stronger GDP growth in economies that form key parts of the AI supply chain, particularly
Australia’s Asian trading partners. As a result, growth in Australia’s major trading partners
had accelerated and been stronger than expected over the preceding year. Members observed that this had
occurred despite economic headwinds from the Middle East conflict and ongoing changes to global trade
policy. With global demand growing rapidly and supply constrained, prices for some key components in the
AI supply chain had risen sharply in preceding months. These price rises had increasingly been flowing
into producer and consumer prices in some advanced economies. Members noted that there were also some
signs of technology-related price pressures emerging in Australia, including sharp increases in software
and other IT costs reported by liaison contacts.
Members turned to the third upside inflation risk, i.e. that domestic capacity may be more limited than
assumed.
Although recent data had broadly confirmed the staff’s earlier assessment that growth in demand had
eased to below-trend rates in the first half of 2026, GDP growth in the June quarter had been a little
stronger than expected. This had been driven primarily by an upside surprise in private business
investment, which had increased by more than 10 per cent over the year. Members noted that the
strength in investment had been broadly based, though with significant contributions related to the
construction of data centres and renewable energy facilities. By contrast, growth in household
consumption had slowed in the first half of 2026, as expected, to a below-trend pace. This slowing was
consistent with an easing in the growth of household income from previously quite strong rates in early
2025. Members discussed the possibility that consumption growth could remain relatively subdued for some
time, given the economy’s constrained supply capacity, the need for a period of below-trend growth
in aggregate demand and community expectations for other components of demand to grow. Consistent with
that outlook, members noted that the staff expected consumption to grow at a moderate rate in the
September quarter, though recent timely indicators had been divergent. Established housing prices had
continued to fall more quickly than expected in preceding months, and the staff now assessed that the
cumulative fall in housing prices is likely to be greater than had been assumed in the August forecasts.
Members discussed the economic effects of falling housing prices, noting that the effects of reduced
wealth on consumption tend to be relatively modest.
Labour market conditions had eased gradually since the previous meeting, consistent with the slowing in
growth in domestic demand. The unemployment rate had increased to 4.6 per cent in August,
alongside a rise in labour force participation. Members noted that considerable caution is warranted when
interpreting the current official labour force data, because of methodological changes to the survey.
They discussed how to interpret more forward-looking indicators of labour demand; most indicators pointed
to stability in labour market conditions but others (such as some measures of job advertisements)
appeared to be strengthening a little. Taken together, the staff’s judgement was that these leading
indicators pointed to broadly stable labour market conditions in the near term.
Members assessed the signal from the July inflation data, which had been stronger than expected,
particularly for market services. Members noted that these data had led the staff to expect higher
underlying inflation in the September quarter than had been forecast in August. Domestic petrol and
diesel prices were 13 per cent higher than had been forecast in August, driven by
higher-than-expected global energy prices. More broadly, the share of items with prices rising by more
than 2½ per cent was well above average. While the monthly data can be volatile, the
staff’s preliminary assessment – based on sub-components of the consumer price index –
was that the upward surprise in underlying inflation was more likely to reflect greater domestic capacity
pressures than unexpectedly strong pass-through of cost increases flowing from the Middle East conflict.
Members concluded by discussing what these developments implied for their judgement about domestic
capacity pressures and their impact on the inflation outlook. The unemployment rate was now close to the
assessment of full employment embedded in the August forecasts, but the staff were increasingly
questioning whether the rate of unemployment that is consistent with the inflation target was higher than
previously assessed (which would imply greater capacity pressures at present). One indicator consistent
with such a hypothesis was that growth in unit labour costs was above what was consistent with inflation
being at target. Members noted that this pick-up had been driven by subdued productivity growth rather
than particularly strong nominal wage earnings. Another was that business liaison and surveys continued
to record widespread reports of elevated cost growth and few expectations that those pressures would ease
significantly over the year ahead. Survey measures also pointed to a drift higher this year in short- to
medium-term inflation expectations of firms. The staff’s assessment that the stronger-than-expected
underlying inflation data in July was likely to be more reflective of greater domestic capacity
constraints than pass-through of costs related to the Middle East conflict added to this view. Members
discussed the structural factors that could potentially explain lower supply capacity, including the
persistent anaemic rate of productivity growth.
Members judged that these domestic and global developments pointed to an increase in the risk of
persistently elevated inflation.
Financial stability assessment
Members began their semi-annual consideration of financial stability by observing that the balance sheets
of household borrowers generally remained sound. Housing loan arrears rates were low and loan impairments
were around historical lows.
Indicators of indebted households’ ability to service their loans remained healthy. The share of
owner-occupier borrowers currently facing a cash flow shortfall was estimated to be less than
2 per cent, well below its peak in
2023–2024
. Members noted
that this share was predicted to remain low even in a scenario involving plausible further increases in
inflation, the cash rate target and unemployment. Mortgage borrowers still held substantial savings
buffers, with the median borrower holding savings equivalent to just under one year of scheduled mortgage
repayments in the lowest income quintile and almost two years in the highest income quintile. The share
of borrowers drawing on these buffers was also around its historical average. Most borrowers also
retained significant amounts of equity in their home. Members observed that very few borrowers were in
negative equity and that staff analysis showed that this would likely remain the case even in a scenario
where housing prices fell by 20 per cent.
Members discussed the factors contributing to this resilience. One was that real household disposable
income per capita had grown quite strongly since early 2024. Another was a prolonged period of prudent
lending standards. However, members acknowledged that some borrowers experiencing cost-of-living
pressures were having to curtail discretionary consumption. They also observed that households with
mortgages were, on average, financially stronger than others. Low-income households who rent were more
likely to be experiencing financial pressure, given they are most exposed to the adverse effects of
inflation.
Members considered whether risks in housing lending had transferred to the non-bank sector and concluded
this was unlikely. However, non-bank lending to businesses had grown strongly. Part of this reflected
private credit, which had increased from a low base. Members noted the issues for market conduct and
investor protection that were associated with private credit and which were a focus of attention for the
Australian Securities and Investments Commission. Nonetheless, this lending did not yet appear
sufficiently large or connected to the broader financial system to pose a material risk to system
stability. More generally, business borrowers were assessed as generally being able to manage a period of
elevated cost pressures, although conditions were more challenging in certain sectors.
Members turned to discussing the risks emanating from abroad, which were judged to be more material than
domestic cyclical risks.
One growing vulnerability related to global government bond markets. The increase in global bond yields
had so far been orderly, but the share of price-sensitive investors in these markets had risen over time,
alongside growing use of leverage. Such developments were being compounded in some countries by high and
rising public debt levels and the absence of credible medium-term fiscal frameworks. The risk of
sovereign debt default was judged to be low and members observed that only a small proportion of the rise
in interest rates was a signal of sovereign debt concerns. Nonetheless, a more disorderly market
adjustment, with adverse consequences for global economic outcomes and/or financial stability, could not
be ruled out – although the scale and timing of such an adjustment is difficult to predict. Members
noted that the Australian financial system had a good degree of resilience and remained well placed to
manage a shock to global bond markets. In particular, there had been a significant decline over time in
Australian governments’ and banks’ use of foreign funding, and the RBA had tools available to
support liquidity in Australian government bond markets if required.
Low risk premia in major equity and credit markets were another vulnerability for global financial
markets, if they were to move sharply higher in response to an adverse shock. One possible trigger for an
abrupt repricing in global financial markets could be a shift in sentiment towards the AI boom.
AI-related investment was leading to a large accumulation of debt, both to date and prospectively. Some
debt-like commitments were also becoming increasingly opaque. Leverage currently remains quite subdued,
given strong earnings growth, but members noted that market pricing of some AI-related companies embodied
very favourable assumptions about long-run earnings growth that could be difficult to sustain even if the
technology were ultimately successful. In considering the potential implications if market-wide asset
prices were to decline abruptly, members noted that the superannuation industry is generally well placed
to withstand a period of heightened demand for cash. It was nevertheless important that funds continued
to strengthen their liquidity risk management practices.
Members concluded their discussion of financial stability by considering the growing operational threats
to financial stability, including those associated with geopolitics, and how they might interact with
traditional financial risks. Rapid developments in AI were amplifying these challenges, which have been a
focus of the Council of Financial Regulators for some time. Members noted that an outage at a common
service provider – such as a key financial market infrastructure or technology provider –
could have widespread effects on the functioning of the financial system. In this context, it was
critical that financial institutions and financial market infrastructures focus on building resilience to
operational risk, including through regular testing of contingency and recovery arrangements.
Summing up, members agreed that the considerable resilience of borrowers and financial institutions in
Australia implied that financial stability considerations were not currently constraining the setting of
monetary policy. At the same time, members observed that threats to global financial stability were
mounting, including because of factors emanating from outside the financial system. These threats would
have implications for financial stability in Australia were they to materialise.
Considerations for monetary policy
Members began their consideration of the policy decision by noting that inflation remained too high. The
forecasts prepared in August were for inflation to return to the midpoint of the target range by around
late 2027. That depended on economic growth slowing sufficiently below the growth rate of the
economy’s potential supply to create spare capacity, and on assumptions that productivity growth
would pick up and inflation expectations would be stable. Members recalled that, at the previous meeting,
they had judged the risks around the outlook for inflation to be tilted to the upside. This reflected
concerns about the potential for global cost pressures to build if the Middle East conflict persisted
and/or pressures associated with the global AI boom widened, and about the limited margin of spare
capacity domestically.
Since August, some of these concerns had materialised. The Middle East conflict had broadened and oil
prices were now significantly higher than had been assumed in the forecasts. There were also growing
indications of intensifying global cost pressures, particularly those associated with the extraordinary
demand for AI. And domestically, there had been further evidence that capacity pressures may be greater
than previously assessed. The recent inflation outcome had exceeded expectations and liaison revealed
widespread cost pressures that firms were either passing into the prices of their goods and services or
looking to do so. Short-term measures of inflation expectations remained elevated. And GDP growth had, at
the margin, been stronger than expected. The labour market had eased broadly as anticipated but leading
indicators were broadly stable.
Members agreed that financial conditions were restrictive but that some indicators could imply that the
extent of restriction was only modest. Bond yields had risen sharply over preceding weeks, owing in part
to rising term premia but also at least owing in part to market participants’ assessment that the
global neutral real interest rate had risen. Several central banks had raised their policy rates and
markets expected further increases over the period ahead. Members noted that, while monetary policy in
Australia had been tightened earlier than in these other countries, future trends in interest rates in
Australia relative to other countries would also have a bearing on the exchange rate, with implications
for domestic inflation.
In light of these observations, members considered whether to raise the cash rate target by 25 basis
points.
The strongest argument for raising the cash rate target at this meeting was that several of the upside
risks identified in August had since materialised or were building.
Members noted that there had been additional signals from the July inflation data that domestic capacity
pressures may be more extensive than assumed in the August forecast. That implication was supported by
increasingly prevalent messages from liaison about broad-based cost pressures and growth in unit labour
costs remaining higher than judged to be consistent with the inflation target (given continued weakness
in productivity growth). When combined with the slightly stronger-than-expected growth in GDP and signs
from leading indicators that labour demand was proving resilient, it was reasonable to conclude that
excess demand in the economy was greater than members had previously assessed.
International developments added to the view that upside risks to the inflation forecast had materialised.
The Middle East conflict had escalated and oil prices were substantially above the level assumed in the
August forecasts. More broadly, members noted that global cost pressures appeared to be building. Some of
this came from the indirect effects of higher oil prices. Another key driver was excess demand for
AI-related products. Members noted that there were also pressures from developments in agricultural
commodities.
A second argument for increasing the cash rate target at this meeting was that responding in a timely
manner to additional cost pressures would best balance the Board’s inflation and full employment
objectives. Members acknowledged that waiting for further confirmation of the outlook for inflation could
be costly, given that inflation had already been above target for an extended period and there were
concerning indications from surveys and liaison of a growing risk that medium-term inflation expectations
in the business community may be rising. At the same time, members noted that leading indicators
suggested that the risk of a sharp slowing in economic activity in the near term appeared quite low.
Household and business balance sheets generally appeared to have scope to buffer the impact of higher
interest rates. Business investment was showing considerable resilience and leading indicators showed no
signs of any sharp near-term weakening in the labour market. Members also noted that growth in
consumption would need to be subdued for some time if inflation was to return to target, given strong
growth in demand elsewhere in the economy and the starting position of excess demand.
A third argument to increase the cash rate target was that its current level might not be sufficient to
bring the economy back to balance within a reasonable timeframe, even if the identified upside risks to
inflation did not materialise fully. Members acknowledged that if the signals from financial markets of a
potentially higher global neutral interest rate were correct, it would imply that the current cash rate
target of 4.35 per cent was less restrictive that it had been two years earlier. Moreover, if
monetary policy in Australia was unchanged, recent and prospective policy tightening by other central
banks could cause financial conditions in Australia to loosen via a depreciation of the exchange rate.
Members briefly considered the arguments in support of leaving the cash rate target unchanged. These
rested primarily on the possibility that downside risks to activity and employment could prove larger
than expected. One reason to assess that was if members judged that falling housing prices could have a
larger effect on household spending than assumed. However, scenario analysis suggested that even
relatively large falls in housing prices would have only modest direct effects on activity and spending.
Another was the potential for heightened uncertainty associated with the Middle East conflict to weigh on
demand. And a third was that the effects of the tightening in monetary policy earlier in the year might
prove to be larger than factored into earlier forecasts.
Having considered these arguments, all members judged that it was appropriate to increase the cash rate
target by 25 basis points at this meeting. They noted that the August forecasts required a number of
favourable developments to occur for inflation to return to target within the projected timeframe and
that it no longer appeared likely all of these would eventuate. Members expressed their concern that
excess demand was greater than previously assessed. And they considered it prudent to reinforce the
anchoring of medium-term inflation expectations, given the backdrop of a prolonged period of above-target
inflation, the indications from liaison of persistent cost pressures and an economy that, while slowing,
continued to display a degree of resilience.
In reaching that conclusion, members acknowledged that the trade-off between inflation and full employment
had deteriorated because of global cost pressures. They confirmed that their strategy was still to return
inflation to target in a timely manner, while preserving as many of the gains in employment as possible.
However, executing this strategy in an environment of more persistent adverse supply shocks would require
accepting slower growth in demand and employment than would otherwise be the case. Members added that the
Board’s task was to stabilise medium-term inflation at the target even if part of the medium-term
persistence in inflation is driven by factors beyond the influence of monetary policy.
Finally, members discussed the challenges of judging how large the upside risks to inflation were or could
become. They noted that the outlook for inflation would depend, among other things, on developments in
the Middle East, the path of external demand, the extent of domestic capacity pressures and on how that
influenced the pass-through of cost shocks and the evolution of inflation expectations. Members noted
that it was possible these factors could continue to place upward pressure on inflation. Against that
backdrop, members agreed that they would remain attentive to incoming data and the evolving assessment of
the outlook and risks when making their decisions. The Board will remain focused on its mandate to
deliver price stability and full employment and will continue to do what it considered necessary to
achieve that outcome, including increasing the cash rate target further if required.
The decision
The Board decided unanimously to raise the cash rate target by 25 basis points to
4.60 per cent.
Liquidity operations
As a further step in the evolution of the RBA’s liquidity operations framework, members considered a
proposal to offer liquidity over longer maturities through regular term repo auctions. Members noted that
the proposal reflected work undertaken over an extended period as part of the ongoing enhancement of the
RBA’s operating framework. The Board endorsed the establishment of Term Repo Operations to
complement the RBA’s existing standard liquidity facilities. Members noted that further information
about the purpose and design of Term Repo Operations would shortly be announced. 1
It was
envisaged that Term Repo Operations would be operational in 2027.
Endnote 1
This information was subsequently released; see
https://www.rba.gov.au/mkt-operations/resources/tech-notes/term-repo-operations.html
.