Minutes of the Monetary Policy Board Meeting
Sydney – 10 and 11 August 2026
Members present
Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair),
Marnie Baker AM, Renée Fry-McKibbin, Ian Harper AO, Carolyn Hewson AO,
Bruce Preston, Iain Ross AO, Jenny Wilkinson PSM
Others present
Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial
Markets)
Anthony Dickman (Secretary), David Norman (Deputy Secretary)
Meredith Beechey Osterholm (Head, Monetary Policy Strategy Department), Sally Cray (Chief
Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head,
Economic Analysis Department)
Brad Jones (Assistant Governor, Financial System), Andrea Brischetto (Head, Financial Stability
Department) and Richie Evans (Acting Senior Manager, Financial Stability Department),
for discussion of the item on macroprudential policy advice
Financial conditions
Members commenced their discussion by considering the outlook for central bank policy rates globally.
Market participants expected policy rates in many advanced economies to rise over the coming
18 months, although by differing amounts. This reflected concerns about persistent underlying
inflationary pressures, notwithstanding recent inflation outcomes generally having been a little lower
than expected. Several central banks had already tightened policy during 2026. Members noted that
expected increases in policy rates were larger where monetary policy was more accommodative, such as in
New Zealand, Canada and Japan, and smaller elsewhere, such as in Australia, the United States and the
United Kingdom. In the United States, resilient demand and persistent inflation had supported a higher
expected path for policy rates over time, although the most recent Federal Reserve communication had been
interpreted by market participants as reducing the likelihood of a policy rate increase in the near term.
Yields on long-term bonds issued by governments of most advanced economies had risen since the start of
the year. The rise in yields on Australian government securities had been smaller than for some other
sovereign bonds. Members noted that longer term yields had risen most noticeably in the United States and
Japan, reflecting a larger increase in both policy rate expectations and implied risk premia. Measures of
near-term inflation compensation from shorter term bonds had eased in most countries, including
Australia, as oil prices had retraced from their earlier peaks. Measures of longer term inflation
compensation in Australia were still consistent with the inflation target.
Members noted that aggregate volatility and risk premia in financial markets remained low, despite
uncertainty associated with the conflict in the Middle East. Global equity prices had generally risen and
corporate bond spreads had remained low over preceding months, supported by strong earnings and
apparently limited concern among market participants about the effects of the conflict on global economic
activity. Nonetheless, the equity prices of companies linked to the provision of artificial intelligence
(AI) had been volatile and spreads on bonds issued by some of these companies had widened. This reflected
significant fundraising for investment in AI, a reassessment of the prospective returns from investment
in data centres (given broader developments in the market for AI services) and the unwinding of some
highly leveraged positions in certain AI-related equities. In Australia, equity price indices had risen
since May, despite a modest decline in expected earnings, though had underperformed many other markets
over 2026.
In China, weakness in household consumption and the property market continued to weigh on aggregate
private demand. Property market weakness and slower growth in investment had also weighed on demand for
steel. This had been offset by increases in public infrastructure spending and exports. The focus of
authorities’ support continued to be bond-funded fiscal spending and policies directed towards
advanced manufacturing, AI, robotics and green technologies. Monetary policy in China was judged to be
playing a limited role in stimulating economic activity.
The Australian dollar had depreciated by around 1 per cent on a trade-weighted basis since the
May meeting, in response to a narrowing in yield differentials and lower commodity prices. However, it
was still around 5 per cent higher than at the start of 2026. The nominal trade-weighted index
remained broadly consistent with estimates of its long-run equilibrium level. As a result, it did not
appear to be providing a source of variation that was additional to the standard transmission of monetary
policy.
Against this backdrop, members turned to consider the stance of monetary policy in Australia.
Members noted that financial conditions in Australia had tightened in response to three increases in the
cash rate in 2026 and were now judged by the staff to be somewhat restrictive. Banks had passed through
these cash rate increases to deposit and lending rates. The current cash rate target was at the top of
the range of model- and market-based central estimates of the nominal neutral rate. Medium- and long-term
real interest rates derived from inflation-linked bonds were also around their highest level in over
15 years, though short-term real yields were significantly lower than long-term yields because of
higher short-term inflation expectations. Members discussed the role of term premia, policy expectations
and the real neutral interest rate in driving real interest rates. They concluded by noting that
assessments of the neutral rate are inherently uncertain and do not provide a direct guide for monetary
policy.
Other indicators were also consistent with financial conditions being somewhat restrictive. Demand for new
housing loans had declined significantly, particularly from investors, though liaison suggested that
competition among lenders for high-quality borrowers remained strong. Housing prices were also falling
after an extended period of strong growth, though this reflected a range of factors beyond monetary
policy transmission alone. By contrast, business debt had continued to grow strongly despite higher
borrowing costs. Business funding was still readily available from banks and capital markets. Growth in
business credit had been broadly based across the business sector.
Scheduled mortgage payments, as a share of household disposable income, had risen to near their 2024 peak
and were expected to increase a little further as earlier increases in the cash rate flowed through.
Members noted that many households with mortgages tended to have sizeable pre-payment buffers they could
potentially draw upon if needed to help smooth consumption. Extra mortgage payments had eased but were
still around their long-run average (as a share of disposable income).
Members noted that, since May, financial markets had reduced their expectations for further monetary
policy tightening, which, other things equal, would have eased financial conditions marginally. That
decline followed weaker-than-expected domestic data and declines in global oil prices. Pricing implied
that market participants saw little prospect of an increase in the cash rate target in August and around
half a chance of a further 25 basis point increase by the end of 2026. Most market economists
expected no further increase in the cash rate target, though a small number still expected another
increase would be needed to stem persistent domestic inflation pressures. Some market economists expected
the cash rate target to be lowered over the first half of 2027.
Economic conditions
Members’ discussion moved to the global economy. They began by considering developments surrounding
the Middle East conflict, for which there had been some prospect of normalisation at the time of the June
meeting (following the announcement of an interim peace agreement between the United States and Iran).
However, the conflict was ongoing and continued to disrupt energy production and shipping in the region.
Oil and most related commodity prices remained above pre-conflict levels, although they had been volatile
over preceding months. Looking through this volatility, oil prices at the time of the meeting were
broadly in line with the staff’s assumption in their May forecasts. However, members noted that
global inventories of oil and oil products were much lower than at the start of the conflict, creating an
upside risk to energy prices if supply disruptions continued.
Overall GDP growth in Australia’s major trading partners had continued to be stronger than expected.
For some of Australia’s Asian trading partners, the boost to manufacturing activity from global
AI-related investment had been particularly pronounced and had outweighed the negative effects of the
Middle East conflict and changes in US trade policy since early 2025.
Members noted that higher energy prices and strong demand for goods used to develop AI services were
adding to inflationary pressures in some economies. While core measures of consumer price inflation had
not yet risen significantly following the onset of the Middle East conflict, members discussed the
potential for these and other global developments to generate a more pronounced inflationary impulse. If
so, this could push up Australian import prices and, in turn, consumer prices.
Turning to the domestic economy, members noted that inflation in Australia remained well above target,
even after easing unexpectedly in year-ended terms in the June quarter. The largest undershoot of
expectations was in headline inflation, due to lower-than-expected retail fuel and travel prices. By
contrast, underlying inflation, as measured by the trimmed mean, had increased to 3.6 per cent
in the quarter, only slightly lower than expected. Members noted that the strength in underlying
inflation likely reflected a combination of broad capacity pressures – as evidenced by ongoing
elevated inflation for categories such as market services – and some pass-through of cost increases
related to the Middle East conflict.
Members noted that evidence of the pass-through of cost pressures from the Middle East conflict had been
mixed. Higher input costs had contributed to increases in the prices of new dwellings in the June
quarter. Elsewhere, pass-through appeared to have been a little lower in the quarter than assumed in the
May forecasts. The staff continued to expect broader pass-through over coming months, reflecting
prevailing capacity pressures and still-elevated short-term inflation expectations (despite some easing
since the previous meeting). The potential for a more prolonged conflict in the Middle East posed upside
risks to this expectation. However, the extent of pass-through would depend on the degree to which firms
were constrained by customers’ price sensitivity and therefore absorbed margin pressures.
Overall demand growth looked to have moderated a little since the start of the year, broadly as
anticipated. As expected, underlying momentum in household consumption appeared to be easing only
gradually. This was despite very weak consumer sentiment, but consistent with most households’
balance sheets remaining in good shape. Business investment had increased very strongly in the March
quarter, driven by growth in data centre fit-outs, and surveyed business conditions had declined only
modestly since then. By contrast, conditions in the established housing market had eased by more than
anticipated in May and national housing prices had declined by around 1½ per cent from their
March peak. Members noted that this easing appeared to reflect the combined effect of increases in the
cash rate, tax changes announced in the Federal Budget and weaker sentiment (with the relative importance
of each difficult to discern precisely). They also observed that the recent easing in housing prices
followed a period of very significant increases; housing prices were still around 50 per cent
higher than at the onset of the pandemic and 5 per cent higher than a year earlier.
In the labour market, conditions had eased by a little more over preceding months than had been expected.
However, the unemployment rate remained low and conditions were still considered a little tight. Leading
indicators were consistent with only limited easing in labour market conditions in the near term.
Members considered the implications of these developments for spare capacity. Slower growth in aggregate
demand was helping to bring potential supply and aggregate demand back into balance, but members assessed
that some capacity pressures remained in the labour market and economy more broadly. That also reflected
weak productivity growth, which continued to constrain the capacity of the Australian economy to supply
goods and services. Model-based assessments of capacity pressures were consistent with recent information
from liaison and evidence from business surveys. Firms across a range of industries reported continued
labour and non-labour cost pressures and challenges sourcing suitable staff.
Economic outlook
Members turned to the outlook for economic activity and inflation.
The outlook for near-term growth in Australia’s major trading partners had again been revised higher,
the latest in a sequence of quarterly upgrades to forecasts for trading partner growth over the prior
year. Those upgrades reflected both greater-than-anticipated resilience in global trade flows and a run
of upside surprises in AI-related activity, which continued to drive growth in a range of high-income
east Asian economies. For economies outside east Asia, growth forecasts were broadly unchanged since May,
with the effects of the Middle East conflict on activity evolving largely as expected. Members noted that
a combination of AI-related upside growth surprises and broader economic developments suggested that
headline inflation in many economies would remain above central bank targets into 2027. This also posed
an upside risk to global goods prices and, in turn, Australian import prices.
The staff’s forecasts for the Australian economy were conditioned on financial market pricing for
global oil prices and the cash rate. Under these assumptions, year-ended GDP growth was expected to slow
over 2026 before recovering gradually over 2027 and 2028. Members noted that the subdued path for GDP
growth over the forecast period was driven by both softer demand (reflecting the impact of high inflation
on real incomes, easing conditions in the established housing market and the recent tightening of
monetary policy) and limited growth in the supply potential of the economy. Members discussed the various
interactions between housing prices and economic activity, including through dwelling investment and
consumption. They also discussed the stronger outlook for business investment arising from recent and
anticipated strength in investment in data centres.
The forecast was for GDP growth to be below its potential rate over the forecast period. This was expected
to bring the levels of aggregate demand and potential supply into balance in 2027, a little earlier than
previously expected, after which some spare capacity was expected to emerge. Members noted that the
forecast future level of productivity had again been revised down, reflecting productivity outcomes that
had consistently been even weaker than assumed for some time and an unchanged assumption for medium-term
productivity growth.
Subdued GDP growth was expected to weigh on future labour demand. The unemployment rate was forecast to
increase gradually to 4.8 per cent by end-2028, a little higher than forecast in May because of
a higher starting point. Members noted that these forecasts suggested spare capacity in the labour market
would begin to emerge from late 2027. This was expected to constrain wages growth over time, although the
near-term wage forecast profile had been slightly upgraded due to a range of recent wage decisions and
agreements.
Headline and underlying inflation were both forecast to remain elevated in the near term. Members noted
that this reflected assumptions about capacity pressures in the economy and the pass-through to consumer
prices of fuel and other costs affected by the Middle East conflict. For trimmed mean inflation, the
central projection was very similar to that in May. Trimmed mean inflation was forecast to remain above
3 per cent until mid-2027 and then reach around 2½ per cent in late 2027 as capacity
pressures and conflict-related cost pressures ease. Members noted a range of upside risks to this
projection, including: global oil prices could move even higher if the conflict in the Middle East
persists or escalates; pass-through to consumer prices of cost pressures related to the conflict could be
more pronounced; and domestic capacity pressures could be more enduring if the global or Australian
economies receive more support from AI-related investment than anticipated or growth in domestic supply
capacity proves even weaker than assumed. Members also noted potential downside risks: the labour market
may be easing more quickly than assessed; activity could slow more rapidly than assumed (perhaps in
response to the housing market downturn); there could be further adverse changes to global trade policy;
and expected returns from AI investment could be revised down sharply. Members noted that, on balance,
the staff judged the risks to be skewed to the upside.
Considerations for monetary policy
Turning to considerations for the monetary policy decision, members noted that data received since the
previous meeting indicated that the economy was progressing towards the Board’s objectives.
Inflation had eased from its peak in March and the quarterly rate of underlying inflation was slightly
lower than it had been in late 2025. A little more of the tightness in the labour market had abated and
the output gap was forecast to close slightly earlier than envisaged in May. On some metrics, this
progress had occurred a touch more rapidly than had been expected. Nonetheless, members observed that
inflation was still too high and that the economy continued to operate with excess demand.
Members judged that financial conditions were somewhat restrictive, following increases in the cash rate
target earlier in the year. They observed that momentum in the housing market had shifted over preceding
months. Housing prices were falling in some capital cities, though this followed a long period of strong
housing price growth and was being driven by factors other than monetary policy. The softening in housing
demand had flowed into weaker demand for new housing loans, although growth in business credit continued
to be strong.
Members noted the staff forecast that inflation would decline only gradually, returning to around the
midpoint of the target range by late 2027. They observed that the risks to this projection were tilted to
the upside. Members acknowledged that it was difficult to incorporate some of these risks into the
central forecasts, given the potentially extreme nature of their associated outcomes, but that these
remained relevant to their policy decisions. They also discussed various downside risks that might
provide some offset.
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 for the time being.
One argument to raise the cash rate target by 25 basis points at this meeting was founded on an
assessment of the risks to the inflation forecast. Members noted that if the risks around the inflation
forecast were judged to be significantly skewed to the upside, it may be appropriate to mitigate those
risks somewhat by tightening monetary policy pre-emptively. In that regard, members discussed various
upside risks, including: a prolonged conflict in the Middle East could cause oil reserves to dwindle to
very low levels and oil prices to rise sharply; widespread cost pressures reported in liaison could be
passed into consumer prices more fully than assumed; the AI and data centre investment boom could prove
to be larger than anticipated, globally and/or in Australia; aggregate demand in Australia more generally
could be more resilient than forecast; and productivity growth might not pick up as assumed in the
forecasts. Members noted that the case to raise the cash rate target to mitigate some of these risks
would be further strengthened if they placed greater importance on returning inflation to target no later
than the extended timeframe already envisaged in the forecast profile. Members observed that the central
forecast was for inflation to return only gradually to target, adding to the already prolonged period
over which it had been above target.
The case to raise the cash rate target at this meeting could also be further strengthened if members
judged that the trade-off involved in bringing inflation down faster – namely, a
sharper-than-forecast easing of labour market conditions – was perhaps gentler than in some other
historical episodes, given the state of the economy and the nature of current shocks. In considering
this, members noted findings from recent staff research that relatively significant movements in
inflation can be associated with quite small changes in capacity utilisation when the economy is
operating with limited spare capacity. Members also noted staff research that indicates short-term
inflation expectations matter for inflation dynamics even when longer term expectations are anchored.
They observed that both findings imply that a more pre-emptive approach to monetary policy might be
appropriate when the economy is subject to capacity constraints and adverse supply shocks. In applying
this to the current circumstances, members acknowledged that the global cost shock generated by the
conflict in the Middle East meant some spare capacity may be necessary to bring inflation back to target.
The case to leave the cash rate target unchanged at this meeting relied on forming a judgement that,
following the increases in the cash target earlier in the year, monetary policy appeared sufficiently
restrictive to bring inflation back to target within a reasonable timeframe, and that there was still
some time to assess the accuracy of that judgement.
Members noted that one argument in support of the current setting of monetary policy already being
sufficiently restrictive was that the data received since the previous meeting had signalled that the
economy was moving steadily towards the inflation and full employment objectives. Indeed, inflation had
been a little lower than forecast (though still well above target) and the unemployment rate had risen by
slightly more than expected in May. Members observed that the staff’s central forecast for inflation
had it returning to around the midpoint of the target range in late 2027, under the technical assumption
that the cash rate target ended the forecast period at around its current level. It was acknowledged that
inflationary pressures might turn out somewhat stronger than this central case if some of the upside
risks crystallised. However, this was judged to be uncertain and the near-term evolution of the economy
afforded some time to leave monetary policy unchanged while assessing what incoming data reveal about
these risks. Members noted that, by the following meeting, they would have received additional monthly
reports on inflation and the labour market and the June quarter national accounts, while also gaining
additional information about trends in the housing market and the course of the conflict in the Middle
East.
Another reason to leave the cash rate target unchanged at this meeting was that members might judge the
risks around the inflation forecast to be balanced rather than tilted to the upside. Risks to the
downside included the potential for: the labour market to be easing more rapidly than assessed; a more
material adverse impact on activity from the conflict in the Middle East; a larger impact on aggregate
demand from weak consumer confidence and/or the downturn in the housing market; and greater constraints
on firms passing on cost pressures into final prices than expected.
Having considered these various arguments, members judged it appropriate to leave the cash rate target
unchanged at this meeting, while remaining alert to the upside risks to the inflation outlook and being
ready to act should they materialise. Members agreed that the prevailing cash rate appeared to be working
to bring the economy gradually back into balance and that the data received since the previous meeting
had been consistent with this observation. The Board concluded that, in this light, there was time to
assess the incoming data for signs of the risks to the inflation forecast materialising.
Several members judged that it was quite possible that the upside risks to the inflation forecast would
crystallise, requiring some further tightening. Other members noted the potential for downside risks to
offset them. All members agreed that, given prevailing uncertainties, upcoming decisions would benefit
from additional information that could strengthen their conviction about the outlook for inflation.
Members agreed that further progress in delivering the outcomes envisaged in the central projection would
be needed before they could be confident that inflation would return to target with the current monetary
policy setting. They re-confirmed their commitment to returning inflation to target in a timely way.
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 continue to do what it considers necessary to
achieve that outcome, including increasing the cash rate target if upside risks materialise.
The decision
The Board decided unanimously to leave the cash rate target unchanged at 4.35 per cent.
Financial stability advice to the CFR and APRA
Members discussed and approved financial stability advice that the staff had prepared for the RBA to
provide to the Council of Financial Regulators (CFR) and the Australian Prudential Regulation Authority
(APRA) at the next CFR meeting. This was in keeping with commitments made by the RBA in the CFR Charter
and the Memorandum of Understanding between the RBA and APRA.
Members noted that financial stability considerations were not constraining the Board’s ability to
set monetary policy. While members remained alert to financial stability risks, particularly those
emanating from offshore, the strong financial positions of domestic banks and most Australian households
and businesses meant they are well placed to manage increased financial pressures over the period ahead.
In light of the current environment and outlook, members supported APRA’s recent position to keep
macroprudential policy settings unchanged. This recognised these settings’ important role in
guarding against a material build-up of vulnerabilities and supporting the resilience of the Australian
financial system.