The Reserve Bank of Australia isn’t blinking. Assistant Governor Sarah Hunter made clear that the central bank’s board views elevated inflation as its primary concern and may need to push interest rates even higher to tame it.
The numbers behind the hawkish tone
The RBA held its cash rate at 4.35% following its August 2026 meeting, after implementing three rate hikes earlier in the year. Headline inflation slowed to around 4% year-on-year as of mid-2026, but underlying inflation remained stubbornly near 3.6%. The RBA’s target band sits at 2-3%, which means core price pressures are still running well above where the board wants them.
The RBA’s own projections paint a sobering timeline. Inflation isn’t expected to return to the target midpoint until early 2028.
Hunter’s language left little room for ambiguity. She stated that higher inflation outlooks imply rates “should be raised” to maintain targets.
Where the pressure is building
The persistent inflation isn’t coming from the usual suspects like imported goods or energy prices. The pressure is concentrated in services and non-tradables sectors, alongside external supply shocks.
Meanwhile, unemployment is expected to rise to around 4.6%. The RBA is walking into the classic central banking dilemma: trading short-term employment pain for long-term price stability.
What this means for markets and the broader economy
For bond markets, the signal is that the RBA isn’t pivoting to cuts anytime soon. While many global central banks have begun easing cycles or at least paused with a dovish tilt, Australia is charting a distinctly hawkish course.
The housing sector deserves particular attention. Property prices and rate expectations are deeply intertwined in Australia, where household debt-to-income ratios rank among the highest globally.