Australia Interest Rate

The Reserve Bank of Australia said its shift toward an ample-reserves framework remains incomplete, with no fixed timeline for reaching equilibrium. Head of Domestic Markets David Jacobs noted in a speech that market behaviour will indicate when reserves reflect banks’ underlying demand rather than pandemic-era asset holdings. He cautioned that demand could move either way, underscoring the need for flexibility. Under the new system, the RBA will not target a specific reserve level but instead supply liquidity as required to keep the cash rate near the board’s target. Full-allotment open market operations will anchor this approach, with other tools available if repo markets falter. The central bank also confirmed that open repo is no longer necessary, as it was designed for a scarce-reserves regime. Market participants must manage liquidity more actively, drawing on both RBA facilities and private money markets to adapt to the evolving framework.

Australia’s inflation has eased from its March peak, with underlying price growth slightly lower than in late 2025, the Reserve Bank's August minutes showed. However, board members judged inflation “too high” and excess demand persistent. Meanwhile, financial conditions were seen as somewhat restrictive after earlier hikes. Staff projected inflation would only gradually return to target by late 2027, with risks skewed upward. Arguments for a 25-bp hike cited upside risks: Middle East conflict driving oil prices, firms passing costs more fully, stronger AI/data-center investment, resilient demand, and weak productivity. The case for holding steady rested on signs policy was already restrictive, inflation slightly below forecast, and unemployment rising. Downside risks included faster labor easing, weaker demand, and housing drag. Ultimately, policymakers left rates unchanged but reaffirmed readiness to act if upside risks materialise.

The Reserve Bank of Australia (RBA) will need to raise interest rates again if upside risks to inflation materialize, Deputy Governor Andrew Hauser warned in a Wednesday speech. He said inflation remains “too high” and highlighted three key risks: the Middle East conflict, the global AI boom, and weak productivity. The central bank has already lifted rates by 75 basis points since the start of the year to curb stubborn price pressures, but held steady at 4.35% for a second consecutive meeting last week. Hauser’s remarks underscore the Bank’s readiness to act further should these risks intensify, keeping policy firmly focused on restraining inflation.