RBA Signals Inflation Battle Ongoing

Australia’s inflation picked up in H2 2025 and was “too high,” according to the Reserve Bank’s February meeting minutes. While much of the rise in underlying inflation was seen as temporary, members judged some of it reflected persistent pressures. As a result, the central inflation forecast was revised materially higher, with inflation projected to stay above target through 2026 and only return close to the midpoint around mid-2028, assuming the cash rate follows the market path. Model estimates suggested spare capacity had narrowed, with aggregate demand exceeding supply and the labour market staying a bit tight. Solid output growth, resilient global conditions, and still-elevated unit labour costs reinforced capacity pressures. Members also worried that financial conditions were no longer restrictive enough. Overall, they agreed there was a stronger case to raise the cash rate by 25bps, as inflation risks had increased and downside risks to full employment had eased.

Australia’s battle against inflation is far from over, the Reserve Bank Chief Economist Sarah Hunter warned in a speech, noting that returning price growth to target will take “some time” and may require further rate hikes. She highlighted that demand has recently grown faster than trend while the economy is already near capacity, adding, “We expect the labor market will remain tight and inflation will remain above target for some time.” Meanwhile, Governor Michele Bullock, speaking at a Senate hearing, stressed that strong private demand, rather than fiscal policy, remains the main challenge. She emphasized the central bank stands ready to raise rates again if inflation proves persistent, as renewed price pressures since late 2025 continue to weigh on the outlook.

The Reserve Bank of Australia indicated it will take further action to curb inflation, which Deputy Governor Andrew Hauser said remains “too high.” Speaking at a business luncheon Wednesday, Hauser stressed the central bank will “continue to do whatever is necessary” to return inflation to its 2–3% target band. The RBA raised the official cash rate by 25bps last week, reversing an August cut after inflation overshot forecasts. Both headline and core inflation are now above target, with projections showing inflation may not fall back within the band until mid-2027. Hauser said the shift from easing to tightening reflects changing conditions, including a stronger-than-expected global economy and a solid rebound in domestic private demand. He emphasized that the bank’s actions are not about favoring special interests but about easing the burden on households by restoring price stability.