Monetary Policy Remains Restrictive, Tightening Working: RBA Kent

Monetary policy in Australia remains “somewhat restrictive,” with earlier tightening continuing to weigh on demand and inflation, Reserve Bank Assistant Governor Christopher Kent said in a speech. He highlighted rising borrowing costs and mortgage payments, a softer housing market, and year-to-date appreciation of the Australian dollar as signs that aggregate demand growth is slowing. Kent stressed this moderation is “intended and needed” to return inflation to target. While estimates of the nominal neutral rate are imprecise, they suggest the current stance is restrictive. Yet financial conditions reflect more than policy alone: housing has weakened more than rate increases imply, amplifying restraint, while resilient global demand tied to AI investment and higher overseas yields could offset it. The central bank will continue weighing these cross-currents as it refines its outlook and guides future decisions.

The Reserve Bank of Australia kept its cash rate unchanged at 4.35% in a unanimous decision at its August 2026 meeting, in line with market expectations. Policymakers noted that financial conditions have tightened following three rate increases earlier this year and that the economy appears to be slowing as expected. Still, inflation remains too high, with capacity pressures contributing to the pickup in H2 2025 and higher oil and related commodity prices linked to the Middle East conflict adding pressure. Short-term inflation expectations, though easing, also remain elevated. Meanwhile, consumer spending growth is slowing, housing momentum has weakened and labour market conditions have eased more than expected. The Board expects inflation to remain high and return to around the midpoint of the target range in late 2027, with upside risks. Policymakers held rates while assessing incoming data but may raise the cash rate if inflation risks materialise.

Australia's underlying inflation remains too high, and further easing in domestic demand may be needed to bring price growth back to the Reserve Bank's 2%-3% target, Governor Michele Bullock said in a speech on Tuesday. She noted that it remains uncertain whether the three interest rate hikes so far this year will be sufficient, as their full impact has yet to flow through the economy. Bullock warned that underlying inflation could rise further as higher oil prices linked to the Iran conflict feed into broader costs, while noting the labor market also needs to cool further. "The board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed," she said. Meanwhile, the recent surge in oil prices highlights the uncertainty from the Middle East war, with more businesses indicating they intend to pass higher costs on to consumers. Bullock added that growth is slowing as expected while the housing market weakened more than anticipated.