RBA Flags Inflation Risks, Keeps Hike Option Open

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.

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.