Ample-Reserves Transition Still Underway: RBA Jacobs

Minutes from the Reserve Bank of Australia’s September meeting showed that policymakers unanimously raised the cash rate by 25bps to 4.6%, citing persistent inflation risks. The meeting record also indicated that further rate hikes remained possible, as several upside threats flagged in August had materialised, including Middle East tensions driving oil above forecasts, global cost pressures partly tied to AI demand, and stronger domestic activity. Meanwhile, inflation readings exceeded expectations, with businesses reporting widespread cost pass-throughs. Short-term expectations stayed high, raising concern about medium-term drift. While the labour market eased broadly as anticipated, demand remained firm and capacity pressures stronger than assessed. Members warned that delaying action risked entrenching inflation after a prolonged period above target. They also noted that holding steady could weaken the Australian dollar as other central banks tightened.

The Reserve Bank of Australia raised its cash rate target by 25 bps to 4.60% in a unanimous September 2026 decision, in line with expectations, marking its fourth hike this year and taking borrowing costs to their highest since 2011. Policymakers noted that higher global energy prices following oil supply disruptions amid the broader Middle East conflict, stronger-than-expected recent inflation and persistent domestic capacity constraints are adding to inflation. AI-related demand is also driving increases in global technology goods prices, while firms report rising costs and plans to pass costs on. At the same time, output growth slowed but was slightly stronger than expected in Q2, while consumer spending is easing. Housing prices fell in most capital cities and new housing loans declined, while labour market conditions have now also eased. The Board said further tightening may be needed to prevent inflation from becoming embedded and return it sustainably to target.

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.