RBA Kent Questions Rate Restraint Despite Four Hikes

Reserve Bank of Australia Assistant Governor Christopher Kent said in a speech that mounting evidence of rising global neutral interest rates raises doubts over whether policy is as restrictive as assumed despite four hikes this year. While confident that policy is somewhat tight, he questioned whether it is tight enough. A higher neutral rate suggests the 4.6% cash rate may be exerting less drag on demand and inflation than policymakers expect, strengthening the case for keeping rates elevated or tightening further. His remarks come as the RBA weighs its next move after September’s hike, citing persistent inflation, energy costs linked to Middle East conflict, and capacity pressures. Kent noted household demand is softening while business credit remains strong, and housing tax changes support restraint. On labor, he cautioned against over-reading monthly data but acknowledged easing, with September employment down and unemployment at 4.7%, a five-year high.

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.