Inflation points to another RBA rate rise

The Reserve Bank of Australia’s (RBA) Monetary Policy Board has increased the cash rate by 25 basis points to 4.6%, taking official interest rates to their highest level in 15 years. The decision was widely anticipated by financial markets and reflects growing concern that inflationary pressures are proving more persistent than previously expected.

Tuesday’s decision signals that the Board’s tolerance for persistent inflation has fallen. The post-meeting statement noted that several upside risks to inflation have recently materialised. Escalating conflict in the Middle East contributed to higher energy prices and renewed uncertainty around global supply chains, while stronger-than-expected domestic conditions over recent months have maintained capacity pressures within the Australian economy. These developments have increased the risk that inflation will remain above the 2–3% target for longer, prompting the Board to act.

While the dual mandate of price stability and full employment continues to guide policymaking, Governor Bullock reiterated that the Board has moved beyond the ‘narrow path’ rhetoric, suggesting a greater willingness to prioritise returning inflation to target, even if labour market conditions soften.

The Board’s concerns were reinforced by recent inflation outcomes, also released this week, which suggest that progress on disinflation has stalled. Headline inflation accelerated to 4.0% in August, above both the RBA’s target range and forecasts. Much of the increase reflected higher housing and transport costs, with the unwinding of temporary fuel excise relief contributing to a renewed lift in petrol prices.

Meanwhile, the RBA’s preferred measure of underlying inflation remained elevated at 3.6% over the year to August, indicating that price pressures remain broad-based across the economy. Together, these outcomes cast doubt on the expected pace of the return to target and will likely reinforce the Board’s concern about ongoing inflationary risks.

Focus is increasingly turning to whether incoming activity data show sufficient moderation in demand to ease capacity pressures across the economy. The key question for the RBA is whether slowing economic activity will be enough to return inflation to target or whether further policy tightening will be required. 

The full effects of the four interest rate increases delivered so far this year have yet to flow fully through the economy. There are, nevertheless, emerging signs that activity is beginning to soften. The Monthly Household Spending Indicator plateaued in August after several months of stronger outcomes. The composition of spending shifted away from discretionary items, spending on which fell by 0.3%, and towards non-discretionary categories, which increased by 0.6%. This suggests that households remain under pressure from broad cost-of-living challenges.

However, the challenge for the RBA is that demand has softened without slowing inflation. In an environment of weak productivity growth, even modest levels of demand continue to put pressure on the economy’s limited supply capacity and contribute to inflation. While households are feeling the effects of higher interest rates, inflation remains above target and has proven sticky in several parts of the economy, creating a challenging environment for policymakers.

Attention now turns to the November cash rate decision on Melbourne Cup Day, where the RBA Board will decide whether further tightening is required.

Governor Bullock remarked that the Board will continue to do what it considers necessary to return inflation sustainably to target, including increasing the cash rate if required. The outlook remains data-dependent. However, with the balance of risks still skewed to the upside and the RBA adopting a more hawkish tone, Deloitte Access Economics expects an additional interest rate hike this year, most likely at the November meeting. 

This newsletter was distributed on 5 October 2026. For any questions or comments on this week’s newsletter, please contact our authors.