Reserve Bank of Australia Adjusts Policy in Response to Ongoing Inflation and Economic Strength

The Reserve Bank of Australia (RBA) has addressed the nation’s economic landscape during its latest appearance before the House of Representatives Standing Committee on Economics, highlighting recent steps taken to steer inflation back to targeted levels amid persistent economic pressures.

Governor Michele Bullock outlined the central bank’s decision to tighten monetary policy by raising the cash rate target to 3.85 percent, after observing a resurgence in inflation during the latter half of 2025. While inflation had previously shown signs of moderating, it climbed above expectations to 3.4 percent on a trimmed mean basis, and headline inflation reached 3.6 percent, spurred by broad-based price rises in services, retail goods, and new housing. At the same time, Australia’s employment picture remains robust, with near-record workforce participation and unemployment at historically low levels.

Bullock explained that stronger-than-expected demand, resilient international trading conditions—bolstered by ongoing global investment in AI—and a pick-up in both household consumption and business investment contributed to this inflationary persistence. With the economy’s supply side unable to keep pace with demand, the RBA saw excess demand as a key driver behind inflation, necessitating a tighter monetary policy stance to cool demand and realign it with the economy’s capacity.

Alongside monetary policy, the RBA maintains focus on ensuring an efficient, innovative payments system. The bank is concluding a review of card payment costs and surcharging, with findings due by March 2026, and engaging stakeholders on expanding its regulatory oversight in the evolving payments sector. Recent operational incidents have underlined the importance of system stability, prompting internal reviews and a renewed emphasis on strengthening payment infrastructure.

Governor Bullock also highlighted the challenges facing cash distribution, especially in rural and regional areas. Despite a long-term decline in cash use, its role in financial inclusion and resilience remains paramount. The central bank, in cooperation with industry and other public bodies, is working to sustain cash access, with new regulations mandating cash acceptance for essential goods at major retailers and petrol stations.

Finally, Bullock provided an update on the significant institutional reforms underway following the 2023 Review of the RBA, including the creation of a dedicated Governance Board and advances in transparency, culture, and policy effectiveness. Nearly all major recommendations have been implemented or are underway, with a continued commitment to ongoing improvement in order to ensure the central bank remains fit for purpose in a changing economic environment.

These developments are pivotal as the RBA navigates a delicate balance between curbing inflation and supporting the health of Australia’s economy, reaffirming its central role in fostering economic stability and resilience.