Assistant Governor Sarah Hunter stated that returning inflation to the 2-3% target range may require intentionally weakening the Australian economy relative to its trend growth rate. This approach aims to anchor inflation expectations, even if it leads to significant economic hardship and increased unemployment.
Australia's current cash rate is 4.35% after three rate hikes in 2026. The central bank is facing persistent inflation, supply shocks, and a labor market that has not loosened as expected.
Hunter highlighted that geopolitical factors, specifically high oil prices, could drive inflation expectations upward. To counter this, the RBA may create a gap between demand and supply capacity to cool spending.
The RBA forecasts unemployment to rise to 4.6% to bring inflation sustainably within the target. Hunter referenced the early 1990s recession, where unemployment peaked above 10%, as a historical comparison for economic downturns.
