MNI: Future RBA Adjustments Seen As Minor Tweaks To 3.6% Rate

Any adjustment to the Reserve Bank of Australia’s cash rate would only be a minor policy tweak rather than a fundamental shift and would likely be driven by short-term inflation pressures in 2026, former RBA economists told MNI.

Peter Tulip, chief economist at the Centre for Independent Studies and a former senior RBA official, said recent CPI, labour market and Q3 GDP data suggested the risk of a hike from the currrent 3.6% sometime in the first half of 2026. 

“My guess over the next few quarters into early 2026 is that the unemployment rate might edge down a bit, underlying inflation will remain above target and the bank will react by tightening. They should do that now, but they’ll likely wait until it becomes obvious and then move,” he said, adding he expected only a small increase.

The two-quarter annualised pace of growth implied by this week’s national accounts – about 2.3% – gave a slightly better sense of momentum and pointed to continued labour-market tightness than the 2.1% y/y or 0.4% q/q result, Tulip added.

"The unemployment rate is on the low side. In the past, when it's been this low, we've had accelerating inflation. Many people had been thinking the unemployment rate might rise a bit to something a bit more sustainable. You don't see signs of that in the in the national accounts.”

Governor Michele Bullock’s recent comment that unemployment at 4.3% was likely below the NAIRU underscored the inflation risk, but he urged the Bank to be more transparent about its estimates. "In fairness, the macro economic numbers are very good," Tulip conceded. "We've got unemployment near the NAIRU, inflation near the target, GDP growing near potential, so the adjustments in policy we're talking about are really tiny ones."

Markets are increasingly pricing higher rates in 2026, with some participants seeing a hike sometime in Q3.

RBA TOLERANCE

Blair Chapman, senior economist at Seek and a former RBA research economist, expects the Bank to remain on hold for an extended period, with only a small chance of a hike in late 2026 if inflation proves persistent. He said the RBA would likely tolerate inflation staying above the target band if it meant preserving recent labour-market gains, noting employment growth has already begun to slow.

While monthly inflation prints remain volatile, Chapman said quarterly data and broader labour-market conditions rather than short-term price swings would continue to guide policy. He expects Q4 and Q1 quarterly inflation to be weaker than the recent monthly readings. (See MNI POLICY: RBA Sees Balanced Risk, Despite Monthly CPI Shock)

Pointing to falling participation as a sign of gradual labour market loosening, Chapman said easing cost-of-living pressures would naturally lead some people to reduce hours. While the national accounts showed higher private investment, he said this was largely driven by AI-related spending, which could reduce labour demand over time.

“Obviously the cut’s gone, there’s no chance for a cut,” Chapman said, adding that the Bank is now uncertain about the next move. He said the labour market was not overheating, with employment growth slowing and unemployment ticking up only gradually. New South Wales in particular has seen subdued jobs growth relative to its strong population gains, while employment-to-population ratios have risen only in South Australia, Tasmania and the ACT over the past year. 

The Bank was more likely to wait until late 2026 to hike at the earliest if its tolerance for above-target inflation were eventually tested, he concluded.