Statement on Monetary Policy – August 2026 Overview

Inflation remained elevated in the June quarter, against the backdrop of ongoing domestic capacity pressures and some effect from higher input costs due to the Middle East conflict. Capacity pressures and the labour market have eased a little as growth in domestic demand looks to have moderated. That said, the economy is still operating with capacity constraints: growth in the economy’s supply potential remains constrained by weak productivity growth, and the labour market is still judged to be a little tight.

Monetary policy is judged to be somewhat restrictive, which is expected to help bring the economy into better balance. But that process will take some time, reflecting the normal lags in transmission. The easing in domestic capacity pressures and conflict-related cost pressures is expected to result in inflation declining to the midpoint of the 2–3 per cent target range by early 2028. The key risks to the inflation outlook are: the potential for global oil and non-energy price pressures to be higher than expected; faster and more fulsome pass-through of these global shocks into Australia’s economy; and the risk of more persistent domestic capacity pressures. However, larger or more persistent negative effects of the Middle East conflict, or a greater-than-expected deterioration in housing market conditions could pose downside risks to the inflation outlook. On balance, the staff judge the risk to the inflation outlook to be skewed to the upside.

The Monetary Policy Board decided it was appropriate to leave the cash rate target unchanged at 4.35 per cent. The Board noted that inflation is likely to remain high for some time and that there are upside risks to this projection. The Board remains focused on ensuring that high inflation does not become embedded and will continue to do what it considers necessary to bring inflation sustainably back to target.

Oil prices have been volatile but growth in Australia’s major trading partners has remained resilient, supported by strong AI-related activity.

The Middle East conflict has continued to disrupt energy production and shipping in the region and contributed to high and volatile global prices for oil and other key commodities. Higher energy prices have contributed to higher producer and consumer price inflation in many economies recently. Strong demand for AI-related goods has also added to producer price inflation in some economies.

GDP growth in Australia’s major trading partners has continued to be stronger than expected, with support from AI-related investment outweighing the adverse effects of the Middle East conflict in some key trading partners. However, significant uncertainty remains, particularly around the resolution of the Middle East conflict and US trade policy.

Growth in domestic demand looks to have moderated broadly as expected …

In Australia, GDP grew by 2.5 per cent over the year to the March quarter. Private demand remained the main driver of growth over the year, underpinned by continued growth in consumption and elevated levels of business investment. The strong growth in business investment was largely driven by investment in data centres.

More recently, partial data suggest that consumption growth moderated only modestly in the June quarter, as expected in the May Statement. This is a more resilient picture than that suggested by consumer sentiment, which remains very weak.

… while housing market conditions have eased considerably.

Housing price growth and activity in the established housing market in Australia have eased by more than assumed in the May Statement. Housing prices nationally have declined by 1.6 per cent from their peak in March and auction clearance rates have fallen. This follows a long period of very strong growth in housing prices and reflects the combined effect of cash rate increases, tax changes announced in the federal budget, and weaker sentiment.

Capacity pressures remain, despite easing a little further …

The moderation in the growth of aggregate demand in Australia is helping to bring the overall level of potential supply and demand back into balance, but we assess that some capacity pressures remain, based on a range of survey- and model-based indicators.

Labour market conditions have eased by a little more than expected, with the unemployment rate increasing over recent months to 4.4 per cent. However, labour market conditions are still assessed to remain a little tighter than full employment. This is consistent with growth in unit labour costs remaining elevated at 3.3 per cent over the year to the March quarter. There are also reports from liaison that many firms still note some labour market tightness, particularly in relation to difficulty in sourcing staff with appropriate skills and experience.

… and inflation remains high.

Both headline and underlying inflation remained elevated in Australia. Headline inflation declined slightly to 3.9 per cent in year-ended terms in the June quarter, and was materially weaker than expected, largely driven by lower retail fuel and travel prices. However, trimmed mean inflation remained high at 3.6 per cent over the year, only slightly below expectations, reflecting ongoing economy-wide capacity pressures and the pass-through of higher costs as a result of the Middle East conflict.

Financial conditions appear to be somewhat restrictive, which will help to ease domestic capacity pressures.

The cash rate increases earlier in the year have tightened financial conditions in Australia, with banks passing through these increases to deposit and lending rates. Most of this has already flowed through to higher scheduled mortgage payments, which are relatively high as a share of household disposable income. Demand for new housing loans has eased, but business credit growth remains strong. Despite depreciating since the May Statement, the Australian dollar remains higher than at the start of the year, consistent with the tightening in monetary policy in Australia compared with other economies. Overall, financial conditions appear to be somewhat restrictive.

Market participants are now pricing in about a 50 per cent chance of a cash rate increase by the end of the year. Financial markets participants expect that many advanced economy central banks will also tighten policy in response to domestic inflationary pressures and possible second-round effects of the Middle East conflict.

The outlook for major trading partner growth has been revised up and headline inflation across many economies is expected to remain above central banks’ inflation targets into 2027.

The near-term outlook for growth in Australia’s major trading partners has been revised up a little, owing to stronger-than-expected demand from the AI investment boom. Across many advanced economies, headline inflation is expected to remain above target into 2027 owing to elevated energy prices and, in some instances, strong AI-related demand. Risks to global inflation are judged to be skewed to the upside.

Domestic GDP growth is expected to ease over 2026 and remain below potential growth in coming years.

GDP growth in Australia is expected to be subdued this year. This reflects a combination of factors, including weaker growth in real household disposable income, softer conditions in the housing market and the increases in the cash rate earlier in the year. Partly offsetting these factors is the anticipated continued strength in business investment, which is expected to be driven by data centre investment. The slowing in demand is expected to help bring the economy into balance in 2027, a little earlier than anticipated in May. As some of the headwinds start to ease, growth is expected to recover gradually over the remainder of the forecast period.

Labour market conditions are expected to ease gradually and labour cost growth is expected to moderate from an elevated level.

Consistent with the anticipated slowing in GDP growth, conditions in the labour market are expected to ease gradually over the forecast period. The unemployment rate is projected to increase further to reach 4.8 per cent by end-2028, while employment growth remains positive. Unit labour cost growth is expected to remain elevated in the near term, moderating gradually later in the forecast period.

Growth in the potential supply of the economy is expected to remain weak.

Growth in potential output is expected to be a little above 2 per cent in 2027 and 2028. That is materially weaker than averages over past decades, reflecting our assumption (adopted in the August 2025 Statement) that the medium-term rate of trend productivity growth is 0.7 per cent per annum. Recent productivity outcomes have been substantially lower than this, but productivity growth is assumed to pick up over the forecast period to this rate.

Inflation is expected to remain elevated in the near term and ease back to target only gradually, reaching 2½ per cent by early 2028.

Both headline and trimmed mean inflation are expected to remain elevated in the near term due to ongoing domestic capacity pressures and the pass-through of conflict-related cost pressures. As these capacity and cost pressures subside, inflation is expected to decline to the midpoint of the 2–3 per cent range in 2028.

The risks to inflation are judged to be skewed to the upside.

Several domestic and global factors pose upside risks to the inflation outlook. Globally, a material escalation in the Middle East conflict could increase oil and related prices further. If domestic capacity pressures and elevated short-term inflation expectations persist, this raises the likelihood of greater pass-through to broader consumer price inflation. Stronger-than-expected growth in AI and related technology prices may flow through to upstream producer prices and consumer prices, while a larger indirect effect could operate by exacerbating current capacity pressures, for example, through higher growth in construction demand for data centres that could push up costs elsewhere in the construction sector.

However, capacity pressures in the domestic economy and the labour market could ease sooner than forecast. In part, this could be the result of a larger or more persistent negative effect of the Middle East conflict, or a greater-than-expected deterioration in housing market conditions.

The Monetary Policy Board decided to leave the cash rate target unchanged at 4.35 per cent.

Inflation is likely to remain high for some time and there are upside risks. The Board remains focused on ensuring that high inflation does not become embedded. To achieve this, growth in aggregate demand needs to remain subdued to reduce capacity pressures and bring inflation back to target. With monetary policy judged to be somewhat restrictive, the Board decided to leave the cash rate target unchanged while it assesses how the economy is evolving. The Board has noted that it will continue to do what it considers necessary to bring inflation sustainably back to target.