Statement on Monetary Policy – November 2026Overview

Inflation in Australia remains well above target and a number of upside risks have crystallised since the August Statement. In particular, materially higher global energy prices as a result of the Middle East conflict have added to inflationary pressures. Government bond yields in advanced economies have risen to their highest levels in many years, reflecting a combination of higher term premia, higher neutral rates and expectations of higher policy rates for a time in response to global inflationary pressures. Domestically, housing market conditions have eased and the unemployment rate has risen further than anticipated. However, a range of data, including persistently strong inflation and growth in a broad range of costs, suggest that domestic capacity pressures have been a little greater than previously assessed.

The outlook for inflation has been revised materially higher and reflects a higher assumed path for energy prices amid the ongoing Middle East conflict and greater domestic capacity pressures. Headline and underlying inflation are expected to remain above 3 per cent until end-2027, some time later than forecast in August, and reach the midpoint of the 2–3 per cent range in mid-2028. The risks to the inflation outlook are judged to remain skewed to the upside reflecting risks posed by the Middle East conflict. Tighter monetary policy alongside a weaker outlook for the housing market is expected to keep GDP growth below trend. The unemployment rate is projected to reach a bit over 5 per cent at the end of 2028.

The Monetary Policy Board decided it was appropriate to increase the cash rate target by 25 basis points to 4.85 per cent. Inflation remains elevated and recent data indicate that it is broadly based. The Board noted the increasing risk that higher inflation expectations will become embedded and judged that a further tightening in financial conditions is warranted to support the return of inflation to target.

Globally, higher energy prices and resilient demand growth have added to inflationary pressures, and most advanced-economy central banks have either raised policy rates or are expected to.

The ongoing Middle East conflict has pushed up energy prices. As a result, headline inflation has increased across most economies. Prices for a range of base metals and agricultural commodities have also risen sharply in recent months, driven by the conflicts in the Middle East and Ukraine and adverse weather.

Global economic demand has also been more resilient than expected, supported by the AI boom overseas. GDP growth in Australia’s major trading partners has trended higher over recent years. Recently, the boost to trading partner growth from AI-related demand and supportive fiscal measures in many economies has offset the adverse effects of the Middle East conflict. Market pricing implies that most advanced economy central banks are expected to increase policy rates at least twice by the end of 2027, in line with higher near-term inflationary pressures.

This in part explains why government bond yields have risen to multi-year highs.

Against the backdrop of stronger global inflationary pressures, government bond yields have risen since the August Statement, to their highest level in many years, including in Australia. This reflects a range of factors including expectations of tighter monetary policy in the near term given global capacity and inflationary pressures, as well as some combination of higher neutral interest rates and higher term premia. Long-term inflation expectations in financial markets remain consistent with central bank targets.

Growth in Australia’s major trading partners is still expected to moderate over the next couple of years as the boost from AI-related activity slows and growth in China eases. Headline inflation is expected to remain above central bank targets into 2027 in many advanced economies, reflecting higher energy and other commodity prices, resilient demand and rapid growth in AI-related prices. Risks to global inflation are judged to remain skewed to the upside.

Domestically, growth in activity has slowed, housing market conditions have eased further, and the unemployment rate has risen by more than expected.

In Australia, GDP growth has slowed to a little below its estimated potential growth rate, largely reflecting softer growth in household consumption – consistent with the earlier easing in growth in household income and wealth – exports and public demand. Notwithstanding this slowing in growth, recent data suggest that activity growth this year has been a little stronger than anticipated in the August Statement, supported by rapid growth in data centre investment.

By contrast, conditions in the housing market have eased further. Housing prices in September were almost 5 per cent below their March peak, reflecting higher interest rates and tax changes announced in the federal budget. The unemployment rate rose by more than expected to average 4.6 per cent in the September quarter. That appears to largely reflect a stronger-than-expected pick-up in labour force participation amid cost-of-living pressures, while employment growth has held up.

But inflation has been higher than expected, cost pressures remain elevated, and capacity constraints are now assessed to have been a little tighter than previously thought.

Headline inflation was 3.9 per cent over the year to the September quarter and trimmed mean inflation was 3.7 per cent. While the price of fuel has increased significantly, inflation has been broad-based, with sizeable price increases for a range of market services. Liaison contacts across most industries continue to report sustained cost pressures.

The persistence of high inflation and cost pressures, despite the easing in GDP growth and the rise in unemployment, suggests that domestic capacity constraints have been tighter than previously assessed. Reflecting this, the staff’s assessment of the unemployment rate consistent with low and stable inflation has increased a little, though this assessment remains highly uncertain.

Financial conditions appear to be restrictive, which is expected to weigh on domestic capacity pressures.

Financial conditions are judged to be restrictive. There is, however, significant uncertainty around the extent of this restrictiveness given conflicting evidence. Supporting this assessment, the current level of the cash rate is slightly above the top of the range of central estimates of the neutral rate, and the expected cash rate path is higher still. Housing prices have declined and new housing lending has fallen sharply. However, business credit growth remains strong and corporate risk premia remain low.

The Australian dollar has appreciated since the start of the year and is judged to be around estimates of its long-run equilibrium.

Ahead of the November meeting, market pricing was implying expectations of around one and a half further cash rate increases by mid-next year.

Inflation is expected to remain above 3 per cent until late 2027, reflecting recent increases in fuel and other conflict-related costs and greater domestic capacity pressures.

The outlook for inflation has been revised materially higher relative to the August Statement, particularly through to late 2027. Fuel and other conflict-related costs have increased by more than expected since August, owing to the ongoing conflict in the Middle East. Some of these additional costs are expected to be passed on to consumer prices, while elevated prices of petrol and diesel will also contribute directly to higher headline inflation in the near term. The stronger outlook for underlying inflation also reflects the staff’s judgement that capacity pressures have been a little greater this year than thought in August. Headline and trimmed mean inflation are now expected to remain above 3 per cent until end-2027, some time later than forecast in August, and to return to 2.5 per cent in mid-2028.

The risks to the inflation outlook remain skewed to the upside.

Some of the upside risks identified in August have materialised and are now incorporated in the central forecast, including greater domestic capacity pressures and higher oil prices. But upside risks to inflation from the Middle East conflict and AI-related investment are judged to remain. Energy prices could stay at current elevated levels or rise further, rather than decline as assumed, if disruptions to shipping and refining persist. Combined with ongoing capacity pressures in the domestic economy and elevated inflation expectations, this would increase the risk of stronger pass-through to consumer prices. Strong AI-related investment activity could also push up input costs by more than expected, both directly and by adding to capacity pressures.

However, inflation could fall faster than forecast. For example, capacity pressures could ease sooner if higher interest rates, conflict-related cost pressures and uncertainty, and falling housing prices combine to weigh more heavily than expected on spending and investment.

In Australia, tighter monetary policy is expected to keep GDP growth below potential, with spare capacity emerging in the labour market in 2027.

Higher-than-expected global energy prices, a softer housing market and a higher assumed path for the cash rate than in the August forecasts are expected to constrain domestic GDP growth. The very strong expansion in data centre investment is expected to only partly offset these headwinds to growth.

Labour market conditions are expected to ease. The unemployment rate is forecast to rise to a bit over 5 per cent by end-2028. That is consistent with below-potential GDP growth but is around ¼ percentage point higher than previously expected, largely reflecting the judgement that more people than previously forecast will remain in or join the labour force. The economy is currently operating with excess demand and is judged to reach balance next year, slightly later than previously thought, with spare capacity emerging in 2027.

The Monetary Policy Board decided to increase the cash rate target.

Inflation remains elevated and data since the previous meeting have confirmed that underlying inflation remains broadly based. Capacity pressures appear a little tighter than previously estimated and there are indications that higher fuel prices are being passed through to prices of other goods and services. Inflation is now expected to remain above 3 per cent for the coming year and there is an increasing risk that higher inflation expectations will become embedded. Given the revised inflation outlook and the continuing upside risks, the Board judged that a further tightening in financial conditions is warranted to support the return of inflation to target. The Board stated that it will continue to do what it considers necessary to bring inflation sustainably back to target.