Governor Michele Bullock says interest rate changes can take up to a year and a half to work through fully, which means the effects of this year's four increases could still be arriving well into 2027 and beyond.

Monetary policy has a timing problem built into it. A central bank sets the cash rate today based on what it expects inflation to do in the future, yet the full effect of that decision on spending, hiring and prices does not show up for a long time.

At her 29 September media conference, Governor Michele Bullock put a number on that delay. Discussing how long rate changes take to work through fully, she said "it can take 12, perhaps even 18 months". That single phrase goes a long way towards explaining why the Monetary Policy Board talks about inflation over a horizon of years rather than months, and why it can raise rates even as some parts of the economy are already cooling.

Putting the lag on a calendar

This year the Board lifted the cash rate target four times, each by 25 basis points: on 3 February, 17 March, 5 May and 29 September. That took the target from 3.60 per cent to 4.60 per cent.

Applying Bullock's 12-to-18-month range to those dates gives a rough sense of the timing. The following is simple calendar arithmetic for illustration only. It is not an RBA projection, and the real effects will not arrive on a neat schedule.

  • February 2026 rise: full effect somewhere between February and August 2027.
  • March 2026 rise: between March and September 2027.
  • May 2026 rise: between May and November 2027.
  • September 2026 rise: between September 2027 and March 2028.

Seen this way, the economy in late 2026 is still absorbing tightening that was delivered earlier in the year, and the most recent rise has only just begun its journey. Bullock made the same point in her own words. "We raised interest rates three times earlier in the year," she said, adding: "A lot of that effect is still to flow through."

Why the effects take so long

A cash rate decision does not change behaviour overnight. It travels through several channels, each with its own pace.

The quickest is usually the interest rates that banks charge and pay. Assistant Governor (Financial Markets) Christopher Kent said in August that "Lending and deposit rates have increased in line with the cash rate." For borrowers on variable rates, higher repayments follow fairly promptly. Kent noted that "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income."

Changes in behaviour come more slowly. Households tend to adjust their spending over time rather than all at once as budgets tighten, and the Board's September statement described consumer spending as easing gradually. Bullock also pointed to offset accounts as a factor: "a lot of people have a mortgage, and then they have an offset account, which sits in the background." According to the October Financial Stability Review, the median borrower is able to cover over a year of scheduled mortgage payments from offset and redraw buffers.

The housing market is another channel. Kent said "housing credit growth, which moves closely with housing prices, has started to slow," and that "Growth of new housing loans has fallen significantly." He added that "forward indicators such as auction clearance rates have also declined to be below their long-run averages." The September statement noted that housing prices had fallen in most capital cities, while describing the effects of the housing downturn as uncertain.

Then there is the currency. Bullock observed that "The exchange rate channel takes a while to feed through." Kent said the Australian dollar had appreciated "by around 5 per cent on a trade-weighted basis since the start of the year", and explained that "A higher exchange rate helps moderate inflation by lowering the domestic price of imports."

The forecasts already assume a long road

The RBA's own forecasts reflect that slow pace. The August Statement on Monetary Policy, prepared on a cash rate assumption of around 4.3 to 4.5 per cent, before the September hike, projected headline CPI inflation of 3.6 per cent by December 2026 and 2.8 per cent by June 2027. Trimmed mean inflation, the underlying measure, was forecast at 3.3 per cent in December 2026 and 3.0 per cent in June 2027, reaching 2.4 per cent by June 2028. The August minutes said spare capacity was expected to emerge from late 2027.

The starting point remains well above target. Headline inflation was 3.9 per cent over the year to the June quarter, and the monthly CPI indicator showed 4.0 per cent for August. The trimmed mean was 3.6 per cent in the June quarter, and Bullock described underlying inflation at the September press conference as "about 3.5 per cent". The target range is 2–3 per cent, with a midpoint of 2.5 per cent.

Speaking to a parliamentary committee on 18 September, Bullock said "inflation will not return to around the midpoint of the target range until late 2027." She also explained what the Board is aiming for in quarterly terms: quarterly inflation needs to be "more around .6 rather than .8 and 1".

Why the Board still moved in September

If so much of the tightening is still in the pipeline, why add more? The Board's answer is that inflation pressures were proving stronger than expected. Its statement said some of the upside risks flagged in August were materialising, including higher global energy prices, AI-related demand lifting technology prices and capacity pressures at home. It judged "a further tightening of financial conditions" was warranted and said it is focused on preventing high inflation from becoming embedded.

Bullock also pointed to how long inflation has been above target: "we have been outside of our target now for six years." The lag works against the Board here. Waiting for evidence that past rises have done their job risks letting price pressures settle in, while acting now means accepting that the full impact will not be visible for a year or more.

The bottom line

Bullock's 12-to-18-month estimate means that the four rate rises of 2026 are, in effect, still in the pipeline. Some channels, such as mortgage repayments and housing credit, are already responding. Others, including the exchange rate and household spending, take longer, and the effect on inflation itself is expected to build gradually through 2027.

That makes each upcoming data point a partial picture. The September minutes are due on 13 October, the next CPI release on 28 October, and the Board's next decision at 2.30 pm on 3 November. Bullock has said the Board will raise rates again if needed, but she has also been clear: "I'm not going to give you forward guidance."