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In a single sentence to federal MPs, Governor Michele Bullock summed up the Reserve Bank's strategy: growth in spending across the economy needs to stay subdued for a period if inflation is to come down for good.

When the Governor of the Reserve Bank of Australia appeared before the House of Representatives Standing Committee on Economics on 18 September, her opening statement covered inflation, jobs, housing and the payments system. But one line captured the core of the bank's approach.

"A period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably," Bullock told the committee.

Eleven days later, the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60 per cent. Understanding that one sentence helps explain why.

Unpacking the sentence

Each part of the Governor's statement carries weight.

  • "A period" signals that this is not meant to be permanent. The RBA is describing a phase, not a new normal.
  • "Subdued growth" is not the same as no growth. The RBA's August forecasts had GDP growing by 1.4 per cent over the year to December 2026, which is modest but positive.
  • "Aggregate demand" refers to total spending in the economy, by households, businesses and others combined.
  • "Capacity pressures" describe the strain that arises when demand presses against what the economy can readily produce.
  • "Sustainably" points to the RBA's concern that inflation should not just dip temporarily but stay down.

Put together, the Governor's argument is that easing the pace of spending growth for a time will relieve pressure on the economy's capacity, and that this is necessary for inflation to return to target and remain there.

Why inflation needs this treatment

The case begins with the inflation record, which Bullock set out for MPs. "Inflation fell significantly from its peak of 7.9 per cent at the end of 2022 to be within the 2–3 per cent target range for a period in 2024 and 2025," she said. But since then: "Over the past year, both headline and underlying measures of inflation were around or a little above 3½ per cent."

Her conclusion was blunt: "Inflation is too high. We are focused on getting it back down and making sure that it does not become embedded."

Since that appearance, the RBA's homepage has reported the August monthly CPI indicator at 4.0 per cent for headline inflation. Underlying inflation is lower; the Governor said on 29 September that it had been about 3.5 per cent for the past six months. The target is 2–3 per cent, aiming for the 2.5 per cent midpoint.

Bullock also told the committee that some of the pressure comes from abroad: "The Middle East conflict, the AI boom and extreme weather events are contributing to upward pressure on a range of energy, agricultural and technology-related prices." Those are forces the RBA cannot directly control. What it can influence is domestic demand, and with it the risk that those price rises become embedded in broader inflation.

Jobs, housing and the balance of risks

A call for slower demand growth naturally raises questions about jobs. In her 18 September statement, Bullock said: "The unemployment rate – at 4.5 per cent – is low by historical standards." That was the figure at the time of her appearance. At her 29 September media conference, she cited a rate of 4.6 per cent, saying unemployment "has risen from 3.5 per cent over the past couple of years to 4.6 per cent" while over a million jobs had been created over that period.

She added on 29 September: "The unemployment rate is still quite low historically, and we still think the labour market is a little bit tight." Asked about recession, she said: "That is not our central base case at this moment."

Housing also featured in the parliamentary statement. "Housing prices are still around 50 per cent higher than they were in early 2020," Bullock said, while noting that housing prices have fallen in most capital cities. She was careful to add: "Monetary policy does not target housing prices."

On household finances, she told MPs: "The share of borrowers in negative equity remains very limited and only a small share are facing severe difficulty with their loan repayments." The Financial Stability Review, released on 1 October, supported that picture, finding that "Most Australian households with mortgages remain well placed to manage more difficult conditions."

From parliament to the September decision

Bullock told the committee on 18 September that the cash rate had already increased by 75 basis points in 2026. On 29 September, the Board added another 25 basis points, taking the cash rate target from 4.35 per cent to 4.60 per cent. The Board's statement said: "Today's policy decision was unanimous."

The statement also noted that recent data suggest growth and inflation in Australia have been higher than expected, and that "global energy prices are now much higher than had been assumed in the August forecasts." At the same time, it said "There are signs that growth in consumer spending is easing gradually as expected."

In other words, part of the slowing in demand the Governor described to parliament appears to be under way in household spending, while other parts of the picture have run hotter. "Growth in business investment and debt is strong," the statement said.

The Governor has also emphasised that rate changes act with a lag, saying "it can take 12, perhaps even 18 months" for the full effect. And she has pointed to the other side of the equation: productivity is "doing nothing", she said, and "the supply side of the economy has to grow."

What to watch:

  • 13 October, 11.30 am AEDT: minutes of the September meeting.
  • 28 October: the next CPI update.
  • 3 November, 2.30 pm AEDT: the next decision and the November Statement on Monetary Policy, with updated forecasts.

The Board has said it "will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed." That describes its stance rather than signalling any particular outcome.

The bottom line

Bullock's message to parliament was that Australia needs a stretch of subdued demand growth to ease capacity pressures and bring inflation down for good. With headline inflation at 4.0 per cent, underlying inflation around 3.5 per cent and a labour market the RBA still regards as a little tight, the Board followed her appearance with a fourth rate rise for 2026. The Governor framed it as a temporary phase, not a recession, and new forecasts on 3 November will show how the RBA now sees that phase playing out.