The Reserve Bank judges that Australia's economy is still trying to do more than it can sustainably manage, and its forecasts map out a deliberate slowdown to bring Demand back into line with supply.

Think of the economy as a road with a speed limit. Drive within it and prices stay broadly stable. Push beyond it for too long and Inflation builds. In the language of the November 2026 Statement on Monetary Policy (SMP), Australia is still over the limit: "The economy is currently operating with excess demand and is judged to reach balance next year".

That single sentence goes a long way to explaining why the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.85% on 3 November 2026, effective the following day. The decision was a six to three majority, with three members preferring to hold at 4.60%. It was the fifth increase of 2026.

What "excess demand" means

Excess demand describes a situation where households, businesses and governments together want to buy more goods and services than the economy can comfortably produce with its available workers, equipment and technology. When that happens, firms find it easier to raise prices and harder to find staff, and inflation tends to rise.

The RBA's assessment of the gap has grown over recent months. The minutes of the 29 September meeting recorded that "Members expressed their concern that excess demand was greater than previously assessed." Governor Michele Bullock told the Senate Economics Legislation Committee on 28 October that "the labour market seems a little tighter than we had previously judged" and that "Household spending growth has been moderating only gradually."

Business Investment has also been strong. The September minutes noted it was up more than 10% over the year, and the decision statement said Business investment, including data centres, is stronger in the near term.

The other side of the equation is Supply — how fast the economy can grow without generating inflation. Here the news has been less encouraging.

Deputy Governor Andrew Hauser told a Citi conference in Sydney on 21 October that the RBA had cut its assumption for underlying productivity growth from 1% to 0.7%. Productivity is a key determinant of how quickly the economy's capacity expands. A lower assumption means the speed limit is lower than previously thought, so a given level of demand creates more pressure.

It is one piece of the backdrop to forecasts that show inflation staying higher for longer even as growth slows. In paraphrase, the decision statement lists the drivers of higher inflation as higher fuel and Commodity prices from the Middle East conflict, capacity pressures, and AI-related investment lifting technology goods prices.

The road map in numbers

The SMP lays out the RBA's expected path back to balance. These are forecasts (year-ended, with August forecasts in brackets), not guarantees:

  • GDP growth, year to December 2026: 1.6% (1.4%)
  • GDP growth, year to December 2027: 1.3% (1.6%)
  • Unemployment, December 2026: 4.7% (4.5%)
  • Unemployment, December 2027: 4.9% (4.7%)
  • Unemployment, December 2028: 5.1% (4.8%)

The pattern is one of slower growth and a gradual rise in Unemployment as demand cools. The SMP says: "Tighter monetary policy alongside a weaker outlook for the housing market is expected to keep GDP growth below trend." The decision statement adds that "The forecasts see growth in output slowing further over the coming year".

Alongside that, the RBA expects employment to keep growing, even as unemployment rises. It also expects inflation to ease, though slowly: inflation is not expected to reach the top of the 2–3% target range until late 2027, about three quarters later than previously forecast.

The brakes being applied

Several forces are expected to slow demand:

  • Interest rates. The SMP states: "Financial conditions are judged to be restrictive." The forecasts assume a cash rate averaging 4.9% in 2026/27 and 4.8% in 2027, based on market pricing as at 28 October.
  • Housing. The decision statement notes that "housing prices have fallen significantly" and that "Higher interest rates and falls in housing prices and turnover are expected to weigh on growth". Bullock told the Senate committee: "Housing prices have fallen in most Capital cities and new housing loans have declined."
  • A slowing economy already under way. The statement says: "The economy is slowing, housing prices have fallen significantly and the unemployment rate has risen."

Hauser has been direct about the purpose: "We need a period of below-trend growth to bring inflation down, and we're seeing that happening." He also acknowledged the human cost: "No lost Job is one to celebrate."

A controlled slowdown, not a crash

The RBA is at pains to stress that it is aiming for a gradual cooling rather than a sharp contraction. Assistant Governor Sarah Hunter, in an interview aired on 25 October, said: "We're not trying to achieve a sharp stop or a really big downturn or anything like that." Asked about recession, she said: "We don't see any signs of that yet in any of the data that we track."

Still, the road map carries risks. The RBA describes uncertainty as heightened and has set out scenarios in which inflation is higher and activity lower. Not all indicators point the same way, either: Assistant Governor Christopher Kent noted on 19 October that "there are indicators where the labour market has become less tight a bit faster than we might have forecast."

The six to three vote is a reminder that weighing excess demand today against a slowing economy tomorrow is a delicate judgement.

The bottom line

The RBA's road map has three stages: an economy currently running with excess demand, a period of below-trend growth and rising unemployment, and a return to balance that the SMP expects next year, with inflation following more slowly. Lower assumed productivity growth means the economy's speed limit is lower than previously assumed, leaving less room for demand to run before it adds to inflation. The forecasts may change, and the next monthly CPI on 25 November 2026 and the 8 December decision will offer fresh signals. Readers wanting to understand how this affects their own situation can consider speaking with a licensed adviser or their lender.