Key Highlights

  • The Governor told senators the full effects of recent rate rises are yet to be felt, after four increases totalling 100 basis points this year.
  • The effects arrive through mortgage repayments, spending decisions, housing and credit, and business plans.
  • The lag cuts both ways, since September CPI of 4.3 per cent and likely higher forecasts also weigh on the Board.

Governor Michele Bullock told a Senate committee that the effects of this year's rate rises have not yet fully worked through the economy, a point that shapes how the Board reads every new data release.

Monetary policy has a timing problem. A change to the cash rate is announced in an afternoon, but its effect on borrowing, spending, hiring and prices plays out over many months. That lag sat quietly in the middle of Governor Michele Bullock's opening statement to the Senate Economics Legislation Committee at Supplementary Budget Estimates on 28 October 2026.

Among the developments she listed since the committee's June hearing, the Governor said the full effects of recent rate rises are yet to be felt. Since that June hearing, the Board had raised the cash rate target by a further 25 basis points, taking the cumulative increase this year to 100 basis points.

For households, businesses and anyone trying to anticipate the Board's next move, that observation matters. It suggests the economy is still adjusting to decisions already taken, even as the Board weighs whether more is needed.

How 100 basis points built up

The Board has raised the cash rate target four times in 2026. The fourth increase came on 29 September, when the Monetary Policy Board unanimously lifted the target by 25 basis points to 4.60 per cent, effective 30 September.

In its statement that day, the Board explained that "The three increases in the cash rate target since the beginning of the year have tightened financial conditions" and that "the Board judged that, in light of recent developments, a further tightening in financial conditions is warranted". It cited inflation that "remains elevated" and noted that "some of the upside risks flagged in August are materialising."

Assistant Governor (Economic) Sarah Hunter summarised the year on 60 Minutes, broadcast on 25 October: "the Board have put through four rate hikes this year."

Why the effects arrive slowly

Rate rises reach the economy through channels that each take time:

  • Mortgage repayments. Lenders adjust variable rates and repayment schedules, and households on fixed rates feel nothing until their fixed period ends.
  • Spending decisions. Households tend to adjust consumption gradually as higher repayments eat into budgets and buffers are drawn down.
  • Housing and credit. Borrowing capacity falls, new lending slows and property prices respond over a period of months.
  • Business plans. Firms reconsider investment and hiring as demand and financing costs change.

Several of those channels are already visible. The Governor told senators that household spending growth is moderating only gradually, that housing prices have fallen in most capital cities and that new housing loans have declined. Labour market conditions, in the Board's September words, "have eased broadly as expected in recent months".

Other signs point the other way. Business investment has picked up, the Governor said, mainly in data centres and renewable energy, and output growth, according to the September statement, exceeded expectations in the June quarter at the margin.

What the lag means for households

Because the full impact is still to come, some households may feel more pressure in the months ahead even if rates do not move again. Governor Bullock has not glossed over that. At her 29 September media conference she said: "Those who have mortgages, yes, this clearly impacts them and it hurts them." She also said: "But at an individual level, yes, there are households that are hurting."

In aggregate, the RBA's October Financial Stability Review found that "Most Australian households with mortgages remain well placed to manage more difficult conditions". Around 2 per cent of variable-rate owner-occupiers have a cash-flow shortfall, a share projected to stay a little under 2 per cent and well below the 2024 peak. The median borrower can cover more than a year of scheduled payments from buffers. Arrears of 90 days or more rose a little over the year to date, to around pre-pandemic levels, and the share of borrowers in formal hardship increased but remains low.

The Review also modelled a severe scenario, with unemployment at 6.3 per cent, house prices falling 20 per cent, a cash rate of 5.6 per cent, inflation of 7 per cent and GDP falling 1.4 per cent. In that hypothetical, the share of mortgagors in cash-flow shortfall rises to about 5 per cent. It is a stress test, not a forecast.

Lags versus a hot inflation print

The lag argument cuts both ways for the Board. On one hand, it means past increases will keep restraining demand. On the other, inflation has not yet responded as hoped, and new pressures have emerged.

The Australian Bureau of Statistics reported on 28 October that headline CPI rose 4.3 per cent in the 12 months to September 2026, up from 4.0 per cent in August. Trimmed mean inflation, the underlying measure, was 3.6 per cent, up from a revised 3.5 per cent. Both remain above the 2–3 per cent target range, which uses the 2.5 per cent midpoint as reference.

The Governor told senators that "global energy prices are now much higher than had been assumed in the August forecasts" and that "Inflation will therefore likely be higher than was our base case in August." She added that the Middle East conflict has re-escalated and that short-term inflation expectations are elevated. Low productivity growth, she said, means the economy cannot grow rapidly without adding to inflation pressure.

At her September media conference, she stressed why that matters: "It's critical that we stop expectations for high inflation from becoming embedded in price-setting decisions".

The Board's guidance is that it will be "attentive to the data and the evolving assessment of the outlook and risks", including "increasing the cash rate target further if needed". The decision on 3 November has not been made.

The bottom line

Governor Bullock's reminder that the full effects of this year's 100 basis points of increases are yet to be felt is central to understanding the Board's position. Some of the restraint from past rises is still in the pipeline, which will weigh on spending and borrowing in the months ahead. Yet with headline inflation at 4.3 per cent, underlying inflation at 3.6 per cent and energy prices higher than assumed, the Board has said it is prepared to act further if needed. Its decision, and a new Statement on Monetary Policy, will be released at 2.30 pm (AEDT) on 3 November.