Governor Michele Bullock has described the one circumstance in which a sharp economic slowdown might be needed to tame inflation, and she was equally clear that it is not the Reserve Bank's central case.

Central bankers choose their words carefully, so when a Governor uses the phrase "quite a dramatic slowdown", it is worth understanding precisely what was said and in what context. Michele Bullock used it at her media conference on 29 September 2026, hours after the Monetary Policy Board unanimously raised the cash rate target by 25 basis points to 4.60 per cent.

The full remark was: "that is a circumstance in which I think you might need to have quite a dramatic slowdown in the economy". The circumstance she had in mind was specific. It applied only if inflation expectations became unanchored, that is, if people and businesses came to expect high inflation to persist and began setting prices and wages on that basis.

The quote in context

It would be easy to lift the phrase out of its setting and present it as a warning about the economy's direction. That would misrepresent it. On the same day, asked about the prospect of a recession, Bullock said: "That is not our central base case at this moment."

The dramatic-slowdown remark therefore describes a conditional, adverse scenario, not a forecast. It explains why the RBA treats inflation expectations so seriously: once expectations slip, the Governor suggested, the cost of restoring price stability could rise sharply.

She framed the September decision in exactly those terms. "It's critical that we stop expectations for high inflation from becoming embedded in price-setting decisions," she said, adding that "Higher interest rates are needed to ensure inflation returns to target."

Two paths, side by side

Drawing on the RBA's own statements, the contrast between its central view and the scenario Bullock warned about can be set out as follows.

The central case, as the RBA has described it:

  • Recession is "not our central base case at this moment".
  • Underlying inflation is forecast to stay above 3 per cent until mid-2027 and to be around 2½ per cent in late 2027 (August minutes).
  • Unemployment is forecast to rise gradually to 4.8 per cent by the end of 2028.
  • Bullock said "there is no wage price spiral going on in Australia."
  • Deputy Governor Andrew Hauser told ABC's 7.30 on 8 September that the Board was taking a gradual approach to protect jobs, while remaining prepared to raise rates further if needed.

The scenario Bullock flagged:

  • Inflation expectations become unanchored.
  • High inflation becomes embedded in price-setting decisions.
  • In that circumstance, Bullock said, "you might need to have quite a dramatic slowdown in the economy".

The RBA has not published, in the material reviewed here, any estimate of how large such a slowdown would be, how unemployment would respond or what cash rate it might require. Those details remain unknown.

What keeps the bad scenario at bay?

Several features of the current picture, as RBA officials have described them, bear on whether expectations stay anchored.

  1. Inflation is elevated but not extreme. Headline CPI rose 4.0 per cent over the year to August 2026. Underlying inflation has been about 3.5 per cent for the past six months, according to Bullock, and the trimmed mean measure was 3.6 per cent in the June quarter. Inflation peaked at 7.9 per cent at the end of 2022.
  2. Wages are not driving a spiral. Bullock attributed fast-rising unit labour costs to weak productivity rather than wages. "The bottom line is that productivity is doing nothing," she said.
  3. The labour market is softening gradually. Unemployment has risen from 3.5 per cent to 4.6 per cent over the past couple of years, in Bullock's account. "What it often means is that people might be taking longer to find a job," she said.
  4. Financial markets are orderly. On bond markets, Bullock said "the bond markets are reacting in an orderly way", adding: "So at this stage, I'd say not alarmed, but we are alert to it."

Against these sit the risks. The August minutes judged risks to the inflation outlook as skewed to the upside, and Assistant Governor (Economic) Sarah Hunter said on 14 September: "we do think the risks to inflation right now are skewed to the upside". The Board's 29 September statement noted that some upside risks had materialised, including further disruption to global oil supply from the Middle East conflict and strong AI-related demand pushing up technology-goods prices. Bullock said of the conflict: "It's lasted, and there doesn't seem to be any end to it."

Inflation has also been above the 2–3 per cent target since the second half of 2025, as Bullock noted in her 18 September Opening Statement to the House of Representatives Standing Committee on Economics. A prolonged period above target is one reason the Board has emphasised expectations.

Why the Board moved now

The Board judged that a further tightening was warranted to return inflation to target in a reasonable period. Read alongside the Governor's comments on expectations, the September increase fits a strategy of keeping the economy on the central path with measured moves, rather than risking the adverse scenario she described.

What the Board does next is not known. "I'm not going to give you forward guidance," Bullock said. The Board has said it "will continue to do what it considers necessary" and remains attentive to the data. The minutes of the September meeting are due on 13 October, the September CPI on 28 October, and the next decision at 2.30 pm on 3 November.

The bottom line

Bullock's "quite a dramatic slowdown" remark describes a conditional risk, not a forecast. She tied it explicitly to a scenario in which inflation expectations become unanchored, and on the same day said recession is not the RBA's central base case. The September rate rise was framed as a way of preventing high inflation from becoming embedded in price-setting. With headline inflation at 4.0 per cent, underlying inflation around 3.5 per cent and the RBA judging risks skewed to the upside, her comments, read together, link the current tightening to keeping that harsher scenario off the table, though the Board has given no guidance on what comes next.