The RBA's August forecasts depended on a run of good news that, by late September, the Board no longer expected to arrive in full, and the gap between that outlook and reality goes a long way to explaining the latest rate rise.

Forecasts are conditional by nature. Each set the RBA publishes rests on assumptions about energy prices, global demand, the exchange rate and the path of the cash rate itself. When those assumptions hold, the forecasts tend to hold too. When they do not, policy has to adjust.

That is essentially what the minutes of the Monetary Policy Board's 28–29 September meeting describe. Explaining the decision to lift the cash rate target by 25 basis points to 4.60%, the minutes say the August forecasts had required several favourable developments that no longer appeared likely to all occur.

What the August outlook assumed

The August 2026 Statement on Monetary Policy, with forecasts finalised on 5 August, set out a path in which inflation eased steadily. Its key projections, in year-ended terms, included:

  • Headline CPI: 3.9% in June 2026, easing to 3.6% by December 2026, 2.8% by June 2027 and 2.4% by mid-2028.
  • Trimmed mean (underlying) inflation: 3.6% in June 2026, easing to 3.3% by December 2026, 3.0% by June 2027 and 2.4% by mid-2028.
  • Unemployment rate: 4.4% in June 2026, rising gradually to 4.8% by the end of 2028.
  • GDP growth: 1.9% over the year to June 2026, slowing to 1.4% by December 2026.
  • Cash rate assumption: 4.3% in June 2026, 4.4% in December 2026 and 4.5% through 2027, before easing to 4.4% in 2028.

The statement said underlying inflation was expected to decline "to the midpoint of the 2–3 per cent target range in 2028", with headline inflation back in the 2–3% range by early 2027 and at or a little below the midpoint through 2028.

The cash rate assumption is the detail that now stands out. At 4.60%, the actual cash rate is above every point on the path assumed in August.

The developments that went the wrong way

The decision statement said some of the upside risks flagged in August were materialising. The minutes add the detail. Several of the shifts concerned prices directly:

  • Energy. The Middle East conflict broadened and escalated, and global energy prices were significantly above the August assumptions. Domestic petrol and diesel prices were 13% higher than forecast in August.
  • Technology inputs. The AI boom drove strong growth in Asian trading partners and pushed up prices of key components in the AI supply chain.
  • Services inflation. July inflation data were stronger than expected, particularly for market services.
  • Breadth. The share of items with prices rising by more than 2½% was "well above average".

Governor Michele Bullock summarised the global side at her media conference: "The conflict in the Middle East has escalated again in recent weeks, and oil prices have risen significantly." She also said "the global AI investment boom has driven significant price rises for some inputs".

It would be easy to blame the forecast miss on oil. RBA staff did not. The minutes record their judgement that the upside surprise more likely reflected domestic capacity pressures than the pass-through of Middle East cost shocks. Staff expected higher underlying inflation in the September quarter than forecast in August.

Bullock made the same point: "Inflation is too high and has been driven by domestic capacity pressures." She added that "The AI boom is also adding to demand in the Australian economy at a time when we already have capacity pressures."

Productivity is part of the explanation. The August forecasts had labour productivity falling 0.5% over the year to both June and December 2026, before recovering to 0.4% growth by June 2027. The minutes record that unit labour cost growth was above what is consistent with the inflation target, driven mainly by subdued productivity growth rather than strong nominal wages. "The bottom line is that productivity is doing nothing," the Governor said.

Not everything moved against the outlook. Output growth slowed but was stronger than expected in the June quarter. Labour market conditions eased broadly as expected, according to the decision statement, with unemployment rising to 4.6% in August alongside higher participation. Members cautioned about reading too much into labour force data given survey methodology changes.

The developments that cut the other way

Some of the news pointed to weaker activity, and the Board weighed it. Housing prices fell more than expected, and staff now judge the cumulative fall is likely to be greater than assumed in August. New housing loan commitments fell sharply, led by investors. Consumer spending is easing gradually.

The case for holding rates, as recorded in the minutes, rested on downside risks to activity and employment, a possibly larger-than-expected effect from falling housing prices, uncertainty in the Middle East and the lagged effects of earlier tightening. Staff scenario analysis, however, found that "even relatively large falls in housing prices would have only modest direct effects."

In the end, the Board concluded that the favourable combination the August path relied on was unlikely to materialise, and that the current setting might not restore balance in a reasonable timeframe. The vote was unanimous.

What happens to the forecasts now

The August numbers are not the RBA's last word. The RBA calendar lists a new Statement on Monetary Policy for November 2026, alongside the Monetary Policy Board meeting and decision. The next cash rate update is due at 2.30 pm on 3 November, and the next CPI update on 28 October.

The Board has not said what it will do. Its closing language commits only to doing what it considers necessary, "including increasing the cash rate target further if required."

The bottom line

The August forecasts rested on several favourable developments and on a cash rate path that peaked at 4.5%. By late September, global energy prices were significantly above the August assumptions, inflation had surprised on the upside and staff judged the cause to be mainly domestic capacity pressures. With the needed developments no longer likely to arrive together, the Board lifted the cash rate above every point on the August assumption. The RBA calendar lists the next Statement on Monetary Policy for November, when the outlook will be set out afresh.