Even as it lifted the cash rate to 4.60%, the Reserve Bank said recession is not its central expectation – but the path to a soft landing has narrowed and the risks are real.

Can a central bank raise interest rates to fight inflation without tipping the economy into recession? That is the question hanging over the Reserve Bank of Australia after the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.60% on 29 September 2026.

Addressing the question of recession at her media conference, Governor Michele Bullock was clear: "That is not our central base case at this moment."

That sentence is worth reading carefully. It is not a promise, and the qualifier "at this moment" does real work. But it does tell us that, in the RBA's assessment, the economy still has enough momentum to absorb higher rates without contracting – at least on the central scenario.

What a "soft landing" means

Economists use the term soft landing to describe an outcome where inflation returns to target without a recession and without a large rise in unemployment. The image is of an aircraft descending gently rather than crashing. A hard landing, by contrast, is when the effort to bring inflation down triggers a sharp slowdown and significant job losses.

For the RBA, the target is inflation of 2–3%, with a midpoint of 2.5%. Headline inflation was 4.0% over the year to August on the monthly CPI indicator, and the Governor said underlying inflation has "been about 3.5 per cent for the past six months". So there is still distance to travel.

The challenge is that monetary policy works by slowing demand. Raising rates is designed to cool spending enough to take pressure off prices. The art lies in doing just enough – and the uncertainty lies in the fact that no one knows precisely where "just enough" sits.

The case for a soft landing

Several pieces of evidence cited by the RBA support the view that the economy is not on the brink of a downturn.

  • Growth has slowed, but the Board's statement said it remains stronger than expected.
  • The Governor said: "Domestic spending and investment have been stronger than expected."
  • She pointed to "over a million jobs created" and described unemployment as "still quite low historically".
  • The Board said labour market conditions have "eased broadly as expected in recent months", with leading indicators "broadly stable".
  • The Governor said "The AI boom is also adding to demand in the Australian economy."

The August Statement on Monetary Policy also assessed the labour market as "still ... a little tighter than full employment". That suggests there is some room for conditions to loosen further without implying severe job losses.

On wages, the Governor offered reassurance: "There is no wage price spiral going on in Australia." That matters for the soft-landing case because a wage-price spiral would require much tougher action to break.

Why the runway has narrowed

The same evidence that supports a soft landing also complicates it. Strong demand is part of why the Board raised rates. The statement cited "pressure on domestic capacity" and said "Firms are experiencing cost pressures" and are increasing or planning to increase prices. The Governor added: "Inflationary pressures will persist for longer than previously expected."

In other words, the economy's resilience is a double-edged sword. It reduces the near-term risk of recession, but it also means inflation is taking longer to fall, which can require rates to stay higher for longer or rise further.

Unemployment has also risen. The Governor said "the unemployment rate has risen from 3.5 per cent over the past couple of years to 4.6 per cent". That is still low by historical standards, but it is a reminder that a soft landing does not mean no one is affected. A gradual increase in unemployment is often part of how inflation is brought down.

Productivity is another headwind. "Productivity growth remains weak," the Governor said, adding that "productivity is doing nothing." Weak productivity limits how fast the economy can grow without generating inflation, which narrows the margin for error.

The downside scenarios

The RBA was frank that its central case is not the only possibility. The statement described "heightened uncertainties" and said the Middle East conflict remains "unresolved", with scenarios where inflation could be higher and activity lower than forecast. That combination – higher prices alongside weaker growth – is one of the most difficult for a central bank to manage.

The Governor was candid about the impact of the conflict: "the Middle East conflict has been a big shock, and it's made us all poorer in this country". She also noted: "Oil prices have risen significantly. Disruptions to oil supply could last longer than anticipated."

It is also worth noting that the RBA's latest published forecasts, from the August Statement on Monetary Policy, predate the September increase. At that time the cash rate was 4.35% and the forecasts had trimmed mean inflation reaching 2.5% by early 2028. The Board has since said global energy prices are "now much higher" than assumed for those forecasts.

The Board's guidance also keeps further tightening on the table. 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." Every additional increase raises the stakes for the soft-landing scenario.

Signals worth watching over coming months include:

  • Whether underlying inflation continues to ease towards the target band.
  • Whether unemployment keeps rising gradually or begins to accelerate.
  • Whether spending and investment remain resilient once higher rates flow through.
  • How energy prices evolve as the Middle East conflict develops.

The bottom line

The RBA is not forecasting a recession, and the evidence it cites – solid job creation, stronger-than-expected spending and a labour market that has eased only gradually – supports that view. But the Board is also clear that the risks are elevated, inflation is proving persistent and it stands ready to act further. A soft landing remains the central scenario, not a certainty. The next milestones are the CPI release on 28 October 2026 and the Board's decision at 2:30 pm AEDT on 3 November 2026.