The Governor's warning that much of the 2026 tightening is yet to be felt helps explain both the Board's patience in August and its willingness to move again in September.

A single sentence from Governor Michele Bullock's 29 September media conference captures one of the central ideas in monetary policy. Reflecting on the Board's earlier decisions, she said: "We raised interest rates three times earlier in the year." Then came the qualifier: "A lot of that effect is still to flow through."

The remark is easy to skim past. It matters because it shapes how the Reserve Bank reads every new piece of data. If the effects of the February, March and May rises are still building, the economy the Board sees today is not the economy those decisions will eventually produce. And the September increase, which lifted the cash rate target to 4.60 per cent, has barely begun its own journey through household and business budgets.

What Bullock actually said

Bullock made the comments at the press conference that followed the Board's decision to raise the cash rate by 25 basis points, at a time when parts of the economy were already showing signs of slowing. She also spoke about the time it takes for interest rate changes to have their full impact, saying "it can take 12, perhaps even 18 months".

Taken together with the dates, the point is straightforward. The first rise of the year was on 3 February. By the end of September, fewer than eight months had passed. On the Governor's description, even the earliest of this year's increases may not yet have done all of their work, and the later ones even less so.

She was equally clear that the Board was not prepared to wait indefinitely. "Higher interest rates are needed to ensure inflation returns to target," she said. "Inflation is too high and has been driven by domestic capacity pressures." And on the outlook: "The Board will increase interest rates again if that's what's needed to get inflation down."

The parts of the economy where the hikes are biting

Some effects have clearly arrived. Assistant Governor (Financial Markets) Christopher Kent, speaking on 13 August when the cash rate was 4.35 per cent, said "the three cash rate increases earlier this year are having their intended effects." He listed several of them:

  • "Lending and deposit rates have increased in line with the cash rate."
  • "Scheduled mortgage payments have risen and are now close to their 2024 peak as a share of household disposable income."
  • "Growth of new housing loans has fallen significantly."
  • "Housing prices have declined in Sydney and Melbourne, with declines becoming increasingly broad-based."
  • "forward indicators such as auction clearance rates have also declined to be below their long-run averages."

The Board's 29 September statement added to that picture. It noted that output growth had slowed, that consumer spending was easing gradually, that housing prices had fallen in most capital cities and that new housing loans had declined noticeably. The labour market had eased broadly as expected.

Bullock also gave a rough sense of the burden on borrowers. She said mortgage payments were "back up sort of around 10 per cent of" disposable income, an approximation, comparing that with "when we had interest rates at 4.35 per cent, so they'll go up a bit further."

Where the effect has not yet landed

Other parts of the economy are still running hot, which is partly why the Board moved again. The September statement described business investment and debt growth as strong, and said inflation remained elevated. Short-term inflation expectations were high and recent inflation outcomes had been stronger than expected. Bullock noted that "businesses in our liaison program continue to expect strong increases in their costs over the year ahead."

The inflation figures show the gap that remains. Headline inflation was 3.9 per cent over the year to the June quarter, and the monthly CPI indicator recorded 4.0 per cent for August. Underlying inflation, measured by the trimmed mean, was 3.6 per cent in the June quarter, and Bullock described it in September as "about 3.5 per cent". The Board's target is 2–3 per cent, with a midpoint of 2.5 per cent.

There are also reasons why the transmission of higher rates may be slower or more uneven than in the past. Bullock highlighted the role of offset accounts: "a lot of people have a mortgage, and then they have an offset account, which sits in the background." She added that "the amount of money in those offset accounts has actually grown quite a lot over the last decade or so." The October Financial Stability Review estimated that the median borrower is able to cover over a year of scheduled mortgage payments from offset and redraw buffers. It is possible that households with large buffers take longer to change their spending in response to higher repayments, although the size of that effect is hard to pin down.

Another channel works through the currency. Bullock said: "The exchange rate channel takes a while to feed through." Kent noted in August that the Australian dollar had appreciated "by around 5 per cent on a trade-weighted basis since the start of the year", and that "A higher exchange rate helps moderate inflation by lowering the domestic price of imports."

Why the lag cuts both ways

The "still to flow through" idea creates a genuine dilemma for any central bank. Move too aggressively, and the combined weight of past and present increases could slow the economy more than intended. Wait too long, and inflation risks becoming embedded, which the Board says it is focused on preventing.

The Board's own forecasts illustrate the uncertainty. The August Statement on Monetary Policy, prepared on a cash rate assumption of around 4.3 to 4.5 per cent and therefore before the September hike, had headline inflation returning to the target range by early 2027. Bullock told a parliamentary committee on 18 September that "inflation will not return to around the midpoint of the target range until late 2027." Asked about the risk of recession, she said: "That is not our central base case at this moment."

The bottom line

Bullock's message is that the 2026 rate rises are a work in progress. Some effects are visible in lending, housing prices and repayments, while others, particularly on inflation itself, are still to come. The Board held in August as earlier increases were, in Kent's words, "having their intended effects", and it moved again in September as some of the upside risks it had flagged began to materialise.

The next steps will depend on the data, starting with the September minutes on 13 October and the CPI release on 28 October. Bullock has declined to signal the outcome of the 3 November meeting: "I'm not going to give you forward guidance."