Highlights

  • The RBA judges the labour market slightly tighter than it previously assessed.
  • Weak productivity limits strong growth without additional Inflation pressure.
  • Data centres and renewable projects drive stronger Business Investment growth.

Slower Demand has yet to remove Australia’s domestic inflation pressures, with weak productivity restricting the economy’s ability to grow without pushing prices higher. Reserve Bank of Australia Governor Michele Bullock told a Senate committee on 28 October 2026 that a further period of subdued Aggregate Demand growth was needed, even as the economy slowed broadly as expected.

Labour Market Assessment Tightens Despite Unemployment Rise

The unemployment rate recently rose a little more than the RBA had expected. Even so, Bullock said the labour market appeared a little tighter than the Central Bank had previously judged.

The evidence lies in elevated underlying inflation pressures. When large volatile price movements such as fuel are removed, the RBA still sees inflation in areas reflecting domestic demand for goods and services. That makes domestic capacity a continuing part of the inflation problem.

The share of the population with a Job remains high. Bullock described that as a welcome outcome for workers, their families and the broader economy, while reaffirming the RBA’s commitment to Full Employment alongside price stability.

Productivity Limits the Room for Growth

Continued weak productivity growth means the economy cannot expand strongly without placing pressure on inflation, Bullock said. She identified this as a fundamental challenge for Australia and for real spending power over the next few years.

Domestic demand growth is slowing, but the RBA considers a further period of subdued aggregate demand necessary to reduce capacity pressures sustainably. The assessment reflects constraints within the economy as well as price shocks arriving from overseas.

Recent inflation has been around 3½ to 4 per cent in year-ended terms. Higher global energy costs, the AI boom and extreme weather are adding to the pressures already evident in domestic goods and services.

Business Investment Strengthens as Household Spending Moderates

The slowdown is uneven across spending categories. Household spending growth has moderated only gradually, while business investment growth has picked up strongly. Spending on data centres and renewable energy projects accounts for most of that investment strength.

The RBA has increased the cash rate target by 100 basis points this year, including 25 basis points since the Committee’s June hearing. Because Monetary Policy operates with a lag, the full effect of the recent increases on activity has not yet arrived.

Bullock said the Board would consider the flow of data and unfolding risks at its next meeting. Its central question is whether the tightening delivered so far will bring inflation back to target within a reasonable timeframe.

The RBA retains flexibility over the timing of a return to the midpoint of its 2–3 per cent target range so that it can balance its employment objective. But allowing inflation to stay away from target for too long risks embedding it in expectations and, through those expectations, in wage and price decisions.