![\"A](\"https:\/\/www.rba.gov.au\/speeches\/2026\/images\/sp-gov-2026-03-03-graph01.svg\")
<\/p>\nI would like to begin by acknowledging the Traditional Custodians of the land on which we meet and pay my
\n\trespects to Elders past and present. I extend that respect to all Aboriginal and Torres Strait Islander
\n\tpeople joining us today.<\/p>\n
Thank you for having me today. This is an important opportunity to reflect on the forces shaping the
\n\tAustralian economy, how these forces are shifting, and how the Monetary Policy Board is responding.<\/p>\n
Since the middle of last year, inflationary pressures have picked up, partly because capacity pressures
\n\thave been stronger than we previously assessed. With underlying inflation now expected to enter the 2\u20133 per cent range in mid-2027 and the labour market still somewhat
\n\ttight, the Board was unanimous in its decision to raise the cash rate in February.<\/p>\n
Today I will set out why the Board judged a rate rise to be necessary in February, how it supports our
\n\tmonetary policy strategy, and how we make decisions even when uncertainty is elevated. I also want to
\n\texplain why listening directly to Australian households and businesses is an essential input to our
\n\tdecision-making.<\/p>\n
Inflation is too high and monetary policy needed to respond<\/p>\n
In the statement following its decision in February, and in the subsequent minutes of the meeting, the
\n\tBoard noted that inflation is too high and that some of the recent increase in inflation is likely to
\n\tpersist (Graph\u00a01). Staff forecasts did not see inflation coming back into the target band until
\n\tmid-2027 \u2013 that is over a year away. The staff\u0092s view is that the CPI data for January, which
\n\twas released after the February meeting, broadly supports this assessment. Headline inflation was
\n\t3.8\u00a0per\u00a0cent in the year to January and it will continue to be boosted for a time by the
\n\tunwinding of electricity rebates. But measures of underlying inflation, which strip out some of the large
\n\ttemporary price moves, are also above the top end of our 2\u20133 per cent
\n\ttarget band.<\/p>\n
Graph 1<\/p>\n
\t\t<\/p>\n
High inflation imposes real costs on people and the economy. It puts pressure on household budgets, which
\n\tmeans people need to spend more time searching for the lowest prices and working out how to make ends
\n\tmeet. This can be stressful and can force some tough decisions. We don\u0092t want families to have to
\n\tcut back on after-school activities for their children or delay non-urgent medical care. And we certainly
\n\tdon\u0092t want people to go without essentials. These are just some examples of the real costs of high
\n\tinflation for all Australians that we are trying to avoid.<\/p>\n
High inflation also makes it harder for businesses to plan. When businesses have to spend more time
\n\tmanaging rising costs, they have less time to plan how they can grow through investment and productivity
\n\timprovements. Even when businesses have growth plans, high inflation creates uncertainty, and that can
\n\tlead them to delay those plans. This is why low and stable inflation matters. It eases the strain on
\n\thousehold budgets and creates the conditions businesses need to invest and lift productivity.<\/p>\n
We have spent a lot of time thinking about the recent increase in inflation and whether this will
\n\tcontinue. Temporary factors have played a part, as my colleague Michael Plumb said in a speech last
\n\tweek. But we
\n\tjudge that some of the inflation pressures are because demand exceeds the economy\u0092s supply capacity.
\n\tAround six months ago we thought that demand and supply would soon be close to balance. But we now think
\n\tdemand was outstripping supply over the second half of last year. There are a few reasons for this. <\/p>\n
First, private demand has been stronger than we expected. Global conditions proved more resilient than
\n\tmany feared after the tariff announcements last year, and financial conditions have been more supportive
\n\tof growth than anticipated. <\/p>\n
Second, the economy\u0092s supply potential appears to have been somewhat lower than previously assessed.
\n\tAnd with our updated judgement that underlying demand exceeds that supply potential, inflation is likely
\n\tto remain above target until those pressures ease. That assessment was central to the Board\u0092s
\n\tdecision to increase the cash rate last month.<\/p>\n
As you know, the Board looks closely at the labour market when making its decisions. Under our dual
\n\tmandate, we aim not only to keep inflation low and stable but also to achieve full employment \u2013
\n\twhich is the highest level of employment that is consistent with low and stable inflation.<\/p>\n
Last year we were concerned that there was a risk that the labour market could weaken materially. That has
\n\tnot happened \u2013 which is very welcome \u2013 and the labour market was resilient through 2025. In
\n\tfact, recent labour market outcomes have come in stronger than we anticipated mid-last year, as my
\n\tcolleague Sarah Hunter highlighted in a speech a few weeks ago. Unemployment is still low, the
\n\tvacancies-to-unemployment ratio is high, and growth in unit labour costs remains elevated (Graph\u00a02).\n<\/p>\n
Graph 2<\/p>\n
\t\t![\"A](\"https:\/\/www.rba.gov.au\/speeches\/2026\/images\/sp-gov-2026-03-03-graph02.svg\")
<\/p>\n
While we expect labour market conditions to ease over time as the economy comes back into balance, we
\n\tstill assess that it is somewhat tight overall. Our judgement in February was that capacity pressures
\n\t\u2013 in the labour market and the economy more broadly \u2013 contributed to the recent increase in
\n\tinflation, and that it was appropriate to tighten policy. The danger we faced was that leaving interest
\n\trates unchanged would risk having inflation above target for longer, ultimately requiring a more
\n\taggressive tightening later, and a more costly adjustment in the labour market.<\/p>\n
Another concern is that the longer inflation stays above target, the greater the risk that people expect
\n\tinflation to stay high. While measures of longer term inflation expectations remain stable, near-term
\n\texpectations have increased a little over the past six months. We are alert to this risk, and we closely
\n\tmonitor expectations using surveys, our business and community liaison program, and financial
\n\tmarket-based measures.<\/p>\n
Dealing with uncertainty<\/p>\n
I\u0092m often asked to give more guidance on the direction of monetary policy, and as you know, I\u0092m
\n\treluctant to do that. <\/p>\n
This is because we set policy in an inherently uncertain environment, from unexpected developments here
\n\tand overseas, as well as uncertainty around our own assessments, forecasts and models.<\/p>\n
That means judging a range of risks and how they might play out. Sometimes the answer is more obvious
\n\t\u2013 when inflation climbed quickly after the pandemic and the cash rate was very low, interest rates
\n\tclearly had to rise.<\/p>\n
But there are other times when the answer is much less clear.<\/p>\n
\n\tThe past few days have seen a significant escalation in conflict and instability in the Middle East, which is deeply
\n\tconcerning. The human cost is particularly regrettable, and we sincerely hope that conditions improve quickly for
\n\tall civilians affected.\n<\/p>\n
\n\tThese events are a timely reminder that in this world of geopolitical uncertainty, things can change quickly. It\u0092s
\n\ttoo early to say what the economic impact will be, events are moving rapidly and there are different ways this can
\n\tplay out. We will take some time to make sense of what it could mean for inflation here. A supply shock could, for
\n\texample, add to inflation pressures. And the potential implications for inflation expectations are something we are
\n\tvery alert to.\n<\/p>\n
But at the same time, a prolonged impact on energy markets could have adverse effects on global economic
\n\tactivity and result in downward pressure on inflation. It is not obvious how this might play out.<\/p>\n
So as much as I know the public would like more certainty about the direction of interest rates, it would
\n\tbe wrong for us to pretend to have greater certainty than we do. <\/p>\n
But that does not mean the Board throws up its hands and says it\u0092s all too hard. <\/p>\n
On the contrary, the staff set out their view of the most likely central case outcome for the major
\n\teconomic variables, which is an important input in the Board\u0092s discussions. And we also look at a
\n\trange of scenarios to understand how the economic outlook might change and how policy may need to respond
\n\tin those circumstances. <\/p>\n
Most importantly, if it becomes clear that the economy has evolved differently from our earlier
\n\texpectations, and that difference is likely to endure, then we adjust the stance of policy, as was the
\n\tcase in February.<\/p>\n
Our approach to dealing with uncertainty varies depending on the context. For example, global developments
\n\tcan be significant drivers of economic outcomes in small open economies like Australia and are therefore
\n\ta major source of uncertainty. These developments take many forms. Some stem from shocks to global
\n\tdemand, for example, due to slower economic growth in our key trading partners. For these kinds of
\n\tshocks, we have history, economic frameworks and models to help us understand the range of possible
\n\timplications for the Australian economy and inform our decisions. Sometimes, however, as was the case
\n\tduring the pandemic, these events are unique and history is not a great guide for how they will play out.
\n\tThese situations require us to supplement our models with informed judgements about the range of possible
\n\toutcomes.<\/p>\n
There are also more ambiguous sources of uncertainty where it can be difficult to pin down the
\n\timplications for our economy. Over the past few years, we have seen a ratcheting up of
\n\tgeopolitical uncertainty and, as I noted before, the recent events in the Middle East are a manifestation
\n\tof that. These types of uncertainties are complex because there are many ways that events could unfold
\n\tand so they can\u0092t be easily captured in our models. To inform our judgement in such cases, we speak
\n\tand listen to others with a variety of perspectives to work through the plausible range of scenarios.
\n\tSuch conversations, for example, helped staff simulate the effects of trade tensions under different
\n\tassumptions using scenario analysis in May 2025. This helped the Board think through the issues
\n\tquantitatively.
\n\tThat said, it\u0092s impossible to predict outcomes with any degree of confidence for this type of
\n\tuncertainty. <\/p>\n
Instead, we must ensure we can position monetary policy to respond if needed. With the cash rate currently
\n\tat 3.85\u00a0per\u00a0cent, and the economy closer to balance than it was a few years ago, we believe we
\n\tare well positioned for such a response if it were to be required. <\/p>\n
But it\u0092s not only future shocks that we need to consider. We also face uncertainty about where the
\n\teconomy stands right now. Our real-time assessment of economic conditions, which underpins our view of
\n\tthe outlook, is always uncertain. The data we rely on can be noisy, incomplete and are usually released
\n\twith a lag. <\/p>\n
Some key concepts \u2013 like spare capacity \u2013 cannot be directly observed, despite being critical
\n\tfor the medium-term inflation outlook. In such cases, we must form a judgement. Sometimes, when
\n\tthe strength of capacity pressures is clear, these judgements are relatively straightforward. By the
\n\tmiddle of 2022, for example, inflation had surged to above 7\u00a0per\u00a0cent, unemployment was very
\n\tlow at around 3\u00bd\u00a0per\u00a0cent and job vacancies were very high \u2013 all strong and consistently
\n\tindicating that the economy was running hot and that monetary policy needed to be tightened.<\/p>\n
But when the economy is closer to balance and demand is near its supply potential, it becomes harder to
\n\tknow whether monetary policy needs to shift to bring inflation back to target.<\/p>\n
The data can send mixed signals, so in forming an assessment about spare capacity we also incorporate
\n\tqualitative information. This is the situation we found ourselves in in August last year when underlying
\n\tinflation had been steadily declining and was approaching the midpoint of the target band, consistent
\n\twith the economy returning to balance. But at the same time, several indicators and model estimates
\n\tpointed to ongoing tightness in the labour market and the economy more broadly. The Board needed to weigh
\n\tthese mixed signals carefully and acknowledge the risk that capacity pressures could be tighter than
\n\tassessed, which would mean higher inflation than staff had forecast at the time. <\/p>\n
As it turned out, inflation did pick up, in part because this risk was realised. And at the margin, recent
\n\tlabour market data point to the risk that conditions may in fact be tightening. This is the environment
\n\twe are operating in now: the judgements about whether the economy is running a bit too hot are not
\n\tstraightforward, but we still need to make them. <\/p>\n
It also underscores why it is so important for monetary policy to be data-driven. Being
\n\t\u0091data-driven\u0092 doesn\u0092t mean we react to every new number or look solely in the rear-view
\n\tmirror. Instead,
\n\tmonetary policy must respond to the outlook for inflation and employment, because interest rates take
\n\ttime to affect the economy. This means drawing on all the available evidence to keep testing and refining
\n\tour central view, and our view of the risks around it.<\/p>\n
The importance of listening directly to households and businesses <\/p>\n
I\u0092ve spoken about how traditional economic data and models can tell us a great deal about what is
\n\thappening in the economy right now and where the economy might be in a year or so. But they cannot always
\n\texplain what\u0092s driving those developments, or whether they are likely to continue. <\/p>\n
That\u0092s why we also draw on what we hear through our business liaison program about what organisations
\n\tare seeing now, and what they expect next. <\/p>\n
Our liaison program has been running since 2001, and in that time our staff have conducted almost 23,000
\n\tinterviews with businesses and community organisations. We have teams in Adelaide, Brisbane, Melbourne,
\n\tPerth and Sydney, and we get to other capital cities and regional centres regularly too. I was in Geelong
\n\tonly last week speaking with the business community. <\/p>\n
The qualitative information we gather plays an important role in our economic analysis and forecasting
\n\tprocess, particularly in times of high uncertainty or of rapid change, where economic data and models may
\n\tfall short. For example, in early 2022 the Board agreed that timely evidence from liaison and business
\n\tsurveys indicated that labour cost pressures were building, even though this was not yet evident in
\n\ttraditional data. The wage and price outcomes and expectations reported by firms through liaison have
\n\thistorically had a high correlation with the private WPI and the CPI and are therefore a useful input
\n\tinto our assessment of current inflationary pressures (Graph\u00a03). <\/p>\n
Graph 3<\/p>\n
\t\t![\"Two-panel](\"https:\/\/www.rba.gov.au\/speeches\/2026\/images\/sp-gov-2026-03-03-graph03.svg\")
<\/p>\n
But listening to businesses and the community matters for more than just our forecasts. Our role is to
\n\tserve the Australian public, and that starts with hearing what people are experiencing.<\/p>\n
In early 2025 we expanded these efforts by introducing a new survey of the Australian public, in-step with
\n\tpeer central banks. The survey tells us a great deal about the key issues
\n\tAustralians are facing as well as their understanding of monetary policy and the economy. It also gives
\n\tus direct insights into the public\u0092s level of trust in the RBA. Maintaining public understanding,
\n\ttrust and confidence is critical because it underpins our ability to achieve our policy objectives and to
\n\tmaintain our independence.<\/p>\n
In relation to the Australian economy, our survey consistently identified inflation as the public\u0092s top concern in 2025, perhaps
\n\tunsurprising given inflation has been elevated for some time. At the same time, most surveyed households
\n\tviewed their own job security as being at or above average, consistent with the labour market remaining a
\n\tbit tight. (Graph\u00a04). <\/p>\n
Importantly, while many households reported that their financial situations were steady or improving, some
\n\tothers told us they were doing it tough \u2013 for example, turning to family, friends or community
\n\torganisations for financial support, or struggling to meet rent or mortgage payments. <\/p>\n
This echoes similar concerns that community service providers tell us via our liaison program about
\n\tcost-of-living pressures and the lack of affordable housing.<\/p>\n
Graph 4<\/p>\n
\t\t![\"One-panel](\"https:\/\/www.rba.gov.au\/speeches\/2026\/images\/sp-gov-2026-03-03-graph04.svg\")
<\/p>\n
These results are not new to us, but the survey has helped us to better understand how economic conditions
\n\tare felt across communities. The findings also underscore the real costs of high inflation. Achieving our
\n\tobjectives of low and stable inflation and full employment is the best way for the RBA to contribute to
\n\teasing these pressures.<\/p>\n
Listening to the public is also important for building and maintaining trust. Because the RBA is
\n\tindependent of government, transparency and accountability to the public is critically important. Trust
\n\tis important for monetary policy transmission, and our survey provides evidence that people with higher
\n\tlevels of trust in the RBA tend to have inflation expectations that are better anchored to the 2\u20133 per cent target. <\/p>\n
This next graph summarises some of the results from the survey (Graph\u00a05). The survey asks people to
\n\tprovide \u0091trust scores\u0092; the higher these are, the higher the reported level of trust in the
\n\tRBA. One of the key takeaways from the survey is that it suggests that public trust in the RBA in 2025
\n\twas around the average of other Council of Financial Regulators (CFR) agencies, as well as peer central
\n\tbanks. You can see this in the left panel of the graph. Importantly, though, the survey also highlights
\n\tthat trust in the RBA varies considerably across segments of our society \u2013 this is shown in the
\n\tright panel of the graph. Trust in the RBA is lower for women and young people, and for people with lower
\n\tlevels of economic literacy and understanding of the RBA\u0092s role and functions. It follows that if we
\n\tare to build trust, we need to work hard to explain how economic conditions affect everyone and what the
\n\tRBA is trying to achieve when it sets monetary policy and fulfils its other functions. <\/p>\n
Graph 5<\/p>\n
\t\t![\"Two-panel](\"https:\/\/www.rba.gov.au\/speeches\/2026\/images\/sp-gov-2026-03-03-graph05.svg\")
<\/p>\n
We are developing strategies to better engage with and reach all segments of the community. Encouragingly,
\n\tour survey suggests that most Australians do value staying informed and want to learn more about the
\n\teconomy and monetary policy. We plan to continue to survey the Australian public to track our progress
\n\tand identify things we need to focus on. We will also be publishing more insights from this survey later
\n\tthis year.<\/p>\n
How are we assessing the current balance of risks?<\/p>\n
To conclude by returning to our assessment of the current outlook for the economy; at this juncture we
\n\tthink a large part of the unexpected increase in inflation since the middle of last year was due to
\n\tsector-specific demand and price pressures that we expect to ease in coming quarters. But economy-wide
\n\tcapacity pressures in the economy are also playing a role and, overall, we think underlying demand in the
\n\teconomy is further from its supply potential than we had assessed six months ago. A range of indicators
\n\ttell us that labour market conditions are tight. And it is uncertain whether financial conditions are
\n\tsufficiently restrictive to return inflation to the midpoint of the target in a reasonable timeframe.\n<\/p>\n
Taking all this together, the Board judged that the inflation outlook warranted an increase in the cash
\n\trate in February. The staff\u0092s view is that the data we\u0092ve seen since then broadly support their
\n\tassessment of the outlook at the time of that decision. We remain focused on returning inflation to
\n\ttarget. The Board will continue to be driven by what the incoming data tells us about where the economy
\n\thas been and what this means for the outlook.<\/p>\n","protected":false},"excerpt":{"rendered":"I would like to begin by acknowledging the Traditional Custodians of the land on which we meet and…\n","protected":false},"author":2,"featured_media":515056,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[64,63,99],"class_list":{"0":"post-515055","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-au","9":"tag-australia","10":"tag-business"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/515055","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=515055"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/515055\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/515056"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=515055"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=515055"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=515055"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}