ABE Weekly: RBA Raises Cash Rate as Inflation Risks Intensify as Household Spending Stalls

Market Insights

• RBA Raises Cash Rate as Inflation Risks Intensify
• RBA Reassesses Unemployment Threshold
• Australian Household Spending Stalls as Discretionary Demand Weakens

RBA Raises Cash Rate as Inflation Risks Intensify

Key Points

• Australia: The RBA increased the cash rate by 0.25% to 4.60% p.a. at its September meeting. July CPI eased to 3.5% p.a., while Trimmed Mean was unchanged at 3.60% p.a.
• United States: The Federal Reserve raised the federal funds target range by 25bp to 3.75%–4.00% p.a. at its September 2026 meeting, its first rate hike since July 2023. The latest U.S. CPI inflation rate remained at 3.4% p.a. in August 2026, while core CPI eased to 2.4% p.a.
• United Kingdom: The Bank of England held Bank Rate unchanged at 3.75% p.a. at its September 2026 meeting. Headline CPI rose to 3.1% p.a. in August, while core CPI remained unchanged at 2.6% p.a.
• Eurozone: The European Central Bank increased its key deposit facility rate by 25bp to 2.50% p.a. at its September 2026 meeting. Euro area headline CPI rose to 3.3% p.a. in August, from 2.9% in July, while core inflation eased to 2.4% p.a.

Here are the latest monetary-policy and inflation figures for key economies:

RBA Raises Cash Rate as Inflation Risks Intensify

The Reserve Bank of Australia (RBA) raised the cash rate by 25bp to 4.60% at its September meeting, extending the tightening cycle as persistent inflation and rising energy costs continue to challenge the disinflation outlook. The move brings cumulative rate increases in 2026 to 100bp, reinforcing the shift towards a more restrictive monetary policy stance.

The decision reflects concerns that inflationary pressures remain broad-based. Higher global energy prices, amid ongoing Middle East disruptions, are adding to domestic cost pressures. At the same time, resilient demand and weak productivity growth continue to constrain the economy’s capacity to expand without generating inflation. Governor Michele Bullock has reiterated that further tightening remains possible if inflation does not moderate as expected.

The outlook remains data-dependent. September-quarter inflation, wage growth, labour-market conditions and developments in global energy markets will be key determinants of the next policy move. With inflation still elevated and the RBA signalling limited tolerance for persistent price pressures, the risk of higher-for-longer rates has increased.

RBA Reassesses Unemployment Threshold as Inflation Fight Continues

A notable shift in the RBA’s recent commentary has been its evolving assessment of the labour market and the level of unemployment consistent with sustainably low inflation. Speaking on 22 September, Bullock indicated that unemployment of around 4.5% represents the lower end of the range the Bank considers consistent with easing inflationary pressures, suggesting some further increase in joblessness may be required.

She emphasised that the RBA does not want high unemployment, but that an excessively tight labour market can sustain wage and price pressures. The comments follow unemployment rising to 4.6% in August, a five-year high, despite a rebound in employment that was driven entirely by part-time jobs. The increase in labour force participation also contributed to the higher jobless rate.

For fixed income markets, the comments are significant for the RBA’s reaction function. They suggest the Bank may be more tolerant of a gradual deterioration in employment conditions while inflation remains above target, reducing the likelihood that a modest rise in unemployment alone would prompt an early shift towards easing.

Bullock has also stressed that monetary policy must balance inflation and employment objectives, with the Bank’s forecasts allowing for unemployment to rise while employment continues to grow.

Australian Household Spending Stalls as Discretionary Demand Weakens

Australian household spending was flat month-on-month in August, undershooting consensus expectations of a 0.3% increase and signalling a loss of momentum in consumer demand.

The result followed increases of 1.1% in July and 0.9% in June, while annual spending growth moderated to 6.8% from 7.0%.

The headline result was supported by an 8.1% increase in fuel spending, reflecting the full restoration of fuel excise following the expiry of government tax relief.

Excluding fuel, household spending would have declined by 0.3%, highlighting the underlying softness in consumer activity. Discretionary spending fell 0.3% over the month, while non-discretionary spending rose 0.6%, reflecting continued pressure on household budgets from essential expenditure.

On an annual basis, discretionary spending remained comparatively resilient, growing 7.2% against 6.3% for non-discretionary spending.