RBA’s Hunter Warns: Q3 Inflation Could Surpass Expectations
Inflation warning shots fired from the Reserve Bank's inner circle.
The Hawkish Signal
Assistant Governor Sarah Hunter just dropped the subtle equivalent of a monetary policy bomb—third-quarter price pressures might hit harder than anyone predicted. Not exactly the news consumers wanted to hear while staring down another grocery bill.
Central Bank Calculus
When RBA officials start talking tougher inflation, markets listen. Rate hike whispers get louder, bond yields twitch, and suddenly everyone's recalculating their financial forecasts. Because nothing says 'economic stability' like central bankers revising their projections upward.
Another quarter, another inflation surprise—because clearly our economic models work perfectly. Just ask your shrinking wallet.
RBA warns inflation could prove tougher to tame
Hunter’s remarks follow upside surprises in recent monthly inflation readings for July and August, which indicate that price pressures across services and housing have remained heightened. The RBA, which has cut the cash rate three times already this year to 3.6%, held steady last month, citing the need for more data.
Hunter said the RBA aimed to keep inflation, on average across the cycle, around the 2.5% midpoint of the target band in underlying terms. However, she cautioned that persistent inflation, especially in labour-intensive sectors, could delay the target return.
Asked about the RBA’s projected neutral rate (the level that doesn’t slow growth), Hunter didn’t offer a specific figure and said it was “a range rather than a point number.”
The quarterly CPI will be a key driver for when the next policy shift will come, economists say. Markets are now split: while some participants continue to anticipate a cut at the RBA’s Nov. 3-4 meeting, others regard the decision as too close to call. Traders have also revised down expectations of aggressive easing by early 2026.
Economic resilience complicates easing plans
Recent data indicate that household spending is holding up better than forecast, supported by more jobs and a rebound in the housing market. The labor market, meanwhile, is tight: Unemployment remains close to 4%. These developments are adding to the arguments for rate stability in an effort to avoid rekindling inflation.
The RBA has repeatedly stated that it aims to ensure inflation remains sustainable within its 2-3% target band before cutting rates again. Services inflation in particular has been stubborn, with higher costs of wages and strong demand for goods from sectors such as health, education, and hospitality, the central bank added.
In her speech titled “Why Productivity Matters for Central Bankers,” Hunter addressed a deeper structural challenge: sluggish productivity growth. She said Australia’s medium-term productivity outlook had been revised down, with trend growth now expected at 0.7%, compared with 1% previously.
That shift implies Australia’s so-called potential growth rate, which is the speed at which it can grow without inflation spiking, is to be a shade lower at 2% a year rather than 2.25%. Hunter said some of the deceleration could be attributed to growth in the care economy, softer mining output, and underinvestment in technology.
Hunter conceded that the RBA’s updated assumption for productivity growth might still be too high. She added that, conversely, rapid advances in technologies such as artificial intelligence could develop faster than expected and deliver stronger productivity gains.
The lagging productivity trend presents a dilemma for policymakers. Slower productivity implies that any given level of demand would generate more inflation, so the RBA has less comfort in stimulating the economy through rate cuts.
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