Fourth Hike to 4.60%: Australia's Inflation Won't Budge, So the RBA Did

^{The Reserve Bank of Australia (RBA) raised the cash rate by 25bp to 4.60% on 29 September 2026, its fourth hike this year and the highest level since late 2011.} 

Pointers

- Fourth hike, no peak signal. The RBA raised the cash rate by 25bp to 4.60% on 29 September. That's the fourth hike this year (100bps in 2026) and the highest level since 2011. Bullock kept the door open to further tightening, so every meeting is live.

- Inflation won't budge. Headline CPI rose again to 4.0% yoy in August, up from 3.5% in July, driven by energy and goods. Trimmed mean is stuck at 3.6%, and the RBA expects core inflation to stay above 3% until mid-2027.

- The economy seems to be softening. Household spending was flat in August, with discretionary spending down 0.3%. Unemployment has risen to 4.6%, and private wage growth is at 3.1%, the softest since mid-2022.

- We think 4.60% is at or near the peak. Policy is somewhat restrictive and demand is cooling, so we lean towards the RBA holding. One more hike remains possible if the Q3 CPI shows core inflation persists.

- Positioning: stick with the barbell. At the short end, 1-year bonds offer decent carry with little duration risk. Longer-dated bonds stand to benefit should economic growth weaken further, but we'd build those positions gradually rather than in one go because of global term-premium risk. Across the curve, we prefer high-quality investment-grade issuers in defensive sectors: major banks, supermarkets and regulated utilities.

What happened

The Board voted unanimously to lift the cash rate target from 4.35% to 4.60%, ending a two-meeting pause and taking cumulative tightening in 2026 to 100bp. At the press conference, Governor Michele Bullock was balanced, but did not signal that the cycle is over:

•         Options on the table. The Board considered only a hold or a 25bp hike. A 50bp move was not discussed.

•         Risks still building. One upside risk to inflation (the Middle East conflict) has materialised and two more (AI-driven demand and domestic capacity) are building. Bullock warned that inflationary pressures may last longer than expected.

•         Door open both ways. She reaffirmed the RBA will hike again if needed, but said policy is already restrictive (“we are in a good position in the moment, we think that financial conditions are restrictive…”) and further hikes may not be needed if inflation comes down.

•         No forward guidance. She declined to say whether 4.60% is the peak, keeping every meeting live.

•         No recession in the base case. The aim is to bring excess demand down, not to tip the economy into recession.

The Board's minutes, due in two weeks, will show how close the hold case came.

Why the RBA hiked

The Board said some of the upside risks it flagged in August are now materialising:

•         Energy. The broader Middle East conflict has pushed energy prices well above the August forecast assumptions, and higher fuel costs are passing through to other prices.

•         AI-driven goods prices. AI-related demand is lifting global prices for technology goods.

•         Domestic capacity. RBA liaison shows firms facing cost pressures and raising prices, or planning to.

•         Sticky core inflation. July headline CPI fell to 3.5% yoy, but trimmed mean held at 3.6% yoy.

Inflation: headline re-accelerates, core still sticky

Headline inflation jumped back up to 4.0% yoy in August from July's 3.5%, driven by a rebound in goods and energy prices. Core inflation has also risen since March and is not budging.

Inflation in tradables (foreign driven) unwound sharply after the March oil shock, falling from 4.5% to a low of 1.5% in June, but has since started reversing, rising to 1.7% in July and 2.9% in August.

Notably, non-discretionary inflation has been rising while discretionary inflation has been falling.

Table 1: Movement in Australia’s CPI

_{Within the components, many of these price pressures take time to materialise. Rents depend on housing supply, which rate hikes tend to reduce, while education, health and insurance prices are set or indexed with a lag. Labour-intensive services should ease as the labour market loosens, but slowly.}

_{That fits the RBA's own forecast that trimmed mean stays above 3% until mid-2027.}

Table 2: Movement in CPI, by components (selected)

The economy: consumers and jobs are softening

The other side of the ledger is weakening. Household spending was flat in August, missing consensus of +0.4%, and discretionary spending growth has slowed every month since May.

Table 3: Changes in household spending, MoM

The labour market is easing too. Unemployment rose to 4.6% in August from 4.4% in June, roughly where the RBA sees full employment, so conditions have moved from tight to about balanced. Private sector wage growth slowed to 3.1%, the softest since mid-2022.

_{The NDIS reforms passed in August add a further, if modest, drag on the labour market. Government-funded care has been one of the main sources of job growth, and the reforms, which include cuts to social and community participation budgets from October and a 30% reduction in intermediary spending from 2027, are likely to slow hiring in the sector. As flagged in our 2H26 outlook, we expect the impact to be gradual rather than abrupt, tilting unemployment slightly higher over time.}

Market reaction

Markets expect more. Overnight index swaps price the cash rate peaking at about 4.96% by June 2027, equivalent to roughly 1.4 more hikes, before edging lower later in the year. However, we don’t see this fully materialising, but the next CPI print will be the key test.

Table 4: Overnight Index Swap implied cash rate

Bonds rallied on the day, after a month of heavy selling

Yields fell 3-10bp across the curve after the decision, as the hike was fully priced and Bullock was no more hawkish than feared. But the curve is still about 30bp higher than a month ago, and over the past week the long end rose 7-8bp, tracking the global sell-off after the Fed's hike.

Table 5: Australia sovereign curve movement

Our view

We believe 4.60% is at or close to the peak. We lean towards the RBA holding and letting past tightening work, for three reasons:

- Policy is already restrictive. Four hikes this year have pushed rates into somewhat restrictive territory, as Governor Michele Bullock herself acknowledged.

- Demand is cooling. Household spending stalled in August as discretionary spending fell, and house prices are declining in most capitals.

- The labour market is loosening. Unemployment has risen to 4.6%, and NDIS cuts are likely to add to it.

That said, the next move is data-dependent, as Bullock herself stressed. The September quarterly CPI, due on 28 October, will be the key input for the 3 November meeting, and a print showing core inflation still rising may prompt one more hike. The October monthly CPI, due in late November, will then feed into the December decision. On balance, we see the cash rate peaking in a 4.60–4.85% range.

How this fits our earlier calls. In our Australia 2H26 Bond Outlook (17 July) and June CPI note (7 August), we said the RBA was near the end of its cycle, with at most one more hike. Today's hike is that one hike. However, core inflation has proved stickier than we expected, so we can no longer rule out a further hike should the Board choose to take out more insurance against inflation.

In terms of positioning, we keep our barbell of around 1-year and 7- to 10-year tenors. Both ends look more attractive than when we first made the call.

Short-dated bonds (around 1-year) offer decent carry with minimal duration risk, serving as one of the safe harbour for investors seeking to park their cash and generate stable short-term income.

Longer-dated bonds stand to benefit should economic growth weaken further. Investors who hold over a medium-term horizon stand to benefit from additional price appreciation as bonds “roll-down” to shorter maturities along the curve. However, we would build long-end positions gradually rather than in one go. Even if the RBA is at or near its peak, Australian long-end yields remain exposed to the global term premium repricing, which domestic data alone cannot offset.

As for specific bonds recommendation, it’s imperative to highlight again our preference for high-quality investment-grade issuers, particularly more defensive sectors such as major banks, supermarket operators and regulated utilities, which are better suited to withstand the higher interest rates and a potentially softer macroenvironment. 

Table 6: Recommended bonds

(within the short ends)

(within the long ends)

(Some additional AUD selections available for self-directed trading on RMO)

Declaration

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in NAB 6.558% 12May2041 Corp (AUD), ANZ 6.124% 25Jul2039 Corp (AUD), GOOGL 6.900% 27Aug2046 Corp (AUD), ANZ 6.749% 21Aug2046 Corp (AUD), GOOGL 6.250% 27Aug2036 Corp (AUD), BPCEGP 6.5618% 12Jun2040 Corp (AUD), ACGB 4.750% 21Jun2054 Govt (AUD), GOOGL 5.200% 27Aug2029 Corp (AUD), ACGB 5.000% 21Jun2036 Govt (AUD), ANZ 5.888% 16Jan2034 Corp (AUD), WOWAU 5.910% 29Nov2034 Corp (AUD), WSTP 5.815% 04Jun2040 Corp (AUD), CBAAU 6.400% 05Mar2046 Corp (AUD), HSBC 5.722% 11Mar2035 Corp (AUD), ACGB 4.500% 21Apr2033 Govt (AUD), TOYOTA 5.500% 12Jun2031 Corp (AUD), TCV 5.250% 15Sep2038 Govt (AUD), BACR 6.158% 28May2035 Corp (AUD), BNP 5.830% 23Aug2034 Corp (AUD), ANVAU 6.4956% 04Feb2056 Corp (AUD), ACGB 2.750% 21Nov2028 Govt (AUD), NSWTC 5.500% 22Oct2036 Govt (AUD), GOOGL 5.500% 27Aug2031 Corp (AUD), ANVAU 6.134% 31May2033 Corp (AUD), NSWTC 5.250% 22Feb2039 Govt (AUD), MIZUHO 6.025% 28Aug2029 Corp (AUD), NOMURA 6.170% 16Apr2031 Corp (AUD), HSBC 6.211% 21Mar2034 Corp (AUD), MQGAU 5.953% 01Mar2034 Corp (AUD), LLOYDS 7.086% 31Aug2033 Corp (AUD), BACR 8.000% Perpetual Corp (AUD), and HSBC 5.996% 26May2032 Corp (AUD), and the analyst who produced this report holds a NIL position in the abovementioned securities.