RBA to lift cash rate to 4.6% as markets fully price September hike

For financial markets, Tuesday's RBA decision is less about the widely priced move to 4.6% than about the signal it sends: Australia's central bank is no longer willing to tolerate core inflation above target even if it chips away at employment. That repricing of the reaction function is already visible in money market curves and will determine whether Australian rate expectations decouple further from global peers.

The Reserve Bank of Australia has reached an inflection point. After a long stretch of questionable patience, its board is almost universally expected to lift the cash rate to 4.6 per cent when it meets on Tuesday, 29 September 2026. That would take the benchmark borrowing rate to its highest level since November 2011. It would also represent something more subtle but arguably more important: a break from the central bank's usual preference for waiting until it can see quarterly inflation data before adjusting policy. The August monthly CPI numbers are due on Wednesday, 30 September, one day after the board decision, and the September quarter consumer price index will not land until 28 October. By moving before either release, the RBA would be signaling that it is done waiting.

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At the same time, the US Federal Reserve, the European Central Bank and the Bank of Japan have all increased rates, tightening global financial conditions and narrowing Australia's relative yield cushion.

This is not happening in a vacuum. Last month's inflation print came in unexpectedly hot, resetting expectations across Australian money markets. As of the weekend before the meeting, market pricing had almost fully priced in a September hike. Since that data release, oil prices have climbed, adding imported cost pressure for a commodity-importing economy. At the same time, the US Federal Reserve, the European Central Bank and the Bank of Japan have all increased rates, tightening global financial conditions and narrowing Australia's relative yield cushion. Domestically, economists have also pointed to booming investment in artificial intelligence as an additional source of excess demand, with capital spending pressures spilling into goods, services and labour markets even before the full macroeconomic effect of AI infrastructure buildout is visible.

The most important shift, however, is harder to quantify. Economists increasingly believe the RBA's reaction function has changed. Where the bank previously placed heavy weight on preserving full employment and was willing to tolerate a slower decline in inflation to avoid labour market damage, the leadership's public statements now suggest a harder trade-off. Governor Michele Bullock and senior officials have signaled that core inflation has been above the target mid-point for too long, and that bringing it down now outweighs the short-term cost of job losses or softer household demand. That is a meaningful change from the post-COVID policy framework.

HSBC chief economist Paul Bloxham captured the shift bluntly: "Whereas previously the full employment mandate was getting a greater focus, we expect the long period of core inflation above the target mid-point means the RBA is losing patience with getting inflation back to target." Chris Read, Morgan Stanley's Australia economist, expects a unanimous board vote in favour of a hike, describing it as a departure from the post-COVID approach that allowed a slower return of inflation to target specifically to limit labour market downside.