RBA's Sarah Hunter signals willingness to slow economy to tame inflation
In brief
- Sarah Hunter signals RBA may deliberately slow Australia's economy below trend growth to control inflation
- RBA forecasts unemployment rising to 4.6%, a level deemed necessary to bring inflation sustainably within target
- Geopolitical factors like elevated oil prices risk pushing inflation expectations higher, complicating the policy path
The price of disinflation
Hunter warned that anchoring inflation expectations could require meaningful economic pain, including higher unemployment. The RBA's own forecasts project unemployment rising to 4.6%, a level the central bank views as necessary to bring inflation sustainably within target.
This framing echoes the early 1990s downturn. Hunter drew a comparison to that recession, during which unemployment peaked above 10% and took years to recover from. The parallel underscores how costly disinflation can be when inflation becomes entrenched.
Current conditions and headwinds
Australia's cash rate sits at 4.35% following three rate hikes during 2026. Yet despite the tightening cycle, Hunter described the Q2 inflation data released on July 30, 2026 as softer than the RBA had anticipated.
The labor market remains tight, running closely in line with the RBA's forecasts despite some noise in headline employment figures. That resilience complicates the RBA's task. A strong labor market can feed back into wage growth and inflation expectations—precisely what Hunter is trying to prevent.
Hunter also flagged external risks. Geopolitical factors, particularly elevated oil prices, could push inflation expectations higher. Oil shocks are outside the RBA's direct control, yet they shape the inflation backdrop the central bank must navigate.
