08 · Policy

Policy over time

Where each policy stands now, how Australia got here, and how it reaches the six objectives — using the same figures as the rest of RCF8.

01Current position

Contractionary

Headline CPI rose to 4.0% in the year to August 2026 as Middle East conflict lifted fuel prices, while domestic capacity pressures kept underlying inflation at 3.6% — above the 2–3% target.

Four 25-basis-point rises in 2026 took the cash-rate target from 3.60% to 4.60%; the latest, on 29 September 2026, said a further tightening in financial conditions was warranted.

Cash-rate target 4.60% (RBA decision, 29 September 2026); headline CPI 4.0% and trimmed mean 3.6% in the year to August 2026 (ABS, 30 September 2026). Source: RBA Monetary Policy Board statement, 29 September 2026 · 29 September 2026

Cash rate4.60%29 September 2026 · RCF8 built-in figure Inflation4.0%August 2026 · RCF8 built-in figure Unemployment rate4.6%August 2026 · RCF8 built-in figure

02Timeline5 periods · select one

2026 · Contractionary

Tightening into an energy shock

Problem
Headline CPI rose to 4.0% in the year to August 2026 as Middle East conflict lifted fuel prices, while domestic capacity pressures kept underlying inflation at 3.6% — above the 2–3% target.
Policy response
Four 25-basis-point rises in 2026 took the cash-rate target from 3.60% to 4.60%; the latest, on 29 September 2026, said a further tightening in financial conditions was warranted.
Outcome
Too recent to judge: the labour market has eased (unemployment 4.6% in August), but inflation remains above target and the energy shock is a supply-side (cost-push) pressure rates cannot remove quickly.

Mechanism & evidence

Mechanism: Higher lending rates squeeze borrower cash flow, cool asset prices and support the AUD, slowing growth in C and I and easing demand-pull and imported inflation with a lag.
Evidence: Cash-rate target 4.60% (RBA decision, 29 September 2026); headline CPI 4.0% and trimmed mean 3.6% in the year to August 2026 (ABS, 30 September 2026). Source: RBA Monetary Policy Board statement, 29 September 2026 · 29 September 2026
Use in essay · evaluation: Use 2026 to evaluate monetary policy against a supply shock: rates can contain demand and expectations, but cannot lower fuel prices, so the trade-off is slower growth and employment.

Compare with

03Objectives

Policy action
Cut the cash rate when growth is running below trend.
Mechanism
Cheaper credit supports consumption and investment; a lower AUD helps net exports.
Effect
Aggregate demand and real GDP growth pick up.

Evidence

Real GDP growth2.4%2025–26 · RCF8 built-in figure Cash rate4.60%29 September 2026 · RCF8 built-in figure

Cash-rate target history: 7.25% to 3.00% (August 2008–April 2009).

Limitation

Weak when confidence is low or rates are near the effective lower bound; one rate applies to every region and sector.

04EvidenceSame series as Historical Graphs

Open in Historical Graphs →

Price stability · policy

Cash rate

RBA cash rate target, each change · RBA table F1.1

4.60%

Latest · 29 September 2026

Update pending

GST

Mining boom

GFC

Investment peak

The long transition

COVID-19

Surge

Easing

Oil

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

Cash rate targetEach dot is a change

Hover any point to see what drove itTap any point to see what drove it

Revision notes · mechanisms and evaluation

Demand-pull versus cost-push inflationA cash-rate rise raises market borrowing rates → C and I weaken → AD grows more slowly → demand-pull inflation eases. It cannot undo an oil, import-price or weather supply shock; it can restrain second-round wage/price expectations only by weakening demand and possibly employment.

Transmission and evaluationCash flow, saving/investment, asset prices and the exchange rate transmit a rate change to C, I or X−M, then AD. Effects are variable and often take roughly 6–18 months or longer. Mortgage debt, fixed-rate roll-offs, confidence, global rates and exchange-rate movements alter the strength; borrowers and savers experience opposite income effects.

Transmission mechanism

Cash rate↑Now 4.60%
Market interest rates↑Variable mortgage & business loan rates
Cash flow
- Loan repayments ↑
- Disposable income ↓
Spending
- C ↓
- I ↓
Aggregate demand↓
Objectives
- GDP growth ↓
- Inflation ↓
- Employment growth ↓

Rate rise → debt repayments ↑ → Yd ↓ → C and some I ↓ → AD ↓ → demand-pull inflation eases, with weaker growth/jobs. High household debt strengthens this channel; fixed-rate loans delay it. Effects have variable lags, often around 6–18 months or longer. Source: RBA, transmission of monetary policy.

Unconventional monetary tools

Quantitative easingThe RBA bought government bonds to lower longer-term yields and support market functioning during COVID. RBA review

Term Funding FacilityLow-cost term loans to banks lowered funding costs and supported credit. RBA, 2024

Forward guidanceCommunication shaped expected rates; the review found time-based promises became hard to keep as conditions changed. RBA review

Yield targetThe RBA targeted a low three-year bond yield in 2020–21 and ended it in November 2021. RBA review

05Exam use

Evidence cues

Quote the current cash rate with its date, next to headline and trimmed-mean inflation.
Use a turning point from the timeline (for example 2022–23 tightening) as a before/after case.

Evaluation cues

Lags of one to two years; effectiveness depends on household debt and confidence.
Blunt across regions; cannot fix supply shocks.
Credibility and forward guidance matter (2021 guidance).

Selected period

Cash-rate target 4.60% (RBA decision, 29 September 2026); headline CPI 4.0% and trimmed mean 3.6% in the year to August 2026 (ABS, 30 September 2026). RBA Monetary Policy Board statement, 29 September 2026 · 29 September 2026
Higher lending rates squeeze borrower cash flow, cool asset prices and support the AUD, slowing growth in C and I and easing demand-pull and imported inflation with a lag.
Objective: Price Stability, Full Employment, Economic Growth.
Evaluation: Use 2026 to evaluate monetary policy against a supply shock: rates can contain demand and expectations, but cannot lower fuel prices, so the trade-off is slower growth and employment.

Figures read RCF8’s verified series (ABS, RBA, Treasury via the live store) and fall back to Historical Graphs’ built-in values, labelled as such. Period records keep their own dated source.