The Reserve Bank's Deputy Governor says the inflation outlook has worsened

The Deputy Governor of the Reserve Bank of Australia (RBA) said on 21 October 2026 that the outlook for inflation has worsened since the Bank published its forecasts in August. He spoke at a fireside chat at Citi's Australia and New Zealand Investment Conference in Sydney, less than two weeks before the RBA's next decision on interest rates.

The Deputy Governor said inflation looks worse than forecast in August

According to the RBA's record of the session, the Deputy Governor said: "The inflation outlook looks materially worse than we projected in the August report." In August the Bank named three risks that could keep inflation high: a longer crisis in the Middle East, the global boom in artificial intelligence and technology, and less spare capacity in the Australian economy than assumed. He said all three had come to pass by September.

He noted that oil prices are about a third higher than the RBA assumed in its August forecasts. Prices for market services, a group that leaves out prices set or regulated by government, are also rising strongly, and the RBA is reviewing its judgement about how much spare capacity remains in the labour market. The Bank has lowered its assumption for underlying productivity growth, a measure of how much more the economy produces for each hour worked, from 1 per cent to 0.7 per cent a year.

Annual inflation was 4.0 per cent in the twelve months to August 2026, according to the RBA's website, above its target band of 2 to 3 per cent. The Deputy Governor said the quarterly measure of underlying inflation due next week is likely to be higher than the RBA assumed in August.

The Bank is watching expectations of future inflation

The Deputy Governor said survey work shows a growing share of businesses now regard inflation of 3 to 3.5 per cent as the new normal. ABC News reported that he called this prospect "the central banker's nightmare", and that he said expectations cannot be allowed to drift from the target.

Inflation expectations matter because they can shape how businesses set prices and wages. If people come to expect higher inflation, it can become harder to bring down.

He also pointed to a softer labour market

The Deputy Governor said monetary policy is working, with an easing in the labour market and subdued household spending, although some parts of the economy are still growing. ABC News reported that he described September's rise in unemployment to 4.7 per cent as a little weaker than expected, while noting that Australia's unemployment rate remains among the lowest in the G20.

He did not say what the Board will decide on 3 November. He said staff forecasts were still being finalised and described the choices between bringing inflation down and protecting jobs as hard. The RBA raised the cash rate in February, March, May and September this year, to 4.60 per cent from 30 September.

On bond markets, he said the rise in long term yields around the world appears to reflect mainly higher real interest rates, the return after inflation, with measures of expected inflation built into bond prices rising only a little.

Market pricing for November moved after the remarks

Bloomberg data reported by ABC News put the chance of a rise in the cash rate in November at 51 per cent after the remarks. The previous week, after the unemployment figures, the odds had fallen below 20 per cent.

Economists' views differ. UBS's economists described the comments as hawkish, meaning inclined towards higher rates, and expect an increase in November, ABC News reported. Goldman Sachs changed its forecast from a hold to a rise to 4.85 per cent on 3 November, investingLive reported. Betashares' chief economist said the RBA appeared prepared to risk a recession to bring inflation down, according to Yahoo Finance.

The S&P/ASX 200 index closed up 0.16 per cent at 8,831.3 points on 21 October, Yahoo Finance reported, and the Australian dollar rose to about 70.1 US cents.

The next pieces of information come quickly. The Governor speaks in Armidale on 23 October, the ABS releases the September quarter consumer price index on 28 October, and the RBA announces its decision at 2.30 pm on 3 November, together with new forecasts. The record of the Deputy Governor's remarks is on the Reserve Bank's website.

Savings and investments respond to rate changes in different ways

Expectations about rates can shift with each speech and data release. Variable rates on cash accounts can move when the cash rate does, while a term deposit fixes its rate for the term. Bond prices move as yields change, and a bond held to maturity repays its face value if the issuer pays. We arrange high interest cash accounts, term deposits, bonds and managed funds, and your adviser can look at how a mix of them fits when you need your money and the income you would like from it.

If you would like to talk about what the rate outlook could mean for your savings, investments or borrowing, please get in touch with your adviser.

This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not a recommendation to buy, sell or hold any investment. Figures are as published on the dates given. Past performance is not a reliable indicator of future performance. Read the full risk warning