(RBA) Minutes of the Monetary Policy Meeting of the Reserve Bank Board

Hybrid – 16 and 17 March 2026

Members participating

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair), Marnie Baker AM, Renée Fry-McKibbin, Ian Harper AO, Carolyn Hewson AO, Bruce Preston, Iain Ross AO, Jenny Wilkinson PSM

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Others participating

Sarah Hunter (Assistant Governor, Economic), Brad Jones (Assistant Governor, Financial System), Christopher Kent (Assistant Governor, Financial Markets)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Andrea Brischetto (Head, Financial Stability Department), Sally Cray (Chief Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head, Economic Analysis Department), Penelope Smith (Head, International Department)

Financial conditions

Members commenced their discussion of financial conditions by considering the impact on markets of the current conflict in the Middle East. Global prices for oil and other forms of energy had risen sharply, short-term inflation expectations had picked up and financial market volatility had increased. The conflict was likely to pose a material adverse supply shock to the global economy, though members agreed that the eventual scale and persistence of the shock was highly uncertain at the time of the meeting. Consistent with that, market prices had continued to be volatile as market participants revised their assessment of the potential implications in response to the flow of information. Members noted that, despite the pronounced volatility, financial markets had so far continued to function effectively.

Market expectations for future central bank policy rates had risen materially in almost all economies since the onset of the current conflict, in anticipation of increased near-term inflationary pressures. This included some central banks that had previously been expected by market participants to lower rates over 2026, such as the US Federal Reserve and the Bank of England, which, at the time of the meeting, were expected to hold rates steady or possibly raise them. Members discussed why markets did not expect most central banks to look through the supply shock emanating from the conflict. They noted that this was more difficult to do when the shock was expected to be large and inflation had been above target for some time (as was the case in many economies).

Government bond yields had increased since the start of the current conflict in the Middle East, including in Australia. The largest increases had occurred in countries where near-term expectations for policy rates or inflation had increased most sharply in response to the outlook for higher energy prices or inflation. Market-implied measures of longer term inflation expectations were still well anchored in most countries, including in Australia, as markets expected central banks to adjust monetary policy as required.

Risk premia in equity and corporate bond markets had risen a little since the onset of the current conflict, including in Australia, but remained low overall. The largest falls in equity prices had been in economies that were large net energy importers, such as the euro area, the United Kingdom, Japan and Korea. In some Asian markets, these declines had merely offset strong gains earlier in the year. By contrast, the decline in US equity prices since the onset of the conflict had followed their earlier underperformance arising from concerns about the effect of artificial intelligence (AI) on corporate profitability and vulnerabilities in private credit markets.

Members turned to assessing the stance of financial conditions in Australia. While financial conditions had tightened in prior months, and particularly since the start of the current conflict in the Middle East, incoming data continued to suggest that this had occurred from a less restrictive position in the second half of 2025 than previously assessed. Accordingly, the extent to which overall financial conditions were restrictive at that time remained a matter of some uncertainty.

The tightening in financial conditions over prior months had been driven primarily by higher market interest rates. Banks had passed on the increase in the cash rate in February to borrowers and market prices implied that expectations for the future path of the cash rate had shifted up further since the previous meeting. There were tentative signs that the earlier rise in cash rate expectations had weighed a little on credit demand.

Members considered a range of recent indicators that suggested financial conditions were not especially restrictive. Spreads between bank lending rates and the cash rate remained low compared with most of the preceding 20 years, even though risk premia had widened a little since the start of the current conflict in the Middle East. Growth in credit had exceeded growth in GDP in the December quarter, despite having since slowed a little; both household and business credit were rising at the time of the meeting relative to the relevant measures of income, with growth in business credit particularly strong. However, members also noted that households had continued to make relatively large extra mortgage payments, which could be consistent with more restrictive monetary policy encouraging a higher saving rate.

Members noted that several other metrics also suggested that policy might be somewhat less restrictive than previously assessed. The cash rate sat within the range of model-based central estimates of the neutral rate. These had generally moved a little higher over 2025, suggesting that any given cash rate might be somewhat less restrictive than previously. Members noted that such estimates are subject to considerable estimation error and do not provide a direct guide to the appropriate stance of monetary policy. Nevertheless, they were consistent with the staff’s February inflation forecasts, which did not have inflation fully returning to the midpoint of the target range over the forecast period even with a technical assumption of at least one more increase in the cash rate. Members also observed that the real short-term interest rate had fallen in preceding months, given the rise in actual and expected near-term inflation.

Members explored the rise in market expectations for the cash rate since the previous meeting. The rise had reflected stronger-than-expected data, recent increases in energy prices and RBA communication. Market pricing indicated a 70 per cent probability of a 25 basis point rate increase at the current meeting and a greater than 100 per cent probability of a rate rise by May, with a further increase fully priced by August. Overall, the expected market path was around 35 basis points higher at the end of 2026 compared with the path assumed in the February forecasts. The median of market economists’ expectations was for an increase in the cash rate in March and another by August.

The Australian dollar had appreciated a little further over February. The current conflict in the Middle East had modestly increased volatility in foreign exchange markets, but the direct effect on the Australian dollar had so far been limited; the depressing effect of weaker global risk sentiment had been offset by a boost from wider yield differentials (reflecting increased cash rate expectations in Australia) and higher commodity prices. Members noted that the appreciation of the Australian dollar had been broadly based across major currencies and trading partners and had contributed to a further modest tightening in financial conditions. However, members reiterated their observation from the previous meeting that this response is consistent with the standard transmission of monetary policy, not additional to it.

Economic conditions

Members noted that the economic data received since the previous meeting had, on balance, been broadly aligned with the forecasts in the February Statement on Monetary Policy, but that their composition pointed to slightly higher domestic capacity pressures than previously assessed. In particular, labour market conditions were judged to be slightly tighter than expected and, consistent with that, model-based estimates of the output gap – which had already indicated excess demand – had been revised slightly higher. Survey measures of firms’ capacity utilisation had also remained above average.

GDP growth in Australia had picked up strongly in the December quarter, exceeding the staff’s estimate of the potential growth rate and adding to existing capacity pressures. Overall growth in the quarter had been as expected but the composition of spending had showed stronger-than-expected exports, inventory accumulation and business investment, offset by significantly weaker-than-expected household consumption (with public demand broadly as expected). Over 2025, there had been strong growth in total private demand, with consumption, business investment and dwelling investment all contributing. Labour productivity growth had increased over 2025 to around the staff’s assumption for its medium-term trend.

Members noted that the staff’s expectation for overall GDP growth in the March quarter was broadly unchanged (with most of the potential impacts on growth from the current conflict in the Middle East likely to take longer to become apparent). The weaker-than-expected outcome for consumption in the December quarter, coupled with more recent monthly indicators (including timely but volatile private bank data on household spending) had suggested some downside risk to the level of household spending in the March quarter. But strong growth in real household disposable incomes and wealth had continued to support a solid near-term outlook. The near-term outlook for business investment and exports had also strengthened; the staff’s assessment was that investment would continue to be supported by spending related to technology and the energy transition, and that exports would be supported by resilient trading partner growth (underpinned by the global AI boom).

Members noted that several indicators suggested that labour market conditions in Australia may have tightened a little since the previous meeting. The unemployment rate was unchanged in January, against expectations for some unwinding of the decline in December 2025. Average hours worked, job