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The Reserve Bank of Australia has delivered its third rise in official interest rates for the year, taking the cash rate up another 0.25 percentage points to 4.35%, and thereby completely reversing the cuts of 2025.

While some make take comfort from the RBA Governor’s words in her post-decision press conference that indicated that we could now expect a pause in rate hikes for at least a little while, her overall responses to questions from the media were surprisingly blunt, as well as fairly alarming regarding the economic outlook.

In previous press conferences, Bullock has been at pains to try not to say anything much at all, especially anything that could possibly be construed as “forward guidance”. In plain language, this means giving absolutely no hints whatsoever on where the RBA itself thinks rates could and should be going, so typically results in dancing around questions from the media.

On Tuesday, in contrast, she used very clear language to deliver three key messages.

Firstly, that the Board feels that the three rate rises this year are enough to knock the pre-war domestic inflationary pressures on the head. With monetary policy now considered “a bit restrictive”, according to the governor, headline inflation is expected to peak at 4.8% over the three months to June this year. The February forecast had it peaking at 4.2%, so this is a meaningful jump. But then it should return to the RBA’s target band (of 2% to 3%) in mid-2027 as higher rates and prices subdue economic activity.

It’s worth pointing out that these are the RBA’s best case forecasts in which the strait of Hormuz would open quite quickly. The RBA uses current futures market prices for commodities, which have energy prices being “resolved in the coming quarters”. Essentially, this entails (Brent) oil prices averaging well below US$100 a barrel over the rest of 2026. On decision day, the price was sitting at US$113 with no resolution to the shipping blockade in sight, and indeed signs of increased hostilities between the US and Iran. It’s also worth noting that the forecasts include market assumptions that interest rates will be increased a couple more times this year.

Secondly, Bullock pulled no punches in repeatedly making the point that higher energy prices have made the economic outlook for Australia over the next two years very grim, even under the best case scenario. Referring to the updated forecasts in the May statement on monetary policy, released alongside the board’s decision, the governor noted “growth will be anaemic” and “it’s not a great outcome for Australia”.

Forecasts for economic growth have the economy crawling at a little over 1% in the second half of this year all the way through to mid-2028. Unemployment is forecast to rise from 4.3% to 4.7%. “It is a very tough time,” the governor said.

Under the two “adverse scenarios” modelled, where energy prices are higher for longer, things get downright ugly, with growth slowing to as little as 0.5%, and unemployment breaching 5%. Fuel shortages have not been modelled, but would, according to the governor, “take us to a very different world.”

Towards the end of the press release accompanying its latest decision, the RBA notes that “the board is focused on its mandate to deliver price stability and full employment”. However, again with some bluntness in the press conference, Bullock admitted that the RBA does not “give equal weight to both.” In other words, if the flow-on effects of the energy crisis are greater than currently expected, or if inflationary expectations are seen to rise too far and too fast, the RBA will prioritise reducing inflation over maintaining full employment.

Finally, she made it clear that, while some degree of pass through of higher energy prices to consumer prices more broadly as well as wages was expected (and not unreasonable), the RBA would be vigilant in ensuring inflationary expectations were reined in and any pass through was a one and done event.

It is not very long since we overcame the economic shocks that accompanied the Covid pandemic, which perhaps makes this current energy price-driven shock feel worse. Again, it comes from a cause beyond our borders and our control, and the resulting economic medicine is hard to swallow.

We all know that monetary policy is a blunt instrument. It is especially tough on young households with lower incomes and higher mortgages. But is there an alternative?

Many are looking to next weeks’ budget to see where fiscal policy will land. Treasurer Jim Chalmers, in his own post-decision press conference, said: “We intend to play a helpful role, not a harmful role.” Fiscal policy won’t be the deciding factor in the inflation outlook, but it does matter and the government will be under even greater than usual scrutiny on budget night.

It’s very hard to see a silver lining ahead for the economy given the frank assessment from the RBA governor, as well as the more detailed outlook in the May statement. Perhaps the newest arm of monetary policy is shocking us all into submission.