Sarah Hunter, the Reserve Bank of Australia’s Assistant Governor for Economics, has laid out a stark proposition: getting inflation back inside the 2-3% target band might require deliberately weakening Australia’s economy relative to its trend growth rate.
Hunter’s remarks come at a time when Australia’s cash rate sits at 4.35% following three rate hikes during 2026, and the RBA is wrestling with a familiar central banking dilemma. Inflation is proving stubborn, supply shocks keep complicating the picture, and the labor market refuses to loosen up the way textbooks say it should.
The inflation expectations trap
Hunter warned that geopolitical factors, particularly elevated oil prices, could push inflation expectations higher. The response would likely involve engineering a gap between demand and the economy’s supply capacity, which is economist-speak for deliberately cooling things down until spending falls short of what the economy can produce.
She drew a comparison to the early 1990s recession, a period seared into Australian economic memory. That downturn saw unemployment peak above 10% and took years to recover from.
