Central bank needs tighter policy as capacity constraints lift inflation risks
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Reserve Bank of Australia (RBA) Governor Bullock said on Friday that the board lifted the Official Cash Rate (OCR) because the economy is more capacity constrained than previously judged, meaning policy needed to be tighter. Bullock added that the RBA needs to dampen demand growth unless supply capacity can expand faster. Key quotes We need to dampen the growth of demand unless the supply side of the economy can expand a little quicker. Based on its assessment that the economy is more capacity constrained, the board judged that monetary policy needed to be tighter. Much of the recent increase in inflation is judged to be temporary but some of it seems to be persistent. Board will be monitoring closely the extent to which the stronger inflation we have observed is persistent or temporary. Market reaction At the time of writing, the AUD/USD pair is trading 0.95% lower on the day to trade at 0.6930. RBA FAQs The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening. While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now…
Filed under: News - @ February 5, 2026 11:24 pm