What Can We Expect From The RBA From Here?

Australia’s central bank has lifted its cash rate to a 13-year high of 4.60% this week, and while markets are beginning to price in a potential pause, the RBA’s October Financial Stability Review makes clear that the path ahead is anything but straightforward. From leveraged hedge fund activity in sovereign bond markets to cyber threats amplified by frontier AI, the risks confronting Australia’s financial system have shifted decisively toward the global and the structural.

Aussie markets pulled back following the RBA’s latest 25 basis point hike, with rate-sensitive sectors bearing the brunt of the selling. But as the move was telegraphed ahead of time in forecasts, the majority of the movement came following comments on what may come next.

Bond futures moved to price in roughly a 35% probability of one further hike to 4.85% before early 2027, leaving the terminal rate question firmly unresolved.

With no meeting in October, the next dates to watch become 2-3rd November, and in absence of comments to start the month, we have the October Financial Stability Review, with the ASX 200 down 1.99% on the day.

There is some divide among the banks as to what may come ahead, as whilst NAB views 4.60% as the likely peak, arguing that the cumulative impact of prior hikes will progressively cool demand and bring inflation back toward the RBA’s 2% to 3% target band. ANZ, by contrast, maintains its forecast for one final 25 basis point increase in November, bringing the cash rate to 4.85%, pointing to services inflation persistence and the risk that energy price shocks could re-accelerate headline CPI.

The RBA itself has signalled a willingness to accept slower near-term economic growth rather than allow elevated inflation to become entrenched in wage and price-setting behaviour.

Driving The Most Recent Decision

The decision to lift the official cash rate to 4.60% was the fourth of the year, bringing rates to the highest level since 2011, and was unanimous among the RBA Monetary Policy Board. The central bank cited persistent underlying inflation running at approximately 3.5% to 3.6%, domestic capacity constraints, global energy price shocks tied to ongoing geopolitical disruption in the Middle East, and rising input costs linked to the global AI technology boom as the primary drivers.

RBA Governor Michele Bullock has made clear that further tightening remains firmly on the table if inflation proves stickier than forecast. “If needed” was the phrase that reverberated through financial markets, signalling that the Board is not yet prepared to declare victory over inflation, even as it acknowledges the lagged effects of cumulative tightening are still working through the economy.

Global Risks: Sovereign Debt, Hedge Funds, and AI Debt

Perhaps the most striking elements of the October FSR are not the domestic data points, but the global macro-financial risks that the RBA identifies as increasingly prominent.

The combination of rising sovereign debt levels across major economies and heavy hedge fund leverage concentrated in government bond markets has created conditions where a disorderly yield spike is no longer a tail risk but a plausible scenario. Leveraged positions in US Treasuries and other sovereign instruments amplify the potential for sudden, self-reinforcing sell-offs if sentiment shifts or liquidity conditions tighten unexpectedly.

Compounding this is the surge in AI-related corporate bond issuance. The global investment boom in artificial intelligence infrastructure is increasingly debt-funded, and the FSR flags some circular financing arrangements among technology firms that warrant close monitoring. This wave of high-grade and high-yield corporate paper competes directly with sovereign issuance for capital, placing additional upward pressure on benchmark yields globally.

The FSR raises a pointed concern about hyperscaler profitability, with the major cloud and AI infrastructure providers currently given very low risk premia by credit markets, reflecting assumptions about durable cash flow generation and competitive moats. Should sentiment shift on those assumptions, whether through disappointing earnings, regulatory intervention, or a broader reassessment of AI monetisation timelines, the repricing could be sharp and contagious across both credit and equity markets.

For Australian markets, which carry meaningful exposure to global risk appetite through commodity prices, currency moves, and capital flows, this is not a distant concern.

Cyber Threats

The FSR dedicates significant attention to operational risks, and the cyber threat landscape has evolved materially. The RBA warns explicitly that frontier AI tools have made cyber attacks more sophisticated, more automated, and harder to detect and contain. The scenario that concerns regulators most is a major cyber attack timed to coincide with a period of broader market stress, a combination that could simultaneously impair operational infrastructure and undermine confidence in the financial system at exactly the moment when that confidence is most fragile.

Against this backdrop, the RBA has placed ASX’s Austraclear settlement system under heightened supervisory scrutiny. Austraclear is the backbone of Australia’s fixed income and money market settlement infrastructure, handling the bulk of government bond and corporate debt transactions.

The FSR concludes that Austraclear has not yet established adequate contingency arrangements for a prolonged operational outage, making it a top supervisory priority. For ASX Limited, this represents both a reputational and a regulatory challenge, arriving at a time when the exchange operator is still working to restore market confidence following the troubled CHESS replacement project.

Domestic Stress Is Real but Contained

On the domestic front, the FSR paints a picture of manageable but uneven stress. Corporate insolvencies remain elevated in hospitality, construction, and transport, sectors that absorbed the sharpest cost increases during the post-pandemic period and are now facing the additional burden of higher financing costs. The September quarter insolvency figures are expected to spike sharply, driven in part by the administration of a large property developer whose collapse will distort the aggregate statistics.

The construction sector’s difficulties are particularly worth watching given the broader implications for housing supply at a time when Australia faces a well-documented dwelling shortage. A wave of developer failures constrains new project commencements, which in turn sustains upward pressure on rents and existing dwelling prices.

Household mortgage stress, however, remains more contained than many feared when the tightening cycle began. The FSR reports that approximately 2% of variable-rate owner-occupier borrowers are currently in a cash flow shortfall, a meaningful number in absolute terms but not indicative of systemic distress. Critically, the median mortgagor holds liquidity buffers in offset and redraw accounts sufficient to cover more than a year of mortgage repayments. This structural cushion, built up during the low-rate period, continues to absorb the shock of higher repayments for the majority of borrowers.

Banking Capital A Bright Spot

The Australian banking system’s capital position represents the clearest positive in the FSR. The aggregate Common Equity Tier 1 ratio across the major banks stood at 12.4% as of June, a level that reflects years of deliberate balance sheet strengthening under APRA’s “unquestionably strong” framework.

The RBA’s stress testing modelled a severe hypothetical downturn involving sharply rising unemployment and falling asset prices, and found that the CET1 ratio would decline only to approximately 11.6%, well above regulatory minimums and comfortably within the range that would allow banks to continue lending through a downturn.

Banks’ direct exposure to the fast-growing private credit sector is capped at a maximum of 2.8% of total assets, and the actual drawn exposure is likely considerably lower. This limits the risk of contagion from any deterioration in private credit quality flowing back onto bank balance sheets, though the RBA notes that indirect exposures and second-order effects warrant ongoing monitoring as the sector continues to grow.

Are We At Peak Rates Then?

The honest answer is that markets do not yet know whether 4.60% represents the terminal rate for this cycle, and neither, it appears, does the RBA with full certainty. The central bank has retained maximum optionality, conditioning future decisions on the evolution of inflation data, labour market outcomes, and global financial conditions.

The base case, consistent with NAB’s view and with the weight of market pricing, is that the tightening cycle is at or very near its peak. The cumulative impact of 400-plus basis points of rate increases since May 2022 is still feeding through mortgage resets, business loan repricing, and consumer spending behaviour. The RBA’s own forecasts anticipate a gradual return of inflation toward target over the next 12 to 18 months, which, if realised, would remove the justification for further tightening.

The risk case, which ANZ and the futures market assign a non-trivial probability, involves a further hike to 4.85% if energy prices re-escalate, services inflation proves stubborn, or the AI-driven input cost pressures the FSR identifies begin to show up more broadly in the CPI basket. The RBA has demonstrated throughout this cycle that it will act rather than wait, and Governor Bullock’s communication has been consistently hawkish in tone.

The broader message from the October FSR is that the domestic financial system is resilient, but it is not immune to the global forces now at play. Sovereign debt dynamics, AI-driven market structure changes, and escalating cyber risks represent a new generation of threats that monetary policy alone cannot address. The RBA is watching all of them closely and will make decisions based on the data it is seeing.