The RBA holds: why inflation resilience remains an investment priority
In the latest Observation, we examine what the RBA’s decision to hold rates means for investors and why preparing for a world of higher and more variable inflation may matter more than forecasting the next move in interest rates.
The Reserve Bank of Australia (RBA) left the cash rate unchanged at 4.35% yesterday, in a unanimous decision that reflects a delicate balancing act: inflation remains above target, but tighter financial conditions are beginning to weigh on parts of the economy.
The decision may offer some relief for households and businesses, but it does not signal that the inflation challenge is behind us. The RBA noted that inflation is likely to remain elevated for some time, with risks still tilted to the upside. It also made clear that further rate increases remain possible if inflationary pressures prove more persistent than expected. Indeed, markets are pricing a ~80% chance of a further rate hike by Q1 2027.
For investors, the bigger question is therefore not simply where interest rates go next, but what kind of inflation environment we should expect over the years ahead.
A different inflation environment
The economic environment has changed significantly since the relatively stable period of the 1990s and early 2000s. Over the five years to June 2026, Australian headline inflation has averaged 4.4% a year, well above the 2.6% average recorded between 1990 and 2020. At the same time, a number of longer-term forces are making the inflation outlook more complex, from geopolitical fragmentation and changing demographics to climate change, energy security and the rapid adoption of new technologies.
The result is not necessarily a return to the extreme inflation of the 1970s. Rather, it points towards a world where inflation may be less predictable and somewhat higher for longer.
That matters because inflation is ultimately about purchasing power. Even modestly higher inflation, sustained over many years, can materially erode the purchasing power (or real value) of cash.
Australia faces particular challenges
LGT’s assessment is that Australia may face somewhat greater inflationary pressure than the US over both the shorter and longer term.
Part of this reflects Australia’s exposure to imported goods, energy prices and a relatively high-wage environment, alongside a less flexible labour market and weak productivity growth. These factors can make it harder for the economy to absorb supply shocks without those pressures feeding through into inflation expectations and ultimately prices.
Tuesday’s RBA decision reinforces the point. While the Bank considers monetary policy to be restrictive and is allowing time for the economy to slow, it also expects inflation to remain above target for longer than previously hoped.
Building resilience into portfolios
For investors, the answer may not be to make a dramatic tactical shift every time inflation moves higher.
Instead, inflation resilience can be built into portfolios over time through diversification and exposure to assets that can participate in economic growth and retain their real value.
Our approach favours meaningful exposure to equities and real assets as part of this longer-term resilience. Companies can, over time, adjust revenues and prices alongside the broader economy, while real assets can provide exposure to tangible economic value.
This does not mean that commodities or fixed income have no role. Their usefulness can vary considerably depending on the source of inflation and the policy response. As central banks respond to inflationary pressures, for example, higher interest rates can create value in fixed income securities, particularly at or close to the peak of a hiking cycle. Our latest tactical outlook indicates that we may be close to this point, which is why we have recently closed our underweight to fixed income and begun leaning back in to secure attractive income and ballast our constructive positioning in equities.
As the RBA’s latest decision demonstrates, the path back to price stability may not be straightforward. For long-term investors, preparing for a world of somewhat higher and more volatile inflation may therefore be less about predicting the next rate move and more about ensuring portfolios are resilient to what comes next.
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