Following last week’s CPI inflation shocker, financial markets abandoned hopes of further rate cuts.
As expected, the Reserve Bank of Australia (RBA) chose to hold the official cash rate steady at 3.60%, with its commentary turning hawkish.
The Bank’s statement noted that “inflation has picked up”, with the 1.0% trimmed mean inflation print of 1.0% “materially higher than expected at the time of the August Statement on Monetary Policy”.
However, the RBA also acknowledged that some of the rise was driven by “temporary factors” and flagged one more rate cut in 2026:
“The Board’s judgement is that some of the increase in underlying inflation in the September quarter was due to temporary factors. The central forecast in the November Statement on Monetary Policy, which is based on a technical assumption of one more rate cut in 2026, has underlying inflation rising above 3% in coming quarters before settling at 2.6% in 2027″.
The RBA statement notes that the domestic economic outlook is mixed.
While the housing market and consumption have picked up, growth in employment has slowed by slightly more than expected. Wage growth has also eased from its peak, but productivity growth remains poor and the growth in unit labour costs remains high.
As a result, the RBA remains cautious and data dependent as it tries to balance inflation with full employment:
The recent data on inflation suggest that some inflationary pressure may remain in the economy. With private demand recovering and labour market conditions still appearing a little tight, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting.
Financial conditions have eased since the beginning of the year, but it will take some time to see the full effects of earlier cash rate reductions. Given this, and the recent evidence of more persistent inflation, the Board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve. The Board remains alert to the heightened level of uncertainty about the outlook in both directions.
The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.
The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.
Realistically, we would be unlikely to see a change in the cash rate before the second quarter of 2026, conditional on the unemployment rate rising and underlying inflation remaining stable.
