[SYDNEY] Australia’s central bank held its key interest rate steady in a widely anticipated decision, warning of stronger inflationary pressures in the economy and reaffirming that future moves will be guided by incoming data.
The Reserve Bank of Australia’s (RBA) board held its cash rate at 3.6 per cent on Tuesday (Nov 4) after consumer prices surged beyond expectations last quarter, while the labour market remains tight. The decision was taken unanimously by the nine-member board, according to a statement.
“The recent data on inflation suggest that some inflationary pressure may remain in the economy,” the rate-setting board said in the statement. “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.”
The Australian dollar extended losses after the decision, having weakened in recent sessions versus the greenback due to doubts over a December rate cut by the Federal Reserve. However, it gained against the New Zealand dollar – reaching the highest since 2022 – on wagers that the RBA’s monetary policy will be more restrictive.
The decision comes as economists from Goldman Sachs to Commonwealth Bank of Australia reckon the RBA’s easing cycle has come to an end, while the median estimate is for the next cut in May 2026. This has been spurred by concerns over a renewed burst of inflation at a time when households are increasingly cashed up and the economy is forecast to accelerate.
The RBA’s pause follows a Fed cut to its key rate for a second consecutive meeting, and despite a hawkish bent, markets still see a chance the US central bank will ease again in December. The Bank of England meantime is also expected to stand pat on Thursday as it struggles with inflation pressures as well.
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“The RBA finds itself between a rock and a hard place,” said Callam Pickering, an economist at global jobs site Indeed. “Trimmed mean inflation is clearly too high, but the economy remains weak and the job market continues to slow. Geopolitical uncertainty also bubbles along in the background, largely ignored by financial markets, but still potentially impacting economic conditions.”
The RBA on Tuesday also published its quarterly macroeconomic forecasts which showed core inflation is expected to climb above the top of the 2 to 3 per cent target through mid-2026, while the labour market is likely to remain broadly stable. The latest estimates assume one rate cut in the second-quarter of next year.
The RBA said that the stronger than expected third quarter CPI report “suggests there could be a little more underlying inflationary pressure than we previously thought” and noted that the recent run of data add weight to the possibility that “there is slightly more capacity pressure in the economy than we previously assessed.”
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The RBA operates under a dual mandate and aims for inflation at the midpoint of its 2 to 3 per cent target while trying to achieve sustainable full employment.
Domestically, economic data has been mixed. While there are signs of a cyclical upturn as private demand picks up, there are some worries of a stagflation-type scenario playing out. Recent data show credit growth has picked up while house prices hit a record high in October, suggesting financial conditions aren’t overly restrictive.
At the same time, Australia’s manufacturing sector shrank in October for the first time this year and was accompanied by the first fall in headcount in eight months. That’s a bad omen for unemployment which, at 4.5 per cent, is at its highest rate since September 2021.
Separately, figures on Monday showed a private gauge of job advertisements fell for a fourth consecutive month in October to be 7.4 per cent lower than a year earlier.
Nonetheless, governor Michele Bullock recently described the job market as still a little bit tight.
On the international front, uncertainty is elevated with the outlook clouded by the Trump administration’s protectionist policies, heightened geopolitical tension and a slowdown in Chinese demand.
RBA officials have repeatedly said that their worst-case scenario on tariffs has not come to pass after Australia received the global baseline rate of 10 per cent and many nations refrained from retaliating against the US. Last week’s truce between Washington and Beijing also eased frayed nerves.
“There are also uncertainties regarding the assessment that monetary policy remains a little restrictive, the lags in the effect of recent monetary easing, the balance between aggregate demand and potential supply for goods and services, conditions in the labour market and the outlook for productivity growth,” the rate-setting board said.
“These uncertainties present risks in both directions to the inflation and employment outlook.” BLOOMBERG
