Australia’s central bank kept its cash rate unchanged at 3.60% on Tuesday, in line with expectations, noting that elevated core inflation, stronger consumer spending, and a rebound in the housing sector made it cautious about loosening policy further.
After concluding its two-day meeting, the Reserve Bank of Australia (RBA) said recent figures indicate inflation may remain persistent and said that its outlook will shift as new data emerges.
Financial markets had largely ruled out a rate cut after hotter-than-expected inflation data for the third quarter, and they also view a December easing as unlikely.
The Australian Dollar dipped 0.3% to $0.6521 after the RBA provided minimal clarity on future rate moves, while three-year bond futures edged down 2 ticks to 96.32, Reuters reports.
Interest-rate swaps now price in only about a 10% likelihood of action in December, and some investors believe the rate-cut cycle may already be finished.
“The Board’s judgment is that some of the increase in underlying inflation in the September quarter was due to temporary factors,” according to the RBA board.
The bank pointed out that financial conditions have loosened over the course of the year and acknowledged uncertainty over whether policy is still slightly restrictive. As a result, it said the Board decided caution was warranted and would adjust its outlook as new data comes in.
The RBA has lowered rates three times this year based on quarterly inflation readings, but in Q3, underlying inflation jumped to 3%, the upper limit of its 2–3% target, driven by persistent strength in service-sector prices and housing costs.
Indeed, housing prices saw their fastest increase in over two years in October, reinforcing concerns that financial conditions may not be as tight as previously assumed. The RBA has also indicated that the current 3.6% cash rate is only mildly restrictive.
“Not only did the board concede that recent data suggests 'inflationary pressure may remain in the economy', but they also lifted their near-term inflation forecast substantially,” stated Harry Murphy Cruise, head of economic research and global trade for Oxford Economics Australia.
“Underlying inflation is now forecast to rise even higher, hitting 3.2% in Q4 and staying there until the middle of next year. If that proves correct, interest rates won't move lower until the second half of 2026 at the earliest, if at all,” he continued.
Adding to the challenge for policymakers, unemployment has climbed to 4.5%, the highest level in four years, after an extended period of stability, and the rebound in consumer spending remains uneven.
In its latest quarterly projections, the RBA now expects core inflation to stay above its 2-3% target until mid-2026, leaving little scope for additional rate reductions.
Furthermore, among major banks, Commonwealth Bank of Australia believes the rate-cut cycle has already ended, while National Australia Bank and ANZ still anticipate one more cut next year. Westpac, meanwhile, is forecasting two more reductions in 2026.