The RBA left the cash rate on hold at 3.6% at today's meeting in Sydney. The decision was straightforward as the Monetary Policy Board (MPB) voted unanimously to hold after inflation came in 'materially higher' than it had expected in the September quarter, reaccelerating towards the top of the 2-3% target band and prompting the RBA to raise its inflation forecasts for the coming year. The sense is the MPB is setting up for an extended pause. Having already been cut by 75bps since the start of the year, the MPB has got the cash rate closer to a neutral setting where it will move cautiously. With risks to domestic growth and inflation seen as balanced, Governor Bullock highlighted the importance of retaining optionality to respond to the incoming data. Markets see one further cut to the cash rate in this easing cycle as the most likely scenario.
Australia's Q3 inflation report was by far the most influential development for the MPB since its previous meeting in late September. Inflation rose more steeply than the RBA had been expecting in the quarter, seeing headline CPI jump from 2.1% to 3.2%Y/Y while trimmed mean or core CPI lifted from 2.7% to 3%Y/Y. At the post-meeting press conference, Governor Bullock said that while temporary factors - such as electricity rebates and council rates - were at play in Q3, more persistent price pressures in areas such as housing construction and market services were also part of the story.
On the back of these upside surprises, the RBA raised its inflation outlook in today's Statement on Monetary Policy. It now sees headline CPI ending 2025 at 3.3% (up from 3%), 3.2% in 2026 (from 2.9%) and then 2.6% in 2027 (from 2.5%). Core CPI for 2025 was upped to 3.2% from 2.6% before easing back to 2.7% in 2026 (from 2.6%) and then 2.6% in 2027 (from 2.5%).
Importantly, the MPB is also taking some signal from the inflation data about economic conditions more broadly. Because inflation lifted and is above the midpoint of the target band, the MPB judges that demand continues to outweigh supply in the economy, with tightness remaining in the labour market. While the earlier rate cuts have already supported household spending and the housing market, the MPB believes that there is more to play out.
That is reflected in the growth outlook that has lifted from 1.7% to 2% this year. While there was a downgrade to growth next year from 2.1% to 1.9%, the forecast for 2027 remained at 2%. With the outlook for resilient growth remaining intact, the RBA sees little further softening in the labour market. Forecast unemployment has ticked up from 4.3% to 4.4% across the projection horizon. The next RBA monetary policy meeting is set for 8-9 December.
