The RBA looks set to sign off for 2025 with a hawkish hold, leaving the cash rate at 3.6%. Incoming data has driven a hawkish repricing of the rates outlook in Australia to the point where a rate hike in the second half of 2026 is now seen as the RBA's most likely next move. That compares to expectations for one further rate cut after the November meeting. In light of this, a hawkish surprise from the RBA seems an unlikely scenario. The main question is whether the tone of the decision statement and Governor Bullock's press conference supports the hawkish repricing that has taken place.
Last time out in November, the RBA's decision to hold was a straightforward one. The RBA raised its inflation forecasts after CPI in the September quarter rose to 3.8%Y/Y in headline terms and 3.3%Y/Y on a trimmed mean or core basis - material upside surprises. However, Governor Bullock's post-meeting comments were balanced enough for markets to still have an additional rate cut priced in to round out the easing cycle. Data on both sides of the RBA's dual mandate (2-3% inflation and full employment) has since altered that view.
On inflation, headline CPI was clocked in the new monthly data series rising from 3.6% to 3.8%Y/Y in October, with the trimmed mean firming from 3.2% to 3.3%Y/Y. Although temporary factors (electricity prices, travel costs and fuel) are pushing up headline inflation, the RBA has also noted upward pressure from areas such as home building costs and in services. In October services inflation lifted from 3.5% to 3.9%Y/Y.
An encouraging labour market report in October saw employment reaccelerate (42.2k) at a 6-month high, seeing the unemployment rate fall from 4.5% to 4.3%. The unemployment rate has trended higher through the year; however, it still remains at a level the RBA sees as consistent with its full employment mandate. Those conditions are currently generating wages growth of 3.4%Y/Y as of the September quarter - a solid pace without posing upside risks to inflation.
Meanwhile, last week's National Accounts were stronger than they looked - despite quarterly GDP growth slowing to 0.4% (2.1%Y/Y). Beneath the hood, domestic demand rose 1.2% in the September quarter - fastest rise since Q2 2023 - on broad-based gains across consumption, investment and in the public sector. Meanwhile, household spending made a strong start to the December quarter surging by 1.3% in October.
All in all, expect the RBA to remain on hold on the basis of the incoming data since the November meeting. In the post-meeting press conference, Governor Bullock will likely keep to her usual script by steering clear of validating any particular rate path, stressing optionality to respond to the data is key.
