MNI POLICY: RBA Sees Balanced Risk, Despite Monthly CPI Shock

The Reserve Bank of Australia continues to view the 3.6% cash rate as somewhat restrictive, despite recent strong inflation data, including October’s monthly print, which policymakers will largely look through, MNI understands.

The Australian Bureau of Statistics this week began publishing its full monthly CPI series, which showed headline inflation at 3.8% and trimmed mean inflation at 3.3% in October, both above expectations and outside the Bank’s 2-3% target band. However, the RBA will continue to rely primarily on quarterly inflation data for policy setting, as the new-seasonally adjusted monthly series only extends back to April 2024. At least three years of history are needed to identify seasonal patterns clearly, which may themselves be shifting.

While October’s data were firm and will be scrutinised for signs of underlying pressure, the Bank had already been analysing similar information via the old monthly CPI indicator. September-quarter data pointed to particular strength in new housing construction costs and market services, which the Bank will continue to monitor within the monthly figures as it awaits the next quarterly print due Q1. 

RESTRICTIVE POLICY

RBA officials see risks to the economy as balanced. They judge policy to be slightly restrictive and still above neutral, but close enough to make precise calibration difficult.

Evidence suggests the neutral real rate, which is unobservable and must be inferred from output and inflation dynamics, has declined over time. (See MNI INTERVIEW: RBA At Risk Of Q1 Hike - McKibbin)

Market pricing has shifted toward a more clearly two-sided risk assessment. While earlier in the year markets focused on downside growth risks and the possibility of further easing, economists now broadly expect rates to be on hold for some time, with both upside and downside inflation risks acknowledged.

Leading indicators such as job ads point to modest labour-market easing ahead, consistent with the RBA’s forecast for a gradual rise in unemployment. At the same time, capacity utilisation has picked up, signalling that parts of the economy remain tight. (See MNI INTERVIEW: Spare Capacity Risks 2026 H2 RBA Hike - Fabo) This combination underpins the Bank’s view that inflation risks are now more evenly balanced than earlier in the year.

October's decline in the unemployment rate was broadly consistent with the Bank’s view that September’s sharp rise overstated labour-market softening. However, the renewed rise in capacity-utilisation measures is a factor the Board will continue to monitor closely.