MNI RBA WATCH: Board To Hold, Push Out Midpoint Return
The Reserve Bank of Australia Board is expected to keep the cash rate at 3.6% next Tuesday following stronger-than-expected Q3 inflation and is likely to push back the anticipated return of inflation to the midpoint in updated forecasts released alongside the decision.
Higher Q3 inflation, particularly in the trimmed-mean measure, has significantly shifted market expectations, all but eliminating any chance of further 2025 rate cuts and pushing out potential easing to May at the earliest.
This follows September’s pause, when Governor Michele Bullock refrained from signalling an easing bias despite unemployment ticking up to 4.5%. (See MNI RBA WATCH: On Hold, Eyeing Further Labour, CPI Data) The RBA has held the cash rate steady since its 25-basis-point cut in July.
Q3 INFLATION
Australia’s headline CPI grew 3.2% y/y in Q3, 20 basis points above expectations and up from 2.1% in Q2, while trimmed-mean inflation – the RBA’s preferred measure – rose to 3.0% from 2.7%, topping forecasts by 30bp, according to ABS data released Wednesday.
While the RBA had anticipated some increase in headline CPI as government electricity subsidies ended, the rise in trimmed mean – up 1.0% q/q – was unexpected. Bullock had previously stated that a 0.9% q/q rise would represent a “material miss.”
Stronger price pressures came from a 3.3% annual increase in the cost of eating out, suggesting households continue to have sufficient disposable income to support higher prices. Services inflation also broadly remained sticky, edging up 20bp to 3.5%. Excluding the effect of expiring rebates, electricity costs would still have risen 5.9% over the year.
Former staffers have consistently warned of stronger inflationary pressures that could impact the RBA's easing path. (See MNI INTERVIEW: Stronger Q3 Inflation To Limit RBA Easing) Some expect the Bank to hold the cash rate at 3.6% for some time.
HIKES NEXT?
Former RBA senior economist John Simon told MNI this week that the Bank’s next move could be up in H1 2026 if Q4 and Q1 CPI readings remain elevated, questioning whether the current 3.6% cash rate will be sufficient to cool inflation. “If we’re close to long-run neutral – and I’ve been saying 3.5%, which is where we are – and the economy still has heat in it, that suggests an increase might actually be on the cards,” Simon said. “I wouldn’t expect the picture to be clear until next year.”
He also noted the results are likely to prompt a significant reshaping of the RBA’s forecasts, pushing back the expected return of inflation to the midpoint beyond the current projection horizon. The Bank's August Statement on Monetary Policy had inflation at 2.5% by the end of 2027.
