MNI RBA WATCH: Bullock Strikes Cautious Tone Following Pause

The Reserve Bank of Australia may not need to ease as much as its peers, Governor Michele Bullock said on Tuesday after the Board unanimously decided to hold the cash rate at 3.6%.

“We do see elevated inflation in the first 12 months because of the most recent numbers,” Bullock said, referring to the September quarter’s 3% trimmed mean result, which largely drove Tuesday’s widely-anticipated decision. (See MNI RBA WATCH: Board To Hold, Push Out Midpoint Return) “That’s baked in now, and then we see the quarterly numbers starting to come off and delivering an inflation rate of around 2.6% by the end of the period. But there’s a great deal of uncertainty.”

While the RBA’s updated forecasts are based on at least one more cash rate cut, Bullock noted that keeping rates at 3.6% would push inflation toward the 2.5% target midpoint more quickly.

“The Board is watching very carefully. We think we’re pretty close to neutral ... we may be a little bit restrictive, we may not. So there may be a slight decrease, there may not. The Board is going meeting by meeting, using data to inform that outlook,” she said. “If that outlook doesn’t look reasonable, they’ll change their mind. We don’t have a bias.”

Bullock’s remarks triggered volatility in Australian dollar overnight index swaps as traders struggled to price the RBA’s next move. Markets currently expect the cash rate to remain unchanged until at least mid-2026, with pricing shifting toward a September cut as the day progressed.

The Board has held the cash rate steady since its 25bp cut in August. 

EXCESS DEMAND

Bullock said the economy had probably retained more demand than previously expected, which continued to drive inflation, particularly in market services and new-dwelling costs.

She added that much of Q3's inflation, with underlying rising 1% q/q, was likely driven by temporary factors that should moderate in quarterly terms through 2026. However, the year-ended figure will hover around 3% due to the third quarter's outsized impact.

Monetary policy remains tight despite mixed signals on financial conditions, she reiterated.

“Some things, like credit spreads and equity markets, suggest things are a little bit easy. Other things, like the amount of disposable income people are putting into their mortgages and the credit-to-disposable-income ratio, suggest things are a little bit tighter,” she said.

“We still judge we’re marginally on the tight side, and that’s what’s baked into the forecast. But it’s also true that the forecast only comes back to 2.6%, so the Board will have to wait and see. It’s possible there are no more rate cuts. It’s possible there are some more. But as I said earlier, we didn’t go up as high, so we might not have to come down as far.”

LABOUR MARKET STABILITY

Bullock said forward-looking labour market indicators remain relatively optimistic, noting September's unemployment spike to 4.5% may have been data volatility. (See MNI: RBA To Remain Cautious Despite Unemployment Surge)

“Those indicators suggest there’s a bit more stability in the labour market than you might think just from seeing the unemployment rate move from 4.3% to 4.5%. We’re conscious of risks on both sides, but for now, our best guess is that the unemployment rate will remain reasonably stable from here.”

The RBA Board next meets Dec 9.