Key Takeaways:
- The Reserve Bank of Australia (RBA) has left interest rates on hold at 3.6 per cent
- The RBA is prepared to lift rates if necessary next year to combat inflation
- Recent data showed headline inflation picked up in October to 3.8 per cent, from 3.6 per cent in September
- The RBA board’s decision to keep rates steady was unanimous
- Economists believe that the prospect of a rate cut is now dead, and it’s uncertain if interest rates will fall again at all
Introduction to Interest Rate Decision
The Reserve Bank of Australia (RBA) has made the decision to leave interest rates on hold at 3.6 per cent, with the central bank’s governor stating that the board is prepared to lift rates if necessary next year. This decision comes after recent data showed headline inflation picking up in October to 3.8 per cent, from 3.6 per cent in September. The RBA board’s decision to keep rates steady was unanimous, and the governor, Michelle Bullock, stated that the prospect of a rate cut was not discussed at the December meeting. However, the prospect of future rate hikes and when they may be necessary was discussed extensively.
Inflation and Interest Rates
The recent increase in inflation has raised concerns that interest rates may need to be lifted to combat it. The RBA board stated that recent data suggested "the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures". The board’s judgment is that some of the recent increase in underlying inflation was due to temporary factors, and there is uncertainty about how much signal to take from the monthly CPI data given it is a new data series. The decision to keep interest rates on hold was the RBA board’s final interest rate decision for 2025, and its next meeting will not take place until February 2-3, so interest rates will remain at 3.6 per cent for the next two months at least.
Economists’ Reactions
Economists have reacted to the RBA’s decision, with Callam Pickering, APAC economist at global job site Indeed, stating that hopefully the RBA’s cautiousness would not allow the inflation problem "to once again spiral out of control". Nerida Conisbee, Ray White Group chief economist, said high housing costs were keeping overall inflation elevated, and it was creating a policy headache for the RBA. The challenge for policymakers is that the most stubborn sources of inflation are now the least responsive to interest rate increases. Rents remain high due to a lack of rental housing, construction costs are easing only gradually, and utilities and insurance are driven largely by structural and regulatory factors, not consumer demand.
Housing Market and Inflation
The housing market is also a significant factor in the current inflationary pressures. Home prices have risen by almost 50 per cent in the past five years, pushing housing affordability to its worst levels on record. The lack of rental housing and high construction costs are contributing to the inflation problem, and the RBA is facing a policy paradox. Keeping rates high weighs on household spending and business investment, helping slow demand, but these same restrictive conditions are holding back residential construction and discouraging new rental supply, reinforcing the very housing inflation the RBA is trying to control.
Government and RBA Response
Federal Treasurer Jim Chalmers said the pick-up in inflation recently was partly due to temporary factors and was "something we’ve seen in many parts of the world". RBA governor Michelle Bullock said it would be wrong to think that the RBA board has no appetite to lift rates, but they had opted to keep rates steady over the summer. The board will do what it thinks it needs to do to get inflation back to 2.5 per cent, and it’s uncomfortable with the recent rise in inflation in Australia. The conversation the board had was uncomfortable, and they are uncomfortable where inflation is, but they will be agile and nimble in their decision-making.
Market Expectations
The market had been expecting a change in the RBA’s tone compared to its previous meeting in November when its tone was still quite dovish, and that was delivered today. EY chief economist Cherelle Murphy said the economy appears to be operating at, or maybe even above, its capacity, and so the Reserve Bank cannot provide any more stimulus with it generating unwanted inflation. At worst, the economy could already be operating with domestic demand at a level, and with interest rates, that are encouraging inflation. In light of changing dynamics, the Reserve Bank is being rightly cautious, but any continuation of recent inflation changes and upgraded inflation forecasts will likely come with tighter monetary policy in 2026.