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The Reserve Bank of Australia kept interest rates unchanged at 3.60% Tuesday despite inflation picking up more than expected, signaling caution as policymakers wait to see whether earlier rate cuts will cool an economy showing signs of renewed strength.
The Monetary Policy Board’s decision leaves borrowing costs steady while trimmed mean inflation hit 3.0% over the year in the September quarter, up from 2.7% in June. The increase caught the central bank off guard, with inflation coming in materially higher than forecasted in the August Statement on Monetary Policy.
“Inflation has recently picked up,” the board said in its statement. “The Board’s judgement is that some of the increase in underlying inflation in the September quarter was due to temporary factors.”
The decision affects millions of Australians with mortgages, credit cards and personal loans as the country navigates an uncertain economic landscape marked by recovering consumer demand, tight labor markets and global trade tensions.
Inflation Surge Exceeds Forecasts
Headline inflation rose sharply to 3.2% over the year in the September quarter, driven partly by the end of electricity rebates in several states. Trimmed mean inflation, which strips out volatile price movements, jumped 1.0% in the three-month period.
The central bank acknowledged the surprise increase but attributed part of the uptick to temporary pressures. The board’s November forecast, based on a technical assumption of one more rate cut in 2026, projects underlying inflation rising above 3% in coming quarters before settling at 2.6% in 2027.
Interest rates have been working to bring aggregate demand and potential supply closer to balance since inflation peaked in 2022. The recent acceleration suggests that process remains incomplete despite substantial progress from the 2022 highs.
Consumer Spending Powers Ahead
Economic data show the pickup in private demand from the June quarter continuing into the second half of the year. Consumption figures suggest Australians are spending more as earlier interest rate reductions take effect.
The housing market is strengthening across the country, with prices rising and dwelling construction costs increasing again after a period of weak growth. The board cited the housing recovery as evidence that recent rate reductions are working their way through the economy.
“The housing market is continuing to strengthen, a sign that recent interest rate reductions are having an effect,” the statement said.
Credit remains readily available to both households and businesses, supporting continued spending and investment even as borrowing costs stay elevated by historical standards.
Labor Market Shows Mixed Signals
The unemployment rate climbed to 4.5% in September from 4.3% in August, with employment growth slowing more than the central bank expected. But beneath that softening, the labor market remains tight by most measures.
Job vacancies stand at high levels and measures of labor underutilisation remain low. Business surveys and the bank’s liaison with companies indicate a significant share of firms still struggle to find workers.
“Various indicators suggest that labour market conditions remain a little tight, notwithstanding a recent easing,” the board said.
Wages growth has eased from its peak when adjusted for quarterly volatility, but productivity growth has been weak. That combination means unit labor costs, which measure how much companies pay per unit of output, remain high and could continue feeding into consumer prices.
Uncertainties Cloud Economic Outlook
The board highlighted substantial uncertainties about both domestic and international economic developments that could push inflation and employment in either direction.
If private demand continues exceeding expectations, it could increase labor demand, add to capacity pressures and make it easier for businesses to pass cost increases to customers. But the improvement in consumer spending might not persist if households pull back.
Global uncertainty remains elevated despite minimal impact so far on overall growth and trade. Many forecasters have revised up near-term expectations for world growth, but trade policy developments are still expected to hurt global expansion over time.
“Beyond tariffs, a broader range of geopolitical risks remain a threat to the global economy,” the statement said. “This could all weigh on growth in aggregate demand and lead to weaker labour market conditions in the domestic economy.”
The board also faces uncertainties about whether monetary policy remains restrictive, how long earlier rate cuts take to work through the economy, the balance between demand and supply, labor market conditions and productivity growth prospects.
Cautious Approach Wins Out
The board decided maintaining the cash rate at its current level was appropriate given recent inflation data and signs of persistent price pressures.
“With private demand recovering and labour market conditions still appearing a little tight, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting,” the statement said.
Financial conditions have eased since the beginning of 2025, but the full effects of earlier rate reductions will take time to materialize. The board judged it was appropriate to remain cautious and update its outlook as new data arrive.
“The Board remains alert to the heightened level of uncertainty about the outlook in both directions,” the statement said.
The decision was unanimous, indicating all board members agreed on the wait-and-see approach despite the inflation uptick.
Price Stability Remains Focus
The board emphasized its commitment to delivering both price stability and full employment, the dual mandate guiding Australian monetary policy.
“Maintaining price stability and full employment is the priority,” the statement said. “The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.”
Policymakers pledged to remain attentive to incoming data and the evolving assessment of economic risks. The board will closely monitor global economic developments, financial markets, domestic demand trends, and the outlook for inflation and labor markets.
What It Means for Borrowers
The steady rate decision provides temporary relief for mortgage holders who have faced years of rising borrowing costs. Variable rate mortgages, which track the cash rate, will remain at current levels for now.
Australians with outstanding mortgages of around $600,000, close to the median home price in major cities, will continue paying roughly the same monthly repayments they faced before the meeting. Fixed-rate mortgage holders are unaffected unless their fixed terms expire and they roll onto variable rates.
The decision also affects savings account returns, which typically track movements in the cash rate. Savers will see no immediate change in interest earned on deposits.
Housing Market Implications
The rate hold comes as housing prices accelerate across Australian capital cities. Sydney and Melbourne have seen prices climb in recent months as buyers return to the market anticipating no further rate increases.
Dwelling construction costs rising again after a period of stagnation could add pressure to housing affordability already stretched by years of price growth outpacing wage increases. The central bank noted credit availability supporting continued housing market activity.
First-time buyers face a challenging environment with prices rising and the prospect of rates staying higher for longer as the bank works to ensure inflation returns sustainably to target.
Business Investment Outlook
Readily available credit to businesses supports investment plans, but elevated borrowing costs compared to the ultra-low rates during the pandemic continue weighing on expansion decisions.
Companies report difficulty finding workers, which could force them to raise wages and potentially pass those costs to customers through higher prices. That dynamic keeps pressure on the inflation outlook even as demand moderates.
Weak productivity growth remains a concern for the board. When output per worker stagnates, any wage increases translate directly into higher unit labor costs and potential price pressures.
Global Factors in Play
The board acknowledged trade policy developments expected to hurt world growth over time, though forecasters have recently revised up near-term global growth expectations.
Geopolitical risks beyond trade tensions threaten the global economy and could affect Australia through weakened export demand and disrupted supply chains. Any sharp deterioration in global conditions could force the board to reconsider its cautious approach.
Financial market developments also factor into the board’s thinking, with global monetary policy decisions by the U.S. Federal Reserve, European Central Bank and other major central banks affecting Australian financial conditions through currency movements and capital flows.
Path Forward
The central bank provided no explicit forward guidance about future rate moves, maintaining flexibility to respond as economic conditions evolve. The technical assumption of one more rate cut in 2026 used in the November forecast does not represent a commitment or prediction.
Markets will closely watch upcoming inflation data, employment figures and consumer spending reports for clues about the board’s next move. Any sustained acceleration in inflation could force the bank to abandon rate cut plans, while a sharp economic slowdown might prompt faster easing.
The board meets next in December, when it will have access to another quarter of inflation data and updated employment figures. That meeting will provide the next opportunity to adjust policy if conditions warrant.
For now, the message from Australia’s central bank is clear: hold steady, watch the data, and remain ready to act in either direction as the uncertain economic outlook becomes clearer.
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