RBA: Rates Frozen, Risks Still Warm

The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 3.60% at its November meeting, after an unexpected surge in September quarter inflation data. Furthermore, looking at the Statement on Monetary Policy (SMP), the bank's upward revision to its inflation forecasts for 2026 suggests that the Board is increasingly concerned about persistence in price pressures. While the unemployment rate forecast has ticked up slightly, it remains broadly unchanged, reinforcing the view that the labour market is likely stable.

Taken together, these revisions imply that the RBA will maintain a hawkish bias despite the pause. Any further upside surprises in inflation or evidence of sustained demand mean the Bank will be reluctant to cut rates until it sees clear signs that inflation is tracking back toward target.

Our base case remains that the RBA will stay on hold until February 2026, but the risk profile has shifted toward a longer plateau rather than an early easing cycle. The RBA has made it clear: it prefers to be reactive to incoming data over a forward-looking approach.

Domestic resilience offsets global uncertainty

Domestic resilience is proving a double-edged sword for Australia’s monetary policy outlook. Pick-up in household spending and stable labour market conditions have helped cushion the economy against global uncertainty, including slowing growth in major trading partners and volatile commodity markets. However, this resilience is complicating the Reserve Bank’s task of returning inflation to target, as persistent demand pressures risk keeping price growth elevated even as external headwinds intensify.

Australia’s inflation pulse quickened in 3Q25, with headline CPI up 1.3% over the quarter, the strongest rise since March 2023 and 3.2% annually, driven by a 9.0% jump in electricity prices as annual reviews and rebate timing shifted the out‑of‑pocket burden. Meanwhile the trimmed mean rose to 3.0% for its first annual uptick since 2022. Even after adjusting for seasonality, the surge in discretionary outlays in 3Q CPI print was notable particularly as the earlier rate cuts flowed through to households.

At the same time, the labour market is cooling but still resilient: unemployment lifted to 4.5% in September while trend joblessness held at 4.3%. Seasonal hiring typically intensifies ahead of the holiday period which is why the RBA remained unfazed by the uptick. The Bank noted that wages growth has eased from its peak, but weak productivity is keeping unit labour costs elevated, reinforcing its decision to hold the cash rate at 3.60% while it gauges whether recent inflation strength is transitory or more persistent.

As per NAB’s 3Q Business Survey, SME conditions bounced back strongly in Q3, thanks to better trading and profitability and a modest lift in employment. Confidence also improved for the fourth straight quarter, reaching its highest level since 2022, though both measures remain below long-run averages. Larger SMEs are clearly outperforming smaller firms, leading on confidence, cash flow, and forward orders, while the smallest businesses saw conditions weaken.

The resilience is colliding with two structural drags: skills shortages and compliance/red‑tape burdens. On ground client interactions tell us that technical skill gaps are widespread and productivity‑dampening while business surveys continue to flag policy and regulatory pressures in confidence readings. In this sense, the RBA’s latest hold, after earlier cuts, may be perceived by firms as an added burden via higher‑for‑longer borrowing costs layered atop skills and compliance challenges; yet it is equally important for anchoring inflation expectations and preserving price stability, which ultimately creates the macro certainty needed for long‑horizon tech investment to pay off.

The bank’s own SMP underscores that private demand is recovering, and capacity pressures remain, so the near‑term policy task is delicate: keep inflation in the 2–3% band while firms accelerate digital adoption, training pathways and productivity‑enhancing investment to ease supply constraints and lift trend growth.

Risks and Outlook

The forecast revisions suggest the RBA sees inflation risks persisting longer than previously expected, even as growth remains subdued. Headline CPI is now projected to peak at 3.3% by Dec 2025 (up from 3.0%) and stay above target until mid‑2027, while trimmed mean inflation is also revised higher to 3.2% through 2025 before easing gradually. At the same time, GDP growth forecasts are only modestly stronger, and unemployment is expected to hover around 4.4%, signalling a soft landing rather than a sharp slowdown. These changes reinforce the RBA’s cautious stance: policy will likely remain restrictive for an extended period, with the cash rate assumed at 3.3% through 2027, as the Bank prioritizes price stability despite structural headwinds like weak productivity and skill shortages.

RBA Nov-25 SMP Forecasts

Sources: RBA, RSM Australia