RBA: Rates Lifted, Pressures Persist

Australia’s economy has surprised on the upside, with growth and inflation both stronger than anticipated. Rising prices are now more widespread, suggesting that the economy is operating closer to capacity than previously thought. In response, the RBA has lifted the cash rate to 3.85 per cent, reflecting the likelihood that inflation will remain above target for some time.

Late 2025 saw broad-based inflationary pressures. Costs increased across services, retail goods, and housing construction. While temporary factors such as fuel prices and the end of electricity rebates added to headline inflation, underlying price pressures also picked up, signalling that domestic demand is driving sustained upward pressure on prices.

Private demand has been the key driver of growth. Household spending has held up well, and housing investment has strengthened alongside improving market conditions. We had noted previously in our CPI report that, "Despite the seasonality in the December inflation data, consumer spending was quite significant." - and the same sentiment was echoed in the RBA's statement. Business investment also rose, though some of this is likely to be short-lived due to its uneven and import-heavy nature. Looser financial conditions from previous rate cuts may be amplifying demand, raising questions about how restrictive policy currently is.

The labour market has shown considerable tightness. Unemployment is low and stable as firms continue to struggle to fill positions amid skill shortages. Understandably, wage growth remains elevated, reflecting ongoing pressure on labour capacity.

Looking ahead, the May meeting could be the next point for potential policy adjustment, depending on how inflation and economic activity evolve. For now, our base case is that rates will remain on hold unless new data suggests a material change.

Risks and Outlook

Global growth has held up better than expected, supported by supply chain adjustments and strong AI-related investment. Geopolitical tensions have so far had little impact on domestic dynamics but could push up inflation or slow activity if conditions worsen.

The RBA’s latest forecasts show upward revisions to both growth and inflation, reflecting the Bank’s view that inflation will take longer to return to target amid ongoing excess demand. The unemployment rate has been revised slightly lower, signalling continued strength in near-term jobs growth. Cash rate assumptions confirm that the forecast revisions are indeed hawkish. Overall, the forecasts suggest the economy is expected to stabilise no sooner than mid-2027 onwards.