RBA thoughts turn to policy tightening

This week’s meeting of the Reserve Bank’s Monetary Policy Board (MPB) left the cash rate target unchanged and also signalled a shift in the central bank’s risk assessment.  

Upside risks to inflation are now front of mind and the debate at Martin Place has shifted decisively. The old question was, would the RBA be able to deliver one final rate cut in the easing cycle early next year? The new question is, will Australia’s central bank now leave rates unchanged for a prolonged period or instead start tightening policy in the first half of 2026? In the words of Governor Michele Bullock, from her post-meeting press conference: 

‘I don’t think there are interest rate cuts in the horizon for the foreseeable future. The question is, is it just an extended hold from here or is there possibility of a rate rise? I couldn’t put a probability on those but I think they’re the two things that the Board will be looking closely at coming into the new year.’

One way to think about this is in terms of two views on what recent inflation numbers tell us. The first is that some elements of inflation are proving disappointingly persistent, making the return to target take longer than the RBA is comfortable with. That would argue for the governor’s ‘extended hold’ option. The second is that the spike upwards in recent inflation readings signals that inflation is not just proving more persistent, but that this persistence is broad based and that inflation may even be at risk of re-accelerating as the economy hits its speed limit. A near-term rate increase would be the appropriate response in this case.

For now, all this leaves any case for a future cut reliant on a negative shock to activity, perhaps from adverse developments in the global economy. But the MPB’s view is that such downside risks have abated, even asinflation risk has increased.

One note of caution. In the RBA’s data-dependent world, we have already seen how market expectations about the future path for rates can swing quite quickly as additional information becomes available. After all, the current shift in market sentiment largely reflects one quarterly and one monthly inflation reading. Tracking the data flow will continue to be important, and this week’s release of the November labour force numbers serve as a timely reminder of this point. While the unemployment rate was unchanged last month - despite consensus forecasts for a slight increase - the underemployment rate rose by 0.4 percentage points. At the same time, employment fell by more than 20,000, despite market expectations for positive job growth. That indicates a modest degree of labour market weakening, although not enough to materially alter the MPB’s analysis of the current balance of risks.

We dig deeper into the MPB’s latest thinking below, review this week’s labour market release in a bit more detail and provide the usual selection of further reading and listening.

The MPB is likely to debate the case for a rate hike next February

As noted above, the RBA’s Monetary Policy Board (MPB) voted unanimously this week to leave the cash rate target unchanged at 3.6 per cent. That decision was widely expected by markets, which meant that once again this was another meeting where most of the anticipation involved messaging around the decision, rather the decision itself. RBA-watchers were particularly keen to see whether the MPB would signal a shift to a more hawkish outlook for policy. The backdrop here was October’s uncomfortably high reading from the new monthly CPI, which put headline inflation well above target at 3.8 per cent and underlying inflation at 3.3 per cent.

In that context, MPB did sound more hawkish this week, albeit paired with its usual caution around reading too much into a small sample of recent data points. Consider the second paragraph of this week’s short statement by the Board:

‘While inflation has fallen substantially since its peak in 2022, it has picked up more recently…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. Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.’

Similarly, according to the penultimate paragraph:

‘The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures. Private demand is recovering. Labour market conditions still appear a little tight but further modest easing is expected. The Board therefore judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve.’

So, the MPB (1) acknowledged that inflation has picked up, (2) thinks a portion of that increase is broad-based and could prove persistent, and (3) now judges the risks to inflation are tilted to the upside. 

Governor Bullock’s press conference following the MPB meeting further reinforced these messages, using language that was more hawkish than the preceding statement. Responding to the opening question, she explained that the board ‘didn’t consider the case for a rate cut at all’ at this week’s meeting, and added that although the MPB ‘didn’t explicitly consider the case for a rate rise…we did consider and discuss quite a lot the circumstances and what might need to happen if we were to decide that interest rates had to rise again at some point next year.’

In response to further questions, the Governor indicated that another rate cut was no longer on the cards:

‘I would say at this moment that given what’s happening with underlying momentum in the economy, it does look like additional cuts are not needed.’

She explained that this reflected a shift in the Board’s risk assessment:

‘The Board does think that relative to six months ago or seven months ago, a lot of the downside risks seemed to have abated a bit and some of the upside risks seem to have been generated.’

All that said, the MPB did remain cautious about just how much weight to place on both the September quarter’s result and the monthly October print. In the case of the former, the Governor noted there were some mixed messages in the data, commenting that ‘there’s enough in the quarterly inflation print to suggest that there is some persistence there, but there’s also a bit to say, there was a whole lot of random things that just went up and maybe they’re not going to go up again at the same rate’. In the case of the latter, she reminded her audience (in line with our comments at the time) that ‘We don’t know how the monthly numbers are going to play out yet because it’s a new series. They’re volatile. They’re not seasonally adjusted in a way that they normally would be with a long series of data. And the other thing is we don’t know how the series behaves.’

The MPB next meets on 2-3 February 2026. At which point the Board will hope to be better placed to decide whether the signal that the September quarter data sent on underlying inflation was ‘just a whole lot of unrelated one-off factors’ or whether it was ‘demonstrating that there are underlying capacity pressures in the economy’.

Labour market shows modest signs of weakening

The ABS said the number of employed people in Australia in November 2025 fell by 21,300 (seasonally adjusted) over the month. A 56,500 drop in full-time employment drove the decline, only partially offset by a 35,200 increase in part-time work.