RBA fights stubborn inflation as US eases up on borrowers

Australia’s shock inflation figures have killed hopes of mortgage relief, even as US homeowners celebrate falling rates – leading economists explain the stark divide.

While Americans are seeing interest rates cuts, economists say the Fed could be following the RBA soon.

Australia’s shock inflation figures this week have all but killed off hopes of an interest-rate cut next Tuesday while in the United States, homeowners are enjoying falling borrowing costs.

Westpac chief economist and former Reserve Bank assistant governor Luci Ellis says it comes down to how each central bank weighs inflation against jobs and that is why the US Federal Reserve cut rates by 0.25 per cent on Wednesday.

“The Federal Reserve is willing to take out insurance against the risk the labour market weakens, even when inflation is a bit above target,” she said.

“The RBA is not, and has just seen a big number for inflation that goes the wrong way if it’s to hit the midpoint of the 2–3 per cent target.”

Westpac’s Luci Ellis says weakening US employment drove Wednesday’s Fed cut. Jane Dempster/The Australian.

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That 2 to 3 per cent target is key to the RBA’s thinking. Wednesday’s stronger-than-expected inflation result means that unless prices fall sharply in the next few months, Australians shouldn’t expect mortgage relief any time soon.

Across the Pacific, the Fed faces a softer economy and rising unemployment, says HSBC Australia chief economist Paul Bloxham.

“The Fed has an economy that’s slowing down, while Australia’s is growing with consumers still spending,” he said.

“In Australia, we’re at the limit of what we can do without triggering further inflation. With our weak supply and poor productivity, it doesn’t give the RBA a lot of space to move.”

Bloxham said even in the U.S., borrowers shouldn’t expect many more cuts.

“The Fed is at the end of their cutting cycle,” he said. “In truth, there’s not that much difference between Australia and the U.S. – the RBA isn’t going to cut, but the Fed isn’t going to do much more either.”

HSBC chief economist Paul Bloxham believes the US cut might be the last for a while. Source: Supplied

Bullock’s warning

RBA governor Michele Bullock struck a cautious tone at a conference in Sydney last Monday, warning that “monthly numbers can be volatile” but calling the recent rise in unemployment “a bit of a surprise”.

She said the RBA board would need to weigh up whether to hold rates or cut them, stressing the importance of keeping pressure on inflation. Bullock also warned that if trimmed-mean inflation rose by 0.9 per cent for the quarter, above the RBA’s 0.6 per cent forecast, it would be a “material miss”.

The following day, she said the labour market remained “a little tight” and that policy was still “a little bit restrictive”. The message was clear: a rate cut isn’t automatic, especially if inflation keeps rising.

Inflation shock

The Australian Bureau of Statistics confirmed the RBA’s fears last week. Headline inflation jumped 1.3 per cent in the September quarter and 3.2 per cent over the year — up from 2.1 per cent in June. The RBA’s preferred measure, the trimmed-mean CPI, rose 3.0 per cent, above market forecasts of 2.7 per cent.

It was the biggest quarterly rise since March 2023 and the highest annual reading since mid-2024. The surprise spike has wiped out any near-term prospect of a cut.

Michele Bullock, RBA Governor speaking earlier this week in Sydney

Why the RBA is holding firm

Inflation risk: The jump in prices shows inflation isn’t yet moving sustainably toward target. Cutting rates now would risk undoing two years of work tightening policy.

Jobs still strong: Although unemployment has edged higher, the labour market remains tight. With inflation rising, the RBA wants to keep a lid on demand.

Policy credibility: After a long run of rate hikes, the bank is wary of cutting too soon. The lagged effects of higher borrowing costs are still flowing through the economy.

Cautious messaging: Bullock has been clear the RBA “won’t leap at a single number”. Holding rates gives the board flexibility — and avoids sending the wrong signal to markets.

What it means for borrowers

For mortgage holders, the decision means no reprieve on repayments this year — and probably not early next year either. Markets are now betting the first cut won’t come until the second half of 2026.

The hotter inflation data also means more pain for households already squeezed by rising rents, energy bills and grocery prices. Analysts say the RBA will now keep its focus firmly on inflation, even if that means slower growth.

What happens next

At Tuesday’s board meeting, the RBA will pore over fresh data on wages, services inflation and housing costs. If inflation stays sticky, the most likely outcome is another hold, though some economists haven’t ruled out a further rise if prices accelerate again.

Bullock’s comments this week capture the balancing act: cutting too soon risks reigniting inflation, while staying tight for too long could stall growth.

Bottom line

Australia’s economy remains stronger than the U.S., but that strength comes with a price — inflation that’s proving hard to tame.

The Fed can afford to ease because its economy is cooling. The RBA can’t, because ours isn’t.

Until inflation clearly tracks back toward the 2–3 per cent band, Bullock and her board are set to hold the line — and homeowners will keep waiting for relief.