Reserve Bank’s Melbourne Cup Day interest decision sees cash rate hold at 3.6 per cent
Mortgage holders' hopes for Cup Day relief have been scratched as the Reserve Bank holds rates steady, with experts now warning the worst may not be over.
Mortgage holders’ hopes of a cup-day cut have been scratched, with the Reserve Bank leaving the cash rate unchanged at 3.6 per cent.
The hold was widely expected in the wake of last week’s shock inflation rate, which crushed hopes there would be a Cup Day cut.
In its statement announcing the decision – unanimously agreed by the monetary policy board – the RBA said it was made as inflation was “materially higher” and domestic economic activity remained uncertain.
“Inflation has increased and is back above our two-to-three per cent target range, where we expect it to stay for a while,” the statement said.
“The unemployment rate has risen a little, but the jobs market is still healthy and is expected to remain that way.”
Economists expect homeowners will have to hold out until at least February next year for a possible interest rate cut, but even that remains uncertain.
The RBA said it expected inflation to be above three per cent for much of next year before declining to around the middle of its target range by late 2027.
At the post-announcement press conference this afternoon, Reserve Bank governor Michele Bullock was defiant about the messages the bank had sent out before last week’s shock inflation figures.
“I think I’ve been fairly cautious about making predictions about what would be happening to interest rates. If you go back as far as February when the board made its first cut, we used words in the statement to the effect of ‘cutting too quickly or cutting too much might stop the disinflationary process’. The board has always been cautious.”
“So I’m not sure I’d describe the way the board has spoken in its statement or the way I have spoken has given people hope there’s lots and lots of interest rates to come.”
The governor did concede that the Bank had been caught by surprise and that getting back to their targets could take time.
“We think some of this was driven by temporary factors such as travel costs, council rates and fuel and we don’t expect some of these to continue,” she said.
“We are however taking signal from stronger price increases which may suggest more inflationary pressure in the economy than we thought.
“We are aware that we may have misjudged the gap between supply and demand in the economy in either direction.
“If you take the forecasts at face value, that would suggest by 2027 we get back to 2.6 per cent which is close-ish to 2.5. So on the one hand you could argue that is about where we want to be.”
Griffith University Adjunct Associate Professor Graeme Hughes observes the longer bout of inflation will mean higher rates for longer
“Any market hopes for a cut were extinguished by the recent high inflation figures, forcing Governor Michele Bullock and the board, to maintain a vigilant stance. Worryingly, the RBA itself forecasts inflation will creep above 3% before only gradually easing toward 2.6% by 2027.”
This means homeowners must prepare for the cash rate to stay put for the foreseeable future.
Adding to the pressure is Canberra’s spending. The central bank noted that strong Federal Government public demand on everything from infrastructure to services, is currently heating up the economy.”
“This government spending is contributing to high aggregate demand, effectively working against the RBA’s efforts to bring rising prices under control.”
CreditorWatch Chief Economist Ivan Colhoun added that while the RBA’s move was expected, the central bank would be watching unemployment and inflation rates in coming months.
“If the recent rise in the unemployment rate is sustained in coming months, that will become a more significant influence for policy,” he said.
“While the outcome is no doubt a little disappointing for businesses and consumers, high inflation and cost increases in recent years have been very challenging, and constraining the rate of inflation remains an important priority, while the unemployment rate remains pleasingly very low.”
Graham Cooke, head of consumer research at Finder, said the RBA’s decision offered little comfort to households already feeling the pinch.
“Many Australians were hoping for some breathing room before Christmas, but inflation has returned, and the board is waiting for clearer signs of progress before moving on rates,” he said.
“Unless something unprecedented happens, we’re now looking at 2026 for the next rate adjustment.
“If inflation eases, we could see a cut early next year. Until then, homeowners will need to look to other lenders for a better deal.”
Just 14 per cent of Finder’s financial and economics experts are tipping a December rate cut.
Deloitte Access economics partner Stephen Smith said the Reserve Bank had no choice but to hold this month.
“The bank now faces the conundrum of rising unemployment and rising inflation, requiring a difficult balancing act for monetary policy,” he said.
“At 3.6 per cent, interest rates are still weighing on economic growth, while the broad-based nature of the inflation uptick suggests the supply capacity of the economy is not keeping pace with demand.
“The Reserve Bank therefore needs help from government policy in relation to tax, competition and regulatory settings to boost productivity and investment, and improve the supply side of the Australian economy.”
On balance, Deloitte Access Economics still expects the next move in interest rates to be down. However, the timing of that move is in doubt, Mr Smith said.
Harry Cruise, head of economic research and global grade at Oxford Economics, said the RBA would need to keep interest rates restrictive for a little longer.
“But at the same time, unemployment is rising and forward indicators are softening,” he said.
“That combination leaves the RBA between a rock and a hard place; the board’s dual mandate of price stability and full employment is being pulled in different directions.
“In the near term, inflation takes priority, so rates are likely to stay on hold until February.
“Indeed, given rates will remain restrictive into early 2026, we now expect unemployment to rise a little higher than first anticipated, reinforcing the case for another rate cut in May.”
Economists at all four of the major banks were doubtful of rate cuts until at least February.
Investors, via the ASX’s RBA Rate Tracker, had backed in a 93 per cent chance of a hold and a seven per cent chance of a cut as of Monday night.
Two weeks ago, the ASX futures indicated a 72 per cent chance of a cash rate decrease.
David Bassanese, chief economist at Betashares, agreed the next rates move would be a cut.
“I still see the next move in rates as down, but it could be a longer than hoped wait for those managing a mortgage,” he said.
“Last week’s upside inflation surprise was so bad that the RBA will likely want to see at least two more quarterly CPI reports before it could cut rates again, and these will need to show convincing signs of an easing in underlying inflation from 3 per cent to closer to 2.5 per cent.
“That suggest the next opportunity may not come until May next year.”
Chief economist at KPMG Australia, Dr Brendan Rynne, believes RBA easing earlier this year stymied this month’s prospects of a rates cut.
“High interest rates had previously succeeded in curbing demand; however, the three interest rate cuts this year appear to have restimulated household demand,” he said.
Dr Rynne says it’s unclear if Australians would see interest rate cuts next year.
“This outlook still suggests to KPMG that the cash rate should be at more accommodative levels with cuts of at least 25bp or 50bp being necessary to help drive private sector consumption and investment activity in the near term,” he said.
“However, given the shock of the latest quarterly CPI data the timing of these cuts is less certain, with the RBA needing clarity that the worst possible world of inflation continuing to pulse upwards and unemployment deteriorating doesn’t become the Australian economy’s modus operandi.”
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