Reserve Bank hits pause as inflation concerns mount, casting doubt over further cuts this year
In a marked shift from August’s rate-cutting mood, the RBA’s monetary policy board struck a notably more cautious tone, saying that underlying inflation’s decline “has slowed” and that recent data suggest price pressures in the September quarter “may be higher than expected”.
NAB chief economist Sally Auld said the RBA’s assessment of the economic outlook has “evolved in a hawkish direction”, effectively putting the central bank’s easing cycle on hold just weeks after delivering its third rate cut this year.
Governor Michele Bullock’s post-meeting press conference reinforced this shift, acknowledging that monthly inflation data – previously dismissed as too volatile to influence policy – had prompted concern about persistent price pressures.
“A couple of components, market services and housing inflation were a little higher than we’re expecting,” Ms Bullock said. “We’re just being a little bit cautious about that.
“Today we felt … that there had been a bit of an upside surprise on some of the data, the inflation and the activity data, and I should say that’s good news.
“It’s good news that activity is responding.”
The RBA statement said private demand was “recovering a little more rapidly than expected”, and household consumption was picking up as real incomes rose and financial conditions eased.
This recovery, while welcome news for an economy that has been sluggish for years, has caught policymakers off guard.
Rising house prices and easy credit are boosting household wealth, potentially creating conditions where businesses find it easier to pass on cost increases to consumers, Ms Bullock said.
“Something that we had been hearing from liaison, was that over the past six months, businesses have found it a little more challenging to pass costs on, so it’s sort of impacting their margins a bit,” she said. “So that might have been pulling down on inflation a bit.
“We’re not hearing anything yet to suggest that that is not the case anymore, and that they feel emboldened.
“It was really more a scenario to say what happens if, in fact, consumers with increasing wealth, with increasing real incomes now start to consume, and what if that starts to increase demand and businesses say, well, now we can start to push these on. What might that mean?”
She clarified that it’s “something that could happen” rather than something that was happening.
The labour market continues to be another concern for policymakers. Despite employment growth slowing, the unemployment rate held steady at 4.2 per cent in August, and the RBA said conditions “remain a little tight” relative to full employment.
This tightness in labour markets plus persistent services inflation, has created an uncomfortable echo of the post-pandemic period when wage and price pressures proved stickier than expected.
“The dynamics on pricing and wages looks like repeating the stickiness exhibited coming out of the pandemic, albeit the drivers are different now,” Citi chief economist Josh Williamson said.
The implications for households are significant. Market expectations for further rate cuts this year have evaporated, and several economists predict an extended pause that could stretch well into 2026. Pricing of the next 25 basis-point rate cut has shifted from February to May.
The key test will come with the September quarter inflation data, due in late October.
If underlying inflation continues to run hot, it could cement the RBA’s cautious stance and dash hopes of Melbourne Cup Day rate relief.
For mortgage holders who have benefited from 75 basis points of cuts since the start of the year, further relief is no longer guaranteed.
While the RBA repeated that “maintaining price stability and full employment is the priority”, it’s clearly more worried about ensuring inflation pressures don’t become entrenched, even if that means keeping borrowing costs higher for longer.
Ms Bullock emphasised this point repeatedly during her press conference, saying the central bank wouldn’t provide “forward guidance” and would continue to be “data dependent” in its decision making.
“We’ll make that decision in November about whether it’s down again or maybe it’s hold again,” she said, acknowledging that continued economic recovery could justify keeping rates steady.
The shift reflects a growing confidence that the economy can handle current interest rate levels without sliding into recession.
With private demand recovering and employment holding up, the RBA has less urgency to cut.
The rapid-fire rate cuts that provided relief earlier this year appear to be over, replaced by a more measured approach that prioritises inflation control over immediate cost-of-living relief.
The RBA’s next move will depend heavily on whether inflation data validates current concerns or provides reassurance that price pressures remain contained.
Until then, rate cut hopes are on ice
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