The Reserve Bank of Australia (RBA) is expected to keep the cash rate on hold next week after core inflation rose faster than expected, effectively shutting the door on any chance of a near-term rate cut.
The Australian Bureau of Statistics (ABS) revealed that trimmed-mean inflation lifted by 1.0 per cent in the September quarter, above both market expectations of 0.8 per cent and the RBA’s 0.6 per cent forecast.
The annual rate of core inflation has accelerated to 3.0 per cent, the first increase since 2022. Headline inflation has risen by 1.3 per cent over the quarter and 3.2 per cent over the year.
Judo Bank’s chief economic adviser, Warren Hogan, and economist, Matthew De Pasquale, said the data has erased market hopes for a cut in 2025, noting that the probability of a rate reduction next week has dropped from 35 per cent before the release to almost zero.
They added that the RBA’s November forecasts will likely be revised higher, with 2025 year-end core inflation now expected to sit around 3.1 per cent, above the upper end of the 2–3 per cent target range.
“Given the labour market remains stable, the RBA is likely to stay on the sidelines until at least May 2026,” the pair said. “If future inflation data moves back towards 4 per cent, the risk of a rate hike could come into play.”
CBA head of Australian economics Belinda Allen said the latest CPI figures confirm that monetary policy will remain restrictive for longer.
“Given the material upside surprise to the September quarter CPI and the broad-based nature of price pressures, we now expect the RBA to remain on hold,” she said.
CBA previously anticipated one final rate cut in early 2026.
Allen noted that consumption and housing activity have strengthened faster than expected, with internal CBA spending data showing household outlays have picked up since March as rising home prices and resilient savings support demand.
Adam Boyton, ANZ’s head of Australian economics, said the decision to hold is expected to be “unanimous” despite the recent lift in the unemployment rate.
The Reserve Bank is expected to strike a more hawkish tone in its upcoming communications following the latest inflation surprise. Despite a modest rise in unemployment, the labour market is still likely to be described as “a little tight”, Boyton added.
The post-meeting statement is expected to emphasise that inflation has been more persistent than anticipated and that financial conditions have eased since earlier in the year, warranting caution in adjusting the cash rate.
According to Boyton, the RBA is likely to reaffirm its intention to hold steady while monitoring data closely.
“If the activity backdrop proves materially weaker than anticipated, the RBA board does have the option of easing in December,” he said. “We expect the more likely path for policy will be a final 25 bp easing in the first half of 2026, albeit now with risk that our expectation of a final rate cut in February ends up occurring later (i.e. in May and after the next two quarterly CPIs), or not at all.”
VanEck head of investments and capital markets Russel Chesler said surging electricity costs have played a key role in the inflation rebound, rising 9 per cent over the quarter and 23.6 per cent over the year.
While temporary energy rebates may ease some pressure in the December quarter, he warned that high global oil prices could keep energy and transport costs elevated.
“Before today, markets were pricing in a 40 per cent chance of a rate cut in November and full odds of one by February,” Chesler said. “Now, the expectation is that there will not be another rate cut until May next year – if at all.”
Betashares chief economist David Bassanese said the hotter-than-expected trimmed-mean result “kills off any chance” of a Melbourne Cup Day rate cut and casts doubt on a February move.
He described the persistent strength in services inflation, which is now 3.5 per cent, as particularly disappointing.
“The sticky level of services inflation shows the economy is still operating at a high level of capacity,” Bassanese said. “This limits the degree to which the RBA can loosen its grip on growth.”
He added that energy policy failures have exacerbated volatility in electricity prices, distorting underlying inflation trends.
“Our energy policy failures are all the more damning given our abundance of energy resources.”
With inflation pressures lingering and spending momentum firming, economists now see little prospect of the RBA cutting rates in 2025 and an outside chance it may have to tighten again.
The Reserve Bank’s path appears to be diverging from the similar trajectory of the Federal Reserve, which delivered their second consecutive “risk management” cut, dropping policy rates to a target of 3.75–4 per cent.
