This week’s rate hold has delivered a clear hawkish turn by the RBA with the central bank saying rate cuts are no longer on the table.
The Reserve Bank of Australia (RBA) kept the cash rate at 3.60 per cent this week, with governor Michele Bullock confirming an interest rate cut was “not on the table” at the December meeting and would not be for the “foreseeable future”.
Bullock said the board did not consider a cut at all and instead “did consider and discuss quite a lot” the circumstances that might require a hike in 2026 if inflation proved persistent.
She noted headline inflation had risen to 3.8 per cent in October and said it had “picked up more recently”, with risks now “tilted to the upside”.
Bullock said the RBA was “uncomfortable where it is” on inflation and that the February 2026 meeting was now a “live meeting” for a potential rate increase.
She emphasised the board would be “attentive to the data” and that the December-quarter inflation release in late January would be crucial in guiding the next rate decision.
Bullock said the economy was still growing close to potential and that labour market conditions remained tight, though some recent softness was acknowledged.
She added that part of the recent lift in underlying inflation appeared to reflect temporary factors but warned the board was monitoring for broader pressures.
PIMCO executive vice president Adam Bowe said recent data had caused markets to pivot from pricing a rate cut to almost two hikes in 2026.
Bowe said monetary policy “remains restrictive” and would weigh on growth and inflation over the next year, noting households were still dedicating an unusually high share of income to debt servicing and taxes.
“With the market pricing the cash rate back above 4 per cent and yields on 10-year Australian Commonwealth Government Bonds reapproaching the highs of the past 15 years we think there is considerable value in Australian duration,” he said.
VanEck head of investments and capital markets Russel Chesler said expectations for cuts had evaporated and the market had “already” shifted toward a potential rate increase next year.
“The reality is that inflation has crept up on us in the last few months, with the headline inflation number a lot closer to 4.0 per cent than we’re comfortable with,” Chesler said.
CreditorWatch chief economist Ivan Colhoun said the hold was unavoidable given stronger activity and above-target inflation, adding the statement “definitely evolved to signal the risk that monetary policy may have to tighten earlier than previously expected”.
Colhoun said he disputed that inflation had genuinely picked up but warned that if it bottomed above the 2.5 per cent target, the RBA would “have no option but to move to a more restrictive setting”.
State Street Investment Management economist Krishna Bhimavarapu said the statement “leaned hawkish” and that the board’s recognition of a “more broadly based pick-up in inflation” aligned with market expectations.
He cautioned against accelerating pricing for hikes, noting the US Federal Reserve appeared poised to cut rates amid weakening labour market signals.
HSBC chief economist Paul Bloxham said both the RBA and RBNZ were now likely to lead the next global tightening phase, with expected hikes in the second half of 2026.
“For Australia, the challenge is that, despite the RBA’s hope that the post-pandemic high inflation challenge [has] been dealt with, inflation has once again risen,” Bloxham said.
He said the upside Q3 CPI print reset assessments of demand, supply and capacity, making it difficult for inflation to return sustainably to the midpoint of the RBA’s 2–3 per cent band without further policy tightening.
