RBA holds cash rate as inflation concerns rise

The RBA has kept the cash rate on hold at 3.6 per cent at its final meeting of the year, closing out a volatile 2025 marked by cautious policy shifts and renewed inflation pressures. 

The unanimous decision to hold, which was widely expected by economists and money markets this week, reflects a view that inflation is no longer easing quickly enough to support further reductions.

In its statement, the RBA board said inflation had “fallen substantially since its peak in 2022” but had picked up recently, with some of the lift tied to temporary factors. 

It noted uncertainty around how much weight to place on the new monthly CPI series, although the data “do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent”.

Today’s outcome halts a cutting cycle that delivered three reductions earlier in the year, including the first rate relief in four years. 

But a September pickup in inflation, followed by a stronger-than-expected 3.8 per cent CPI reading for October, prompted the board to signal a more guarded stance. 

Governor Michele Bullock has repeatedly stressed the need for gradual adjustments to avoid undoing hard-won progress on price stability.

The RBA said economic activity was continuing to recover, supported by stronger private demand and firmer conditions in housing markets. 

It also said credit remained readily available and the effects of earlier rate cuts were still flowing through, while money-market rates and government bond yields had moved higher in recent weeks.

But labour market conditions “remain a little tight”, the RBA said, with low underutilisation and persistent difficulty sourcing workers. 

While wage growth in the Wage Price Index has eased, broader wage measures remain strong and unit labour costs are elevated.

Markets had assigned a higher probability to a hold than a hike, though ASX pricing continues to factor in the possibility of an increase by mid-2026. 

All 35 economists surveyed by Finder anticipated today’s pause, and most major banks have now ruled out further cuts in this cycle. 

Commonwealth Bank, NAB and ANZ all expect rates to remain unchanged through next year, while Westpac is the lone outlier forecasting two cuts in 2026.

Deloitte Access Economics partner Stephen Smith said today's decision to keep rates on hold should not have come as a surprise.

"Inflation needs to be watched carefully, and the board’s statement today reflected that," he wrote on Tuesday.

"We expect the Bank to adopt a wait-and-see approach over the next few months until it can determine whether the current rate of economic growth is sustainable.

"The economy is still treading water, but the RBA’s fear is that if it does any better, it may re-ignite inflation."

Mr Smith went on to say that tempering inflation would be easier said than done, and that expectations of a rate rise were "premature".

"All eyes will be on the November and December CPI readings, which are both due in January, ahead of the RBA’s first meeting of 2026 in February," he concluded.

AMP chief economist Shane Oliver adopted a similar tone. 

"Given the recent run of hotter inflation and demand data, it was also not surprising to see the RBA further ramp up its hawkish commentary," he said on Tuesday.

"We expect the RBA to leave rates on hold in 2026, but the risks are now more on the upside."

It appears that banks have already moved pre-emptively: eight lenders lifted fixed mortgage rates over the past week, signalling expectations that the easing cycle has reached its floor. 

Canstar data shows the average short-term fixed rate has risen to 5.10 per cent, with borrowers now facing a narrowing window for cheaper credit.

Economic indicators are also shaping the tone, with unemployment dropping back to 4.3 per cent, while underlying inflation crept above the RBA’s 2–3 per cent target band. 

Analysts warn that if price pressures persist, the board may need to consider hikes in early 2026 — a scenario the central bank has not formally entertained but has not ruled out.

Economists expect 2026 to begin with a period of steady rates, with the path of inflation proving to help determine whether the next move is up or down.