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Mortgage holders are the major losers and savers the big winners from the Reserve Bank of Australia’s Melbourne Cup rate-day decision. In a widely predicted move that will frustrate mortgage holders, the RBA held the official cash rate at 3.6 per cent, citing higher-than-expected inflation. The RBA has now held interest rates for two meetings in a row. In a unanimous decision, the central bank chose to hold interest rates thanks to higher inflation, although the bank doesn’t expect inflation to stay higher over the long-term. “The board’s judgment is that some of the increase in underlying inflation in the September quarter was due to temporary factors,” the RBA board said in its statement. Last week, the Consumer Price Index rose 1.3 per cent in the September quarter and 3.2 per cent annually. But in some welcome news for homeowners, the RBA flagged further interest rate relief in the new year. “The central forecast in the November Statement on Monetary Policy, which is based on a technical assumption of one more rate cut in 2026, has underlying inflation rising above 3 per cent in coming quarters before settling at 2.6 per cent in 2027,” the RBA statement said. The RBA also assumes the labour market remains a “little tight”, despite October’s figures showing unemployment reached a four year high. “But measures of labour under-utilisation remain at low rates, job vacancies are still at a high level and business surveys and liaison continue to suggest that a significant share of firms are experiencing difficulty sourcing labour,” the board said. Oxford Economics Australia head of economic research and global trade Harry Murphy Cruise told NewsWire that the RBA was “stuck between a rock and hard place”, with its dual mandates pulling in opposite directions. “We have inflation higher than we want, with the natural response to keep interest rates higher, but now we have unemployment rising with the policy response to cut interest rates,” he said. “Ultimately, inflation is the most immediate concern for the RBA. “That said we still expect two more interest-rate cuts this cycle, one coming in February and one in May 2026 and that being more of a reflection of the weaker labour market.” Australia's Cash Rate 2022 The unemployment rate has jumped to 4.5 per cent, its highest level since November 2021, while inflation has climbed to its highest level since June 2024. The decision came down as Question Time was underway, giving Treasurer Jim Chalmers little chance but to address it within minutes. Addressing the House of Representatives, he defended his economic management, drawing on his oft-repeated point that “inflation is much lower than we inherited from those opposite” -- a fact, he said, “has given the Reserve Bank the confidence to cut interest rates three times already this year”. “And those three interest rate cuts do reflect the very substantial progress we have made in our economy together,” Mr Chalmers said. “When we came to office headline inflation was 6.1 per cent and rising -- it’s now around half of that. “When we came to office trim mean inflation was almost 5 per cent and rising -- it’s now been within the target band for three consecutive quarters, albeit, at the top of the target band now.” He went on to say that if “you look at around the world, inflation ticked up in September for every major advanced economy except the UK where it was flat but much higher than it is here”. Though, he acknowledged “many Australians would have preferred to see more relief delivered today”. Mr Cruise added that in “reading between the lines” of Tuesday’s statement, the RBA would be in “no rush to cut” going forward. “Not only did the board concede that recent data suggests ‘inflationary pressure may remain in the economy’, but they also lifted their near-term inflation forecast substantially,” he said. “Underlying inflation is now forecast to rise even higher, hitting 3.2 per cent in Q4 and staying there until the middle of next year. “If that proves correct, interest rates won’t move lower until the second half of 2026 at the earliest - if at all.” Ray White Group chief economist Nerida Conisbee, responding to the decision, added the bond markets had abandoned expectations of any near-term rate cuts. “While investors now see the next move as a cut no earlier than mid-2026, the central bank’s near-term challenge is balancing this renewed inflation pressure with a cooling labour market,” she said. “And as we have seen clearly, a surprise data announcement can quickly change the direction of rates.” She said Tuesday’s hold showed the central bank was now “walking a narrow line”. “Inflation has re-accelerated just as growth and employment are fading,” she said. “The policy stance remains restrictive, and the RBA will want to avoid locking in inflation expectations while also ensuring it does not unnecessarily stall the economy. “Importantly, the ABS’s transition to full monthly CPI reporting begins this month, providing policymakers with more timely data ahead of the final 2025 meeting on December 9. “This improved visibility on prices will give the RBA a firmer footing to assess whether the September inflation spike was a one-off or the start of a renewed trend.” Before Tuesday’s meeting, AMP deputy chief economist Diana Mousina said the RBA would hold interest rates following an “economic horror show” when inflation re-accelerated faster than experts forecast. The annual rate now sits at 3 per cent, higher than the 2.8 per cent markets were expecting. ”The forecast miss may look small by just looking at the figures at only 0.2 percentage points, but for inflation data, this constitutes a big miss,” she said. The RBA’s final chance to cut interest rates in 2025 will be after its December 8-9 meeting. More to come
