The RBA has signalled it’s too early to rule out one more rate cut as a potentially weakening jobs market could outweigh a ‘temporary’ inflation surge.
The minutes of the November RBA board meeting, released Tuesday, revealed two scenarios that could determine the next direction of the cash rate.
On the one hand, factors like prolonged high inflation, a larger-than-expected recovery in household spending, or weaker-than-expected productivity growth could keep rates on hold from here.
But the board could be forced to cut interest rates if the jobs market weakens from its current state.
“Members observed that many indicators of the labour market had softened over the prior year,” The RBA minutes noted.
If households are more cautious about spending than previously assumed, that could also force rates lower, it added.
“If so, it would likely be appropriate to ease monetary policy to keep inflation at target and the labour market around full employment," the minutes said.
The RBA board has outlined what could force interest rates lower, and what will keep them on hold. Picture: Getty
The RBA held interest rates steady at 3.6% at its November meeting following hotter-than-expected inflation data for the September quarter.
The Consumer Price Index (CPI) surged 1.3% during the September quarter to an annual rate of 3.2%, which is above the RBA's 2-3% inflation target.
Trimmed mean inflation, which strips out one-off and volatile price movements also rose a full percentage point during the quarter to an annual rate of 3%.
Following the interest rate decision, RBA governor Michele Bullock told a press conference the oversized jump in inflation would impact the annual inflation rate for the next 12 months, meaning inflation was expected to remain above its 2-3% target range until mid-next year.
Market expectations for another rate cut have sharply declined in recent weeks on the back of that shock inflation data.
But the RBA minutes noted it was “not yet possible to be confident about which of these scenarios was more likely.”
From here, economists at ANZ and CBA say two pieces of data will be crucial in determining whether households see another interest rate cut – the Consumer Price Index and jobs data.
RBA governor Michele Bullock says the September inflation spike will see the annual rate remain above target until mid-2026. Picture: Getty
ANZ senior economist Adelaide Timbrell, who expects the RBA will cut the cash rate at its first meeting of 2026, said the minutes were slightly more hawkish than the statement from the November decision – but said employment will be ‘key’.
“We retain our call that the RBA will deliver a final 25bp cut in H1 2026, with February the more likely timing,” Ms Timbrell said in a note.
“We consider how the RBA’s assessment of the labour market evolves to be key to future monetary policy decisions.”
Job security remains front of mind for many Aussies a recent survey has found. Picture: Getty
Job security remains front of mind for households, a recent Westpac survey shows – even as consumer sentiment reached its highest level in four years in November.
Westpac’s head of Australian macro-forecasting Matt Hassan said despite their improved confidence around the outlook for the economy and family finances, consumers are more anxious about jobs.
“The deterioration seems to reflect conditions on the ground, with recent labour force updates showing a renewed softening in employment growth and a lift in unemployment,” Mr Hassan said.
Australia’s unemployment eased to 4.3% in October, following a surprise jump to 4.5% in September that had fuelled expectations the RBA could deliver another cut this year.
That pullback removes concerns of a weakening labour market according to CBA’s head of Australian economics Belinda Allen, who expects interest rates will remain on hold from here.
Instead, she expects inflation will be the most crucial factor from here – and one that could potentially cause the RBA to consider “all options,” not just a cut and hold.
“We generally see the speed limit of the Australian economy being reached in coming quarters and inflation pressures persisting,” Ms Allen said.
“We don’t expect any major shift in tone from the RBA this year. But if the Q4 inflation prints higher than the RBA expected… and if economic momentum continues then the February RBA meeting could see the board having to expand their consideration from just cuts or holds, to include all policy options.”
The next round of inflation data will be released on 28 November.
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