Happy Holiday Pause

The RBA kept interest rates unchanged at 3.6%. It was a unanimous decision.

Recent data has inflation risk moving to the upside. This has pushed the Monetary Policy Board’s thinking towards holding for now, with possible future rises. The Board believes interest rates are still restrictive, but is worried that if the economy takes off too strongly, it could be forced to slam on the brakes. But at the moment, it’s happy to take a holiday pause and wait for more data. 

What the RBA’s statement said

“The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures.”

“The Board’s judgement is that some of the recent increase in underlying inflation was due to temporary factors and there is uncertainty about how much signal to take from the monthly CPI data given it is a new data series. Nevertheless, the data do suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.

“Growth in private demand has strengthened, driven by both consumption and investment. Activity and prices in the housing market are also continuing to pick up.”

“Various indicators suggest that labour market conditions remain a little tight.”

“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive. On the domestic side, the pick-up in momentum has been stronger than anticipated, particularly in the private sector. If this continues, it is likely to add to capacity pressures.”

https://www.rba.gov.au/media-releases/2025/mr-25-33.html

What the governor said at the press conference

 “... we are a little concerned about where the latest inflation numbers are… we want more evidence.

“What we’re looking for in underlying inflation is some sort of clues to whether or not that large increase in quarterly trim-mean in September was just a whole lot of unrelated one-off factors or whether or not it was demonstrating that there are underlying capacity pressures in the economy.”

“It’s very uncertain what is temporary and what is persistent [with respect to inflation].”

“We didn’t explicitly consider the case for a rate rise at this meeting but we did discuss and consider … what might need to happen if we were to decide that interest rates had to rise again at some point next year.”

“If inflation continues to be persistent …  then I think that does raise questions about how tight financial conditions are and the Board might have to consider whether or not it's appropriate to keep interest rates where they are.”

“The Board will do what it thinks it needs to do to get inflation back to 2.5% and it’s uncomfortable.”

Private demand, stronger than expected

The September quarter GDP figures were released last week, and at first glance, they seemed disappointing, with quarterly growth of 0.4% coming in below the expected 0.7%.

However, growth over the year was 2.2%, which, besides being a good solid number, is also slightly above the RBA’s GDP forecast.

Even more striking was the unexpected strength of private demand (see chart below). It contributed 0.8% percentage points to the quarterly movement of 0.4%, its largest percentage-point contribution since June 2022.

A big contributor to the strong result in private demand was an increase in private investment (see chart below), with business investment in data centres a key story here. 

But as the monthly household spending indicator for October shows, an impressive 1.3% increase for the month and 5.6% over the year, the Australian consumer is continuing their increased spending into the start of the December quarter (see chart below).

For the RBA, the continued strength of private demand has it double-guessing itself on whether the economy is in balance or whether demand will soon overrun supply, which will increase inflationary pressures.

“Even if we’re in balance, there are upside risks [to inflation] if the economy grows a bit quickly, if we’re already at potential. So that’s sort of the issue we’re dealing with,” Michele Bullock, RBA Governor, Senate Estimate Committee, 3 December 2025.

Some commentators believe the economy has some spare capacity it can turn to so inflationary pressure may be less than the RBA fears, but we are talking at the margins and a few more months of accelerating growth will have the RBA reaching for the interest rate “up” lever.

“There is too much pessimism about supply capacity.” Lucie Ellis, Westpac Chief Economist.

New Balance

Besides the doubt over whether the economy is in balance, the RBA is also uncertain if interest rates are restrictive or not.

“I think our best guess is that policy is still marginally restrictive. But as we said in our latest statement, that judgment is an increasingly important part of the policy challenge.” Andrew Hauser, 12 November, interview with Reuters.

This means that even if the economy grows only moderately from now on, the RBA may still need to increase interest rates to keep growth balanced and inflation pressures low.

Monthly inflation: still not good enough

Inflation, of course, is already running a little hot. The new full monthly CPI series for October saw the RBA’s trimmed-mean inflation figure rise from 3.2% in September to 3.3% in October. Commentators had expected a fall to 3%. Headline inflation increased to 3.8%, even further from the RBA’s 2% to 3% band (see chart below).

The Board is a “little concerned”, but Bullock and the RBA don’t yet have much faith in the new monthly CPI series. They need a few years of watching it in action and for accurate seasonal adjustments before they will let go of the primacy of the quarterly inflation data.

But can the RBA afford to keep making an actual decision only once every quarter? 87% of the new monthly series is now calculated fresh every month compared to 50% previously.

I think if monthly inflation continues to ramp up, it will be hard for the RBA to ignore. No doubt, the RBA will be thinking about this over Christmas dinner. Happy seasonal adjustments!

“We’ve got one quarterly number and we’ve got one monthly number. We don’t know how the monthly number is going to play out yet because it’s a new series. … We do know how the quarterly CPI behaves and the quarterly underlying so we're going to be looking at those sorts of numbers to inform us going forward. ” Michele Bullock.

Australian Private Debt Market

The Australian economy is strong, and private demand is performing better than expected. The labour market has moved from the spotlight, and the RBA is now focused on growth and its upside inflation risks. This means that while interest rates may be falling in the US and elsewhere, private debt investors in Australia can continue to enjoy higher rates in Australia for longer, against the backdrop of a resilient economy.