Don’t need to cut (nor should we)

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

And so it came to pass that the last two higher than expected monthly inflation indicators begot a higher than expected September-quarter inflation result. And the RBA governor gave thanks that the RBA had proceeded cautiously with cuts so far this cycle, and could stare back at the inflation blip and decide to keep rates steady in their slightly restrictive setting.

What the RBA’s statement said

“Trimmed mean inflation was 1.0 per cent in the September quarter and 3.0 per cent over the year, up from 2.7 per cent over the year in the June quarter. This was materially higher than expected at the time of the August Statement on Monetary Policy.”

“The Board’s judgement is that some of the increase in underlying inflation in the September quarter was due to temporary factors.”

“Data on consumption suggest that the pick-up in private demand evident in the June quarter is ongoing.”

“Growth in employment has slowed by slightly more than expected, and the unemployment rate rose to 4.5 per cent in September from 4.3 per cent in August. But measures of labour underutilisation 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.”

https://www.rba.gov.au/media-releases/2025/mr-25-31.html

What the governor said at the press conference

“Inflation in the September quarter was higher than we were expecting in our previous forecasts although you might recall at the September press conference, I did highlight to you that after the July and August CPI indicators we were expecting inflation to print higher than those forecasts.”

“Now, we think that some of this was driven by temporary factors such as travel costs, council rates, and fuel but we don’t expect some of these to continue. We are, however, taking signal from stronger price increases that may suggest more inflationary pressure in the economy than we thought before. In particular, the cost of new dwellings and market services…”   

“... the labour market does seem to have eased. Employment is growing, but at a slower pace than before. Overall, when we take into account a broad range of indicators, we judge that the labour market is still a little bit tight relative to full employment.”

“We still think there’s a bit of excess demand in the economy, and this is what may be manifested in the inflation data.”

“Unemployment went up a little more than expected, but so did inflation ... but I’d say at the moment we’re a little more concerned about making sure we get inflation back in the band.”

“Our best guess is that the unemployment rate will remain reasonably stable from here on in…”

 “... if you take the forecasts at face value, we do see elevated inflation in the first 12 months because of the most recent numbers, that’s baked in now, and then we see the quarterly numbers starting to come off and delivering an inflation rate of around 2.6% by the end of the period.” 

“... we've got three rate cuts, still the bulk of that has yet to come through in terms of its effect on the economy. So we’ll be watching that to make sure that doesn’t feed through too much into consumption and ultimately consumption that can’t be met by supply. That is the key.”

A temporary blip in inflation?

The RBA had been waiting for the release of the September-quarter inflation data to see whether the increases in headline and trimmed-mean inflation in the months of July and August were noise or signal. They were genuine. CPI increased from 2.1% in June to 3.2% in the September quarter. Similarly, trimmed-mean inflation increased from 2.7% to 3% - right at the top of the RBA’s target band (see chart below).

However, according to the RBA, most of the increase in the September-quarter inflation is temporary. In particular, electricity prices increased 9% in the quarter as government subsidies continued to retract (see chart below).

As previously identified in the August data, market services and new dwelling costs were two areas of increasing inflation, which the RBA expects will persist. The increase in inflation in market services is being driven by tight labour supply for restaurant meals and takeaways, and increased demand for domestic travel during the recent school holidays (see chart below). Of the two, the inflation in meals and takeaways is likely to be more persistent. 

Source: RBA’s Statement of Monetary Policy, November 2025

Although the RBA expects the temporary drivers in inflation to disappear in the future, the blip in September will “mechanically” keep the year-ending inflation data higher than they otherwise would be for the next year. This has pushed up the RBA’s headline and trimmed-mean inflation forecasts (see chart below).

If the September inflation blip does not prove transitory, Governor Michele Bullock will have some explaining to do in the future!

Source: RBA’s Statement of Monetary Policy, November 2025

Unemployment - unconcerned

The RBA was also unconcerned with the unexpected increase in unemployment in September. Unemployment increased from 4.3% in August to 4.5% in September, seasonally adjusted (see chart below).

Most indicators and anecdotal evidence tell the RBA that the labour market remains tight (see chart below). So the RBA is choosing to look through the “noise” of the September unemployment increase. This also means that the RBA can remain focused on the inflation side of the dual mandate.  

Source: RBA’s Statement of Monetary Policy, November 2025

Still some excess demand

The RBA has of course done a great job in “landing the plane” with post-pandemic inflation. However, the closer they get to the neutral interest rate, the harder it is to see whether the interest rate is slightly restrictive or expansionary.

At the moment, the RBA still believes that the interest rate is slightly restrictive. Bullock points to inflation that is largely under control and to RBA estimates of a narrowing gap between actual GDP and full-capacity GDP (see chart below).

Given that the RBA believes that the interest rate is still slightly restrictive, it does not feel the pressure to raise rates at this meeting, or in the near future, despite the blip in inflation.

On the other side, because the RBA did not raise rates as high as other advanced economies during the inflation peak, it is also not feeling the pressure to cut rates as fast. It is also content to see the three rate cuts it has made fully work their way through the economy.

Source: RBA’s Statement of Monetary Policy, November 2025

Australian Private Debt Market

The RBA sees no need to move the interest rate from its slightly restrictive setting. The economy remains in good health, and while inflation and unemployment have increased recently, the RBA does not believe that there is anything to be worried about at this stage.