Australia Holds Cash Rate, Flags Inflation Risks

The Reserve Bank of Australia unanimously raised the cash rate by 25bps to 3.85% at its first policy meeting of 2026, in line with market expectations. The decision marked the first rate hike since November 2023, underscoring renewed cost pressures that intensified in H2 2025 amid elevated service expenses and a tight labor market, effectively reversing one of last year’s three cuts. The central bank viewed that inflation is likely to remain above the 2–3% target band for some time, reflecting stronger economic momentum and a healthy job market. The board added that further policy moves will depend on incoming economic data and its evolving assessment of the outlook and risks, including the balance between curbing inflation and sustaining economic growth. While acknowledging progress made in easing inflation over the past year, policymakers stressed that maintaining price stability remains their primary focus, signaling a cautious but data-dependent approach to future tightening.

Australia’s central bank this month considered whether a rise in interest rates might be needed in 2026, given a recent pick-up in inflation, but felt it would take a “little” time to know for sure. The board of the Reserve Bank of Australia (RBA) judged that inflation risks had increased following surprisingly high consumer price readings in October and Q3, minutes from the RBA’s December meeting showed. However, some of the lift in inflation could be due to volatile factors, and it would be important to see the Q4 figures due in late January. “Members discussed the circumstances in which … an increase in the cash rate might need to be considered at some point in the coming year,” the minutes showed. “While recent data suggested the risks to inflation had tilted to the upside, members felt it would take a little longer to assess the persistence of inflationary pressures.” CPI surged to 3.8% in October, while core inflation accelerated to 3.3%, above the RBA’s target band of 2% to 3%.

The Reserve Bank of Australia unanimously kept the cash rate unchanged at 3.6% for a third straight meeting in its final policy decision of 2025, in line with market estimates, maintaining borrowing costs at their lowest since April 2023. The central bank noted inflation has eased markedly from its 2022 peak but has shown a pickup recently. While some of the rise appears temporary, early signals point to broader and persistent price pressures, warranting close monitoring. The labour market was described as “a little tight,” with unemployment edging higher and job growth slowing, yet underutilization remains low, and firms continue to face hiring difficulties. The board warned of uncertainty over domestic and global outlooks, including how restrictive current settings remain. Stronger-than-expected private-sector momentum could intensify capacity strains if sustained. Against this backdrop, policymakers judged it prudent to remain cautious and reassess policy as new data emerge.