RBA holds cash rate at 3.6%, stuck near neutral
RBA holds cash rate steady at 3.6% in November, expects some of the recent rise in inflation to be temporary but partly also a signal of capacity pressures. No near-term moves likely, with a cautious Board assessing the extent of spare capacity.
- The RBA Monetary Policy Board (MPB) kept the cash rate on hold at 3.6% as expected in a unanimous vote. The September quarter inflation shock lifted the near-term inflation outlook. Some of this increase is seen as temporary, such that the RBA’s trimmed mean inflation forecast is back near the midpoint of the 2–3% target range by mid-2027. But the MPB remains cautious given recent evidence of “more persistent inflation”.
- The RBA’s post-meeting communication recognised “a recent easing” in the labour market but still regards it to be “a little tight”. The unemployment forecast was edged up but remains flat through the whole forecast period, with a risk it might rise. Other key risks related to the ongoing pick-up in private demand, and how it balances against the slowdown in growth in public demand.
- While the RBA, appropriately, expects inflation to be lower once the September quarter spike has washed through, it is cautious about the outlook and likely to remain on hold until inflation falls below the target midpoint, or the labour market eases more than it currently expects.
As was universally expected, the RBA kept the cash rate on hold following the November meeting of the Monetary Policy Board (MPB). The September quarter CPI result was well above expectations. Some of this surprise was seen as evidence of inflation being a little more persistent than expected. Underlying (trimmed mean) inflation is expected to remain elevated in the near term before returning close to the midpoint of the 2–3% target range by mid-2027. In the media conference following the meeting, the Governor characterised the MPB as having no bias and that it will be taking things meeting by meeting from here. The stance of policy was seen as “pretty close to neutral”, though the closer you are to that point, the harder it is to gauge what side of a very fuzzy line you are on.
Overall, the language was not as hawkish as it could have been. The RBA acknowledged that some of the latest inflation spike was temporary, and an increase in the cash rate was not considered. Still, with a technical assumption of one rate cut mid next year resulting in an inflation forecast that is not quite at the target midpoint, the MPB must be assumed to be on hold until something happens to change that forecast.
The RBA has concluded from the latest upside inflation surprise that there is a bit less capacity in the economy than it previously thought. As well as the inflation data, it rested this assessment on survey measures of capacity utilisation and related indicators, even as the labour market softened. We think this may assume a very fast pass-through from shifts in capacity to pricing decisions. In its annual forecast review included in the Statement on Monetary Policy (SMP), it also acknowledged an alternative explanation: that firms used the recent pick-up in domestic demand to recover earlier margin compression. This could mean that inflation remains a little elevated in the near term. Without household income growth also picking up, though, further widening in margins would result in a renewed squeeze on household spending power. That would see the recovery in private demand growth falter later on.
The RBA also provided guidance on the transition the full Monthly CPI, which begins next month. The ABS will continue to publish the quarterly Trimmed Mean for the next 18 months, using quarterly data as it currently does. To maintain historical consistency, the Bank will continue to focus on this measure of core inflation while the ABS collects the additional data required to effectively seasonally adjust all relevant monthly CPI components.
In the interim, the monthly Trimmed Mean will include components with incomplete seasonal adjustment. Some series will be smoothed to mitigate seasonal effects. As a result, the monthly Trimmed Mean will behave differently from the quarterly measure, and the three-month average of the monthly Trimmed Mean is unlikely to match the quarterly Trimmed Mean. Along with the RBA’s assessments of spare capacity, this leaves plenty of room for judgement.
The post-meeting communication characterised the labour market as still “a little tight”, despite “a recent easing”. The unemployment rate has recently picked up by more than the RBA expected , but it assesses the outlook from here as “stable” and the labour market more broadly as “healthy”. It acknowledges a risk that the labour market eases more in the near term than it currently expects. We note, however, that much of the RBA’s assessment of current labour market conditions rests on labour market indicators derived from non-public longitudinal labour market data, particularly the quit rate (a point noted in the post-meeting media conference Q&A). Indeed, most of the indicators of full employment in the RBA’s preferred suite pointed to further easing since the March quarter. The only exceptions were a small tick up in the NAB survey measure of difficulty finding suitable labour, and the two separation rates based on non-public data.
At this stage, the RBA’s capacity and growth assessments seem to leave little scope for further easing. Under the assumed path for the cash rate (about 25bps in easing) “capacity pressures are expected to remain and be slightly more pronounced over the forecast period than assessed at the time of the August forecasts. The below-trend growth and gradual easing in the labour market over the past three years has brought demand and supply in the economy closer to balance, but capacity pressures are not expected to ease much further”. There is plenty of uncertainty around this view though: “Demand is expected to be slightly above potential supply over the forecast period, given the market path for the cash rate, although that assessment is uncertain.” If things played out in line with Westpac’s somewhat lower inflation and higher unemployment forecasts, it is clear from the RBA’s communication that the MPB would not resile from adjusting monetary policy.
Observations about the forecast changes
The RBA’s forecasts on the real economy were little changed. GDP growth was marked up slightly in the near term but expected to track at or slightly below 2%yr from here (in line with the RBA’s recently revised estimate of potential output growth). An upgrade to private demand is offset by a downgrade to public demand. (Interestingly, the SMP acknowledges that this shift will boost measured productivity a bit, something we have been saying for a long while). Westpac is considerably more positive on the private demand outlook across consumption, dwelling investment and business investment.
Underlying inflation is expected to be slightly higher, staying above the 2–3% target range until the second half of 2026. The unemployment rate is forecast to increase slightly in quarterly terms, stabilising at 4.4%. Nonetheless, the Bank assesses “there will be slightly more capacity pressure in the economy than previously thought, so the outlook for inflation and wages growth have been revised a little higher”.
Relative to the RBA, Westpac expects inflation to subside more quickly with slightly more slack in the labour market and a marginally softer profile for public demand growth. That in turn gives scope for additional policy easing driving a firmer medium term growth path for demand.
One way to think about the flat inflation forecasts in recent RBA SMPs is that the labour market was seen as a little tight, imparting a tendency for inflation to drift up, which was offset by monetary policy also being a little tight. While the starting point for inflation is now higher, shifts in the labour market and the assumed policy path both imply that a downward slope is appropriate this time around. That is what the revised forecasts deliver, with trimmed mean inflation returning to be close to the midpoint of the target range during 2027.
The RBA’s August forecasts were based on an assumed path for the cash rate that involved one further cut (to 3.3%) in 2025 and two more in 2026, for a trough cash rate of 2.9%. The pricing last week that underpinned this quarter’s forecasts was significantly higher. Only one cut (to 3.3%) was priced, and not until mid 2026. The RBA assesses the current policy stance as being mildly restrictive, which implies some downward pressure on inflation. Even if that were not the case, the November forecasts should still be showing some downward pressure on inflation relative to the flat profile in the August forecasts. The RBA’s workhorse MARTIN model would suggest something of the order of at least 0.1%pt; some of the other models the RBA uses are more sensitive than this, but not by much.
Similarly, the starting point for the labour market is softer than the August forecasts assumed. While the RBA was still characterising the labour market as ‘a little tight’ based on a broader range of indicators, again, relative to the August forecasts the labour market must be creating relatively less upward inflation pressure. The size of this impetus is harder to gauge, but the flat profile in prior rounds implies that the upward pressure from the tight labour market was of a similar order of magnitude to the downward pressure from the policy stance. So count in at least another 0.1%pt off inflation late in the forecast period for this shift.
A welcome feature of the RBA’s current forecasts is that it now acknowledges that its flat participation rate forecast reflects the combination of the dampening effect of cyclical drivers offsetting a structural upward trend. Recall that some of the recent strength in the participation rate reflected the strong jobs market attracting people into (or to stay in) the labour market. On top of this, cost-of-living pressures induced people to supply more labour than normal. These two features are now unwinding, as we predicted over a year ago. At the same time, the structural upward trend from rising female (and we note, older) participation continues. This justifies a flat trend in participation for the next little while – but, we caution, not forever.
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