RBA makes surprise interest rate decision

The Reserve Bank of Australia (RBA) has decided to hold interest rates.

In a unanimous decision, the nation’s central bank wrapped up its final policy meeting of 2025 today, opting to hold the official cash rate (OCR) steady at 3.6%, citing underlying inflation as the culprit.

“While inflation has fallen substantially since its peak in 2022, it has picked up more recently,” the RBA said in a statement. “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.

“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 central bank continued. “Private demand is recovering. Labour market conditions still appear a little tight, but further modest easing is expected. The board therefore judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve.”

The RBA slashed rates three times in 2025, in February, May and August, igniting market momentum and a wave of FOMO among both current mortgage holders hoping to upgrade and would-be homeowners excited about entering the property market. But the bank hit pause at the two subsequent meetings, pointing to stubborn underlying inflation as the reason for holding steady.

This time around, markets broadly expected the bank to hold rates, while also preparing for the possibility of a rate hike. All of the Big Four Banks forecasted no change, even as their outlooks for 2026 diverged. The key factor keeping rates on pause: underlying inflation that continues to run hotter than the RBA would like.

September’s quarterly consumer price index (CPI) revealed that both headline CPI and annual trimmed mean inflation rates are rising Down Under. Headline CPI edged up to 3.2%, in the 12 months leading up to September, compared with 2.1% during the June quarter. Trimmed mean annual inflation rose to 3% in September, up from 2.7% during the June reading. More importantly, both figures are outside of the RBA’s target inflation range of 2% to 3%.

RBA Governor Michele Bullock has repeatedly said the board would not consider easing monetary policy until inflation is back within the RBA’s target range.

October’s monthly CPI reading didn’t provide much relief. Headline CPI rose 3.8% in the 12 months leading up to October 2025, up from 3.6% in September. The trimmed mean monthly inflation rate was 3.3% during the same time period, up from 3.2% in September.

While persistent inflation pressures all consumers, it places an outsized burden on mortgage holders, many of whom had been looking to the RBA for a break in their monthly repayments.

Meanwhile, national unemployment, the RBA’s other key mandate, remains relatively low, underscoring why the central bank was unlikely to pursue another rate cut. After a slight uptick, the nation’s jobless rate eased to 4.3% in October, down from 4.5% the month before. At the same time, wages are picking up nationwide. That combination of tight labour conditions, paired with faster wage growth, risk reinforcing inflationary pressures.

Commonwealth Bank’s Head of Australian Economics Belinda Allen said that “while wages growth has still moderated over the past year, the slight tick up in November is worth watching, especially when combined with recent higher-than-expected inflation prints and Q3 ’25 GDP data showing the Australian economy has reached its speed limit.

“The labour market remains on a solid footing and broadly in balance,” she continued. “We expect the RBA to remain on hold from here, but the data flow on inflation and the labour market will be critical to watch, and recent data highlights the upside risks to both.

If wages continue to strengthen, the risk of interest rate hikes in 2026 will rise.”