Tue Dec 9

The RBA is stuck in a tug-of-war, as it holds rates steady

Written by Stella Huangfu, Associate Professor, School of Economics, University of Sydney

The Reserve Bank of Australia (RBA) has ended the year with a steady hand, keeping the cash rate at 3.6% at its final meeting of 2025. The decision was widely expected, but the real story is in the statement by the monetary policy board ^[1] and what it reveals about the RBA’s thinking for next year.

The RBA acknowledged inflation has become more complicated. While price pressures have eased significantly since the 2022 peak, the bank noted inflation “has picked up more recently ^[2]”. It said the latest data:

suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.

In short, rate cuts are off the table for now.

A recovering economy

At the same time, the broader economy is healing. Growth has strengthened in recent months ^[3], particularly in private demand, and the housing market remains firm.

The RBA highlighted that “economic activity continues to recover”, reflecting firmer spending and investment. But the labour market, while still tight, is gradually losing momentum ^[4].

Together, these crosscurrents give the RBA reason to stay put.

Why the RBA stayed put

Today’s decision reflects two forces pulling in opposite directions.

Inflation is still too high and has been rising ^[5] in recent months. Services inflation has been sticky. Cutting rates now would risk undoing the progress made over the past two years.

But the economy isn’t strong enough to justify a hike either. Private demand has improved, but households remain under pressure, discretionary spending is weak, and hiring has softened. A rate rise now could stall the recovery.

With these pressures pulling in different directions, the RBA has chosen patience. The central bank wants more information from upcoming inflation reports, wages data early next year, and labour market conditions before making its next move.

What’s changed — and why it matters

The tone of today’s statement is cautious. The RBA emphasised “the risks to inflation have tilted to the upside,” but balanced that by noting it will “update its view of the outlook as the data evolve”.

The bank also stressed it is approaching the outlook with care:

The board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.

This is deliberate neutrality. In recent weeks, some economists had suggested the RBA might lean toward a rate hike ^[6], but today’s comments avoid signalling a bias towards higher rates.

A hike remains a risk — especially if inflation continues to rise — but it is not the central scenario.

That neutrality matters. The RBA is telling us it wants to see how the data evolves before committing to a direction.

This is important for shaping expectations ahead of 2026. Talk of an rate increase early in the new year appears premature based on today’s language.

What markets and banks expect

Australia’s big four banks all expect an extended period of steady rates ^[7], with no move until at least May 2026.

Markets are broadly in the same camp, pricing in a long pause ahead of at least one rate increase ^[8] by the end of 2026 ^[9].

Crucially, none of the major banks are forecasting a near-term hike. Their central view ^[10] is that the RBA will hold for a long stretch.

Westpac is the only one expecting a cut — and even then, only if inflation makes more convincing progress. Taken together, this reinforces the message in today’s statement: policy is leaning neither toward tightening nor easing.

The bigger picture

Australia is not alone in navigating this kind of mixed economic picture. The US Federal Reserve has cut rates twice this year ^[11] — in September and again in October. However, those moves have been cautious because inflation in the US remains a concern.

The RBA said uncertainty in the global economy “remains significant”, but it also added there has been little impact on growth or on trade with Australia’s major trading partners.

Looking toward 2026

Today’s “no change” decision sets up next year’s discussion. Inflation is still too high to cut rates, but growth is too soft to hike. That leaves the RBA likely to stay patient well into 2026.

The key question for early next year is whether services inflation finally begins to ease. If it does, attention will turn to when rate cuts might become possible. If it doesn’t, the risk of another hike will grow — but again, this is not the RBA’s central scenario today.

For now, the RBA ends the year in steady, watchful mode. Stability, rather than movement, is the story — and it’s likely to stay that way until the data offers a clearer signal.