Australia’s RBA holds rates at 3.6%

Australia’s central bank has kept the nation’s benchmark interest rate on hold at 3.6% this week. Markets and economists had widely anticipated the action.

The decision follows three rate cuts earlier this year, representing a move toward greater caution while inflation quickens again. The central bank has tried to quell post-pandemic inflation without pinching off job growth. Recent data suggest progress, though risks of inflation persist.

The monthly inflation gauge was up for a second straight month in August. Housing, food, and alcohol prices rose. Economists caution that this trend may indicate fresh price pressures, particularly in services.

According to RBA Governor Michele Bullock last week, the economy was showing “a bit stronger” than expected signs. She added that the labour market is close to full employment and private sector activity is strengthening.

Bullock, however, has cautioned that the RBA is not on a preset course. Future decisions will be conditioned on new real-time inflation, jobs, and wages information.

Markets await guidance on cuts

The 3.6% pause by the RBA hasn’t halted the debate over what happens next. Attention has shifted to the timing of the next step, with some analysts still predicting rate cuts are inevitable. Westpac and Bloomberg Economics foresee the four-year curve falling below 3 per cent by the end of 2026. They believe the economy will slow down sufficiently to compel the bank into action sooner than many think.

National Australia Bank has also extended its forecast to May 2026 with no change in policy. NAB economists say stubborn inflation and robust growth will see the RBA keep rates on hold for significantly longer than market prices.

Commonwealth Bank of Australia (CBA ) previously called for a November cut. Now, its own economists are backing away. They cite data on inflation that have come in stronger than expected in recent months as the biggest risk, cautioning that the path to lower rates “is not clear, it is a done deal. “

International dynamics are also complicating the calculus. The US Federal Reserve slashed rates again earlier this month, the first time it has cut since late 2023. The Fed keeps easing while the RBA holds, and suddenly Australian assets start to look relatively attractive. That would bolster capital inflows, push the Australian dollar higher, and help local bond markets.

Such a split interest rate could make it easier for the RBA not to rush into cutting. Higher relative yields could take some sting out of the financial stress without any need to loosen the stance on policy. But if the stronger currency were to remain, it would also jeopardize weakening exports.

RBA navigates inflation risks carefully

If the Fed moves too quickly to lower interest rates, inflation could reignite and reverse all the progress made over the past two years. But if it leaves rates too high for too long, the risk is weaker growth, sluggish job creation, and more financial stress on household s al ready stretched trying to keep up with hefty mortgage repayments.

It’s a “delicate trade-off,” Governor Michele Bullock recently said. The central bank is walking a tightrope, seeking to maintain its credibility that it will fight against inflation while not tipping the economy into a downturn.

For now, the board believes that moderate restraint on policy will be appropriate. This suggests that interest rates have risen enough to cool prices but not so far as to choke off demand. Surveys that measure payrolls and spending are rebounding as reopening proceeds apace, suggesting the strategy is working, though economists warn the direction could easily change.

How much happens will depend on how inflation behaves in the next few months. And if prices for housing, energy, and services keep rising, the bank may not have a choice but to continue leaving rates higher well into 2026. 

Complicating matters, of course, is the global context. The US Federal Reserve and the European Central Bank have started loosening policy. If Australia falls too far behind other countries, capital flows and exchange rate movements may rewrite domestic financial conditions unpredictably.

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