Australia's Interest Rates Are Frozen, But Inflation Still Rampant?
The Reserve Bank of Australia (RBA) kept its benchmark interest rate unchanged at 3.6% for the third consecutive year at its final meeting on Tuesday. The decision was unanimously adopted by the nine-member board amid a combination of resurgent inflationary pressures and a still-tight labor market. In its statement, the RBA emphasized that its next move would depend heavily on incoming economic data, and that it needed more time to assess the strength and persistence of inflationary pressures. Following the decision, the Australian dollar weakened to around US$0.6616, while the three-year government bond yield fell to around 4.06%.
The Australian economy is currently operating near full capacity, with unemployment near record lows and inflation back above the upper end of its 2–3% target. Consumers, however, remain cautious: real per capita spending is flat, and the household savings ratio is rising slightly as many families seek to rebuild their financial cushion. This complicates the outlook for 2026. The financial market is pricing in a nearly 50/50 chance that the RBA's next move could be a rate hike as early as May, while many economists were previously predicting at least one more rate cut. Major institutions like Goldman Sachs, UBS, and Barrenjoey are now in line with the market, viewing the RBA's next move as more likely a hike, not a cut.
The RBA also faces conflicting global dynamics. Australia is on track for one of the shortest easing cycles among developed economies, cutting rates by only about 75 bps in six months, and even starting cuts later than other central banks. Meanwhile, in the United States, market participants are increasing bets that the Fed will cut rates for a third consecutive time, driven by political pressure and signs of a weakening labor market. This policy divergence has contributed to a major selloff in Australian bonds and a widening yield premium over other government bonds. Domestically, recent data has shown weaker-than-expected economic growth, but high labor costs and capacity utilization—plus the removal of electricity subsidies—have the potential to boost inflation again in the upcoming CPI report. All of this makes the RBA's future decisions even more complex, given its dual mandate: maintaining inflation within the 2–3% range and maintaining a healthy and sustainable labor market. (az)
Source: Newsmaker.id
