Australian Inflation and Interest Rate Update

Key points:

• The RBA received two key surprises last month: higher than expected inflation in Q3 and a rise in unemployment in September.
• Despite the rise in unemployment, the RBA is placing greater emphasis on the stronger-than-expected inflation data
• A December rate cut now appears unlikely, with the RBA likely to need to see slower growth, higher unemployment or more moderate inflation before easing further
• A renewed downtrend in job ads suggests unemployment could rise in coming months, which would likely influence future interest rate decisions

 

Inflation surprise puts rate cuts on hold

The latest inflation figures caught the RBA off guard, with headline inflation rising 1.3% for the quarter and 3.2% over the year. More importantly for interest rate decisions, the trimmed mean measure (used by the RBA to gauge underlying inflation) rose 1% for the quarter and 3% annually, well above the Bank’s August forecast of 0.6% quarterly growth.

The inflation surprise was widespread with key categories like rent, food, electricity, and government charges all continuing to run at a 3% or above pace. While goods prices are rising more slowly than services, they’re not slow enough to offset the overall services inflation trend.

This inflation outcome was enough to invalidate the RBA’s previous forecast that inflation would stay near its 2.5% target for the next two and a half years. As a result, the RBA has reassessed its outlook, and any near-term rate cuts now appear unlikely.

 

Unemployment ticks higher, but the RBA remains cautious

Adding to the complexity, September’s unemployment rate rose to 4.5%, slightly above the RBA’s forecast of 4.3%. While this was a notable shift, the RBA has downplayed its significance, pointing to a still-tight labour market and cautioning against overinterpreting one month’s data—especially without broader confirmation. The Bank also suggested that recent slower job growth likely reflects earlier economic softness, with hiring likely expected to improve in the months ahead.

For businesses, this means the RBA is likely to prioritise inflation. However, if unemployment continued to rise, it could influence future decisions, especially if other indicators begin to confirm a softening labour market.

 

RBA cash rate on hold in November – some further moderate easing possible if unemployment rises

In its November update, the RBA lifted its near-term inflation forecast to 3.2%, well above its 2.5% target. Growth expectations remained steady, while the unemployment rate was revised slightly higher to an average of 4.4% over the next two years - a forecast that may prove optimistic given current trends.

While the RBA isn’t signaling an immediate rate cut, job ad data is sending mixed signals. ANZ Indeed job ads recorded a 2.2% decline in October, after also decreasing 3.5% in September. Typically, this is a signal of rising unemployment, however, SEEK job ads haven’t yet shown the same trend.

This suggests rates are likely to remain on hold in December. However, if labour market conditions continue to soften, modest rate cuts could return to the agenda in H1 2026. For businesses, keeping a close eye on spending, hiring, and employment trends will be key to planning ahead.

 

What it means for my business

The Australian economy remains finely balanced. On one hand, there are early signs of stronger consumer spending and a gradual recovery in residential construction. On the other, inflation remains high and job market signals are mixed. If the labour market does soften further, the RBA may need to consider modest rate cuts, despite its current forecasts and recent decision to hold.

For now, businesses should continue to focus on managing costs and improving efficiency where possible to offset some of these bottom-line cost pressures.

While the RBA’s latest commentary hinted the next move could even be a potential rate rise, it’s worth remembering that forecasts are always uncertain. With a lot of new data due before the February update, the outlook could look quite different in just a few months.

 

 

Author: Ivan Colhoun  Consulting Economist for Bank of Sydney Bachelor of Economics (Hons) Ivan is a highly experienced chief economist and keynote speaker on the Australian economy and financial markets. His career has included leadership roles within financial and professional service organisations, as well as the Reserve Bank of Australia.