Has the RBA’s inflation play suppressed interest rate cuts? – real estate.com.au

A third successive rate hike by the Reserve Bank yesterday came amid the long-standing argument that bad data is to blame for the inability to control inflation.

The cash rate was held at 3.60% this week after the board met for the final time to deliberate on the state of the economy for 2025.

The run-up to the December decision was marred by a series of surprise events, shifting expectations from a cut to a pause to a feasible potential for a rate hike within two weeks. Why? Higher inflation is back, but it’s not yet clear whether it’s a blip or a pattern.

At a press conference after the cash rate decision, RBA Governor Michele Bullock confirmed that the bank is not considering lowering or raising interest rates as conditions between supply and demand are a little too tight.

However, a scenario for a possible rate hike before 2026 was discussed, with the board’s accompanying decision statement confirming its view that risks to inflation have turned to the upside.

We know from recent consumer price index (CPI) data that inflation is persistent. Although the labor market looks strong, this means that the door to further interest rate cuts is closed.

“It will take slightly longer to assess ongoing inflationary pressures,” the decision statement said. “Private demand is recovering. Labor market conditions still appear somewhat tight, but further modest easing is expected.

“It was appropriate to remain cautious.”

Vague prospects

Aussies waited four years for the first of three evenly spaced rate cuts from the bank in February. Although it brought much-needed relief, the bank’s long-awaited easing has been peppered with criticism.

While other peer countries cut rates more quickly this year, Ms Bullock has defended the bank’s gradual approach and said the board wanted to cut rates sustainably to avoid a spike in inflation.

Despite the cautious approach, both headline and underlying inflation have risen outside the 2-3% target range, raising questions about why the RBA’s forecasts have not been more accurate.

Ms Bullock says the monthly CPI indicator is not reliable enough to base decisions on. Photo: David Gray/Getty

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In its communications, the response has been the lack of comprehensive data, with the bank consistently pointing to the Australian Bureau of Statistics’ monthly CPI indicator as too flawed to rely on cash rate decisions.

Instead, the bank based its forecasts heavily on quarterly data and mainly on the reduced average inflation rate that excludes the most volatile price changes.

As a result, the ABS has changed the way it produces and publishes inflation data. Since last month it has now published an extensive CPI indicator.

The new dataset is still in its infancy and has already been identified as a bottleneck by the RBA.

The RBA now uses a new and more comprehensive CPI indicator when forecasting. Photo: Getty

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“There is uncertainty about how much signal to extract from the monthly CPI data as it is a new data series,” the decision statement said. “There are uncertainties about the prospects for domestic economic activity and inflation and the extent to which monetary policy remains restrictive.”

Stephen Smith, partner at Deloitte Access Economics, said the board’s reasoning in its decision “balances risks to inflation and growth while recognizing uncertainty in global markets.”

“It is a well-considered statement that will dampen whiplash sentiment in the markets following recent higher-than-expected CPI data and last week’s GDP result,” he added.

While inflation rates have taken the blame, the RBA also relies on other data to make its interest rate decisions. This includes labor market data – the unemployment rate, the wage price index and the employment rate – together with quarterly GDP data, household consumption data, interest rates and credit growth.

“The economy is still treading water, but the RBA fears that if things improve it could reignite inflation,” says Smith.

“We expect the bank to adopt a wait-and-see approach in the coming months until it can determine whether the current pace of economic growth is sustainable.

“Inflation needs to be closely monitored, and the board’s statement today reflected that. This is not an easy situation to resolve.”

Can inflation be tamed?

Wealth Inside senior analyst Filip Tortevski says the resurgence in inflation, whether a dip or a trend, is “not a policy failure” by the RBA.

“It just shows the limits of what interest rates alone can solve, especially when it comes to housing and the cost of living,” he adds.

“It is important to understand that much of the recent job growth has been driven by government spending, not the private sector, which is why many households are still feeling pressure despite the headlines.”

Regardless of the old CPI data or the new measurements, Australia Institute chief economist Greg Jericho says the decision shows the bank will have to remain in the dark for now.

“The RBA doesn’t really know which direction inflation is heading,” he says. “The RBA has chosen to wait and see. That is at least a small mercy for mortgage holders two weeks before Christmas.”

The Australia Institute’s chief economist, Greg Jericho. Photo: NCA NewsWire / Martin Ollman

While the decision means home loan repayments will not ease this side of Christmas, easing is likely to be far off the table until the RBA can get into a clearer rhythm when interpreting the new inflation data.

“Expectations have shifted further,” said Nerida Conisbee, chief economist at the Ray White Group.

“A move earlier this year now appears unlikely, with any easing more realistically limited to the second half once inflation shows sustained progress towards the target range.”

This article first appeared on Mortgage choice and is republished with permission.