The Reserve Bank of Australia (RBA) has kept the cash rate on hold at 3.6%, but Governor Michele Bullock made clear the decision was neither comfortable nor straightforward as inflation risks reassert themselves.
Speaking after the final board meeting of the year, Bullock said inflation had “come in a bit stronger than expected” and that signs of persistence were emerging beyond temporary, supply-driven factors. This shift in tone marks a subtle but significant recalibration: while the RBA has spent most of 2024 easing cautiously, the balance of risks, she said, “has tilted a bit to the upside”.
Bullock noted that while headline activity aligned with the bank’s expectations, pockets of strength were proving difficult to ignore. Private demand, in particular, surprised on the upside, driven by business investment, even as household spending tracked forecasts. Meanwhile, the labour market remains “a bit tight”, with recent data pointing to more underlying economic heat than previously assessed. Such conditions risk slowing the disinflation process at a time when the RBA is attempting to engineer a soft landing.
“It’s an uncomfortable conversation we had today,” Bullock admitted, describing the board’s debate around inflation. “They are uncomfortable where it is.” She reiterated that the board remained firmly committed to returning inflation to the 2–3% target band, and that it would “do what it thinks it needs to do” to make that happen.
Importantly, she signalled a shift in how the bank is thinking about its recent easing path, saying the board was now “going through a bit of a pause … to make sure that we haven’t eased a bit far”. Although a rate hike was not explicitly considered at this meeting, Bullock confirmed the board spent considerable time discussing “what might need to happen” if inflation proved more stubborn in 2025.
“If inflation continues to be persistent and looks like it is not coming back down towards the board’s target … the board might have to consider whether to keep rates where they are, or in fact at some point raise them,” she said, adding that any move would be taken on a meeting-by-meeting basis. While she would not offer timing, Bullock said a hike “at some point next year” was a possibility, while ruling out cuts entirely.
Experts: February now “live” for a hike
Economists were quick to interpret the decision and accompanying commentary as a tilt toward a more hawkish bias. NAB chief economist Sally Auld said the meeting had effectively turned February into a “live” meeting for a rate hike.
“Our sense is that it won’t take much for the RBA to respond to evidence of a more persistent inflation trajectory,” Auld said. If the January inflation releases on the 7th and 28th validate the bank’s concerns, the RBA could be pushed to act. NAB still expects the bank to remain on hold through 2025, but Auld said the risks were “clearly asymmetric”.
At State Street Investment Management, APAC economist Krishna Bhimavarapu said the RBA’s statement “leaned hawkish, as expected”, highlighting the bank’s acknowledgement of a “more broadly based pick-up in inflation”. He argued, however, that part of the recent rise reflects temporary effects and that State Street’s own inflation tracker is “not picking up any imminent price pressures”.
Bhimavarapu noted the government’s withdrawal of energy rebates will help clarify the true inflation outlook early next year. While he agrees rates are likely to remain on hold for an extended period, he urged caution toward the market’s increasingly aggressive expectations for a hike—especially as the US Federal Reserve appears poised to cut rates amid weakening American labour market conditions.
CreditorWatch: Clear signs of increased hawkishness
Ivan Colhoun, chief economist at CreditorWatch, said the RBA had no option but to keep rates on hold given the stronger-than-expected activity data and inflation readings. But he argued the real message lies in the language shift within the board’s statement. He highlighted three passages signalling rising concern:
- Evidence of a more broadly based pickup in inflation, some of which may be persistent.
- A stronger-than-anticipated rebound in domestic momentum, particularly in the private sector, which could add to capacity pressures.
- Clearer acknowledgement that risks to inflation have tilted upward, even as labour market easing remains modest.
Colhoun disputed the notion that inflation has actually picked up, contending instead that inflation simply “never fell as much as the trimmed mean temporarily suggested”. But if inflation stabilises above 2.5%, and economic momentum continues to strengthen, he said the implications are clear: the RBA will have “no option but to move to a more restrictive setting”. A quarterly trimmed mean of 0.9% or above for Q4 would be the first major test.
Bullock: No tensions with the government
Bullock also pushed back on suggestions of tension between the RBA and the government over fiscal settings.
Despite public spending sitting at 28.3% of GDP, she said she had not had “difficult” conversations with Treasurer Jim Chalmers and believes the government is focused on helping bring inflation down. “Whenever I speak to the Treasurer, he’s always very conscious of that,” she said.
For now, the RBA is holding fire. But Bullock’s message was clear: the board remains uneasy, inflation risks are rising, and a rate hike in 2025 is no longer a remote scenario but a live one—entirely dependent on the data.