September quarter inflation materially above RBA’s August forecast drives a hold decision at November meeting. But delay now adds to the chances of more cuts next year.
- Inflation data implies a “material miss” to the upside on inflation. RBA Monetary Policy Board will therefore keep the cash rate on hold at its November meeting. The upside surprise and emerging consumer recovery also count against a December move.
- Even a February cut is far from certain now, given the size of the upside surprise this quarter. We are conducting a full reassessment for the cash rate outlook in light of both the inflation outcome and the evolving picture on domestic demand.
- However, with the starting point for the unemployment rate now also higher, and a higher assumed track for the cash rate in the forecasts, there are downward pressures on inflation further out. The RBA is focussed on inflation risks now, but could be surprised in 2026 by the gradual labour market softening.
Again it comes down to the CPI data. A trimmed mean reading of 1.0%qtr, 3.0%yr is too high for the RBA’s comfort. Indeed, earlier this week the RBA governor characterised an outcome of 0.9% on the quarter as “a material miss”. The Monetary Policy Board (MPB) will therefore opt to be cautious and wait and see inflation approach closer to the midpoint of the target range before considering further cuts. The RBA will instead keep the cash rate on hold at its November meeting next week. There were possible outcomes today that would have pointed to a different decision, but not this one.
The earliest the MPB will be in a position to get more comfort on inflation is with the next quarterly print ahead of the February 2026 meeting. It will only have one read of the new full monthly CPI ahead of the December meeting and will be reluctant to take too much signal from this new measure. Even a February cut is far from certain now, given the size of the upside surprise this quarter. We are conducting a full reassessment for the cash rate outlook in light of both the inflation outcome and the evolving picture on domestic demand.
Another factor counting against a December rate cut is that the consumption outlook has brightened. Our own internal data had previously (and correctly) been showing that the recovery in household spending was slow to come through. However, these data now suggest solid gains in Q3 and into Q4. We therefore upgraded our forecast for Q3 consumption growth in our October Market Outlook. We now think it is likely that the national accounts will report stronger consumption growth than the RBA’s August forecasts, and this will factor into the RBA’s decisions in December – and, quite possibly, early 2026 as well.
Some caution on a strongly hawkish interpretation of these data is warranted, though. There is recent past experience of a September quarter CPI surprising on the upside, only for the December quarter result to reverse much of the surprise. Recall that even with our own nowcast for September quarter trimmed mean inflation (a “big” 0.8%qtr with upside risk), the year-ended figure still stood at 2.6%yr for calendar 2025 because December quarter was seen as likely to print at 0.5%qtr. The near-term does look higher now, even with some payback, but it would be an over-interpretation of the data to carry the September quarterly outcomes forward as a new trend.
There is also the difficulty of how this plays out in the RBA’s forecasts, which will be updated next week alongside the policy announcement. The starting point for the labour market is weaker and the implied trough for the cash rate was 3.2% as of this morning, rather than the 2.9% that was priced in at the time of the August SMP. Both factors should weigh on the RBA’s inflation forecast relative to August, at least beyond the next couple of quarters.
While the starting point for inflation is also materially higher, and the near-term consumption outlook also strong, the forecasts would need to take a lot of signal from this to completely offset the downward pressure further out from these other sources. At her speech earlier this week, the Governor pointed to “stickiness” in services inflation in selected other countries. The data in Australia a bit more mixed, with some components of personal and financial services inflation still slowing. But given where the RBA’s attention is directed, we think it will keep rates on hold until it is satisfied that inflation from this quarter is contained.
Granted, there is month-to-month noise in the labour market data and, like the RBA, we expect a partial reversal of September’s kick up in the unemployment rate over the next month or two. Even at 4.4%, though, the unemployment rate would be starting the forecast period above the rate that the RBA forecast for the entire period back in August. We think it is significant that the RBA chose to be so dismissive of the monthly labour data despite a gradual easing also being evident in job vacancies and other measures, while apparently taking so much signal from higher inflation prints.
Over 2026, though, we expect the RBA to be surprised by the gradual softening in the labour market, and the resulting benign wages growth. Recall that the RBA has been working on the assumption that a flat trend in forecast participation rates is consistent with a balanced labour market. By contrast, we would view such an outcome as implying latent labour market slack as the upward trend in participation rates for female and older workers continues. That easing in conditions should fade in 2027 assuming private sector demand growth does pick up as we are currently forecasting. By that point, though, inflation could be below the target midpoint, which would point to scope for less restrictive monetary policy.
