RBA lifts cash rate 25bps to 4.85% in split vote, citing “broadly based” domestic inflation pressures, Middle East conflict and AI boom. Indications are for a pause to assess in December. While risks are still skewed up, we stick with our existing base case that this is likely the peak of the cycle.
As expected, the RBA Monetary Policy Board (MPB) lifted the cash rate 25bps to 4.85% at its November meeting. This follows the increase at the previous (late-September) meeting and is a marked turnaround from the outlook back in August. The post-meeting media statement cited higher global energy prices resulting from the Middle East conflict, tighter domestic capacity pressures and an increase in inflation expectations for the decision.
However, the decision was a split vote, 6 votes to 3, a possibility we have flagged for some time. In the post-meeting media conference, Governor Bullock explained that the dissenting minority put more weight on the downside risks and did not see signs of wages growth picking up as much as the staff forecasts implied. Those members were reportedly more confident that slower growth would prevent higher inflation expectations becoming entrenched.
Financial conditions are restrictive and this is expected to bring inflation down over time. Because the RBA assesses the risks to the inflation outlook to still be skewed to the upside, the outlook for coming meetings will still be for a decision between holding and hiking. But we note that the post-meeting statement omitted September’s language “including increasing the cash rate target further if needed” from the commitment to do what is necessary to get inflation down.
In the post-meeting media conference, the Governor commented that after five hikes, this is probably a good time to “take stock”. Together with the dissents, we read this as confirming our current view that the MPB will keep rates on hold in December. There is also considerable data flow between now and then, which could go either way, including the Q3 national accounts.
Similarly, a lot could happen between now and February, but we see it as the next most likely timing for a hike, should one eventuate. We still see that as a risk rather than a base case.
Revised forecasts published in the accompanying Statement on Monetary Policy (SMP) show underlying inflation lingering around current rates for longer. This contrasts with the previous SMP forecasts in August, which showed trimmed mean inflation returning to the 2–3%yr target range by late 2027 and a little below the 2.5%yr target midpoint in 2028. We note, however, that the conditioning assumptions on oil prices, which are based on futures prices, were at a local peak at the time the forecasts were finalised.
The RBA’s GDP growth forecasts for 2027 and 2028 were both revised down –0.3%pts to 1.3% for 2027 and 1.5% in 2028, despite an upward revision to the near term. This is well below even the RBA’s downbeat view of potential output growth. Within the GDP aggregate, recent misses and leading indicators have required upward revisions to the near-term outlooks for business and dwelling investment, and downside revisions to public demand. These revisions were offset further out with downward revisions to the 2028 outlook for business and dwelling investment and an upward revision to public demand. Household consumption forecasts were revised down across most of the profile.
With the unemployment rate already at 4.7% in August and September – a rate the RBA did not forecast until end-2027 in its August SMP forecasts – the RBA has lifted its unemployment forecast to show a peak of 5.1% in at end-2028, the end of the forecast horizon. This largely reflects stronger labour supply, with forecasts for employment growth essentially unchanged. We have repeatedly flagged that cost-of-living pressures are likely to keep people in the labour force and thus boost the participation rate. The RBA had previously not factored this adequately into its forecasts but acknowledged in the SMP that this mechanism had kept participation higher than it had expected at the time of the August SMP.
However, because inflation surprised to the upside recently, this additional labour supply has had no bearing on the RBA’s assessment of capacity pressures. The RBA assesses the domestic economy to still be a little tight, and tighter than previously judged. The RBA’s framework for assessing the degree of spare capacity or tightness in the economy necessarily translates an upside surprise on inflation (or unit labour costs) into a conclusion that the economy must be tighter than previously judged. Indeed, the RBA’s estimate of the NAIRU (unemployment rate consistent with inflation stable at target) has been revised up to 4.75%.
The RBA highlighted that elevated inflation expectations may be contributing to higher realised inflation. Consumer inflation expectations have started to lift again but remain below where they peaked earlier this year. However, the RBA appears to be putting more attention on the inflation expectations of firms and the frequency of mentions of pricing in their liaison program. This is putting a lot of weight on proprietary information that is not clearly validated by other, longer-running data sources.
The AI boom is heavily cited in the SMP and other post-meeting communication. The RBA has lifted its forecasts for major trading partners, especially high-income Asian economies that are the centre of high-tech manufacturing. Demand for AI-related goods is also cited as a driver of both global and domestic inflation. And although the RBA has revised up its near-term forecasts for business investment on the back of strong data centre activity, it is working on the assumption that Australia does not become ‘a significant regional hub for data centres’. Nor does it allow for any boost to productivity trends from the technology, even in 2028. This is a very different view of the risks from AI than the RBNZ expressed last week. For the RBA, it is all about inflation, a little bit about pressure on domestic construction resources, and nothing about either an ugly unwind of the current financing boom or a future productivity dividend.
