RBA Holds Cash Rate at 3.6%, Signals Risks Tilted Toward Higher Rates

On Tuesday, Reserve Bank of Australia Governor Michele Bullock sat down at a press conference to explain why the central bank had left its Official Cash Rate at 3.6% after its December meeting. The decision was unanimous and matched what markets had expected. What drew attention was the message attached to it: the board wants to signal that risks have tilted to the upside.

The formal announcement and the Monetary Policy Statement came at 03:30 GMT, with Bullock's press conference an hour later. The statement said recent data suggest inflation risks have shifted upward, but that it will take a little longer to judge how persistent price pressures are. It described private demand as recovering and economic activity as continuing to recover. Labour market conditions, it said, still look a little tight, though further modest easing is expected. The board judged that it was appropriate to stay cautious and update its view as data arrive. It also said part of the recent rise in underlying inflation was due to temporary factors.

The statement acknowledged uncertainty on several fronts: the outlook for domestic activity and inflation, and how restrictive monetary policy still is. Global uncertainty remains significant, but so far there has been minimal effect on growth and trade in Australia's major trading partners.

At the press conference, Bullock was more direct than the written text. She said rate cuts are not on the horizon. The outlook, in her words, is for an extended pause or for hikes, and she would not put a probability on either. She said the board did not explicitly consider a case for raising rates at this meeting, and she declined to put a timeline on any future move, saying the board will go meeting by meeting. The board, she said, will do what it needs to do to bring inflation down. If the data show inflation is not slowing, that would be considered at the February meeting, when inflation and jobs figures will be important. The session was part of a new reporting format the central bank introduced this year.

The data since November explain the shift in tone. The Australian Bureau of Statistics reported on November 27 that monthly consumer price inflation in October ran at an annual 3.8%, the highest in ten months and above the 3.6% forecast. The rise was broad-based, with price pressures in services accelerating. Wage growth held at 3.4%, the level the RBA has forecast for the year. After that release, Bullock warned that if inflation proves more persistent, it would have implications for policy.

Growth also firmed. Real GDP in the third quarter rose 2.1% from a year earlier, the fastest pace since mid-2023 and above the RBA's 2% estimate of trend growth. The numbers moved money markets sharply. According to Refinitiv's Australian Dollar Interest Rate Probabilities, traders last week fully priced in a rate hike by the end of 2026, a reversal from expectations only a couple of weeks earlier of at least one more cut early next year.

The Australian dollar reacted quickly. It came under heavy selling pressure right after the decision, then recovered. AUD/USD was near 0.6625 at the time of writing, up 0.06% on the day. Ahead of the announcement, FXStreet analyst Dhwani Mehta had noted the pair was close to three-week highs around 0.6650, with the 14-day Relative Strength Index just below overbought territory.

The next test is the February board meeting. The inflation and jobs data released before it will determine whether the RBA keeps pausing or moves toward a hike.