The RBA did not make a mistake in 2025 — the facts changed

The Federal Reserve’s focus on interest rates reflects a changing economic landscape rather than policy failure, as inflation, employment and global conditions move in ways few predicted. Stephen Koukoulas reports.

Opinion on MONETARY POLICY from the Reserve Bank of Australia (RBAFrom cutting interest rates in August 2025 to raising interest rates in February 2026, there has been a lot of criticism about its performance.

RBA according to its biggest critics made a mistake, wretchedit was wrong and misguided With the interest rate cuts in 2025, the cash interest rate decreased from 4.35 percent to 3.6 percent.

It’s no surprise that the harshest critics are those who a year ago demanded the RBA raise interest rates three times, from 4.35% to 5% and even back to 5%. Most of them are economic commentators. The Sky After Dark or Australian Financial Review Those who rail relentlessly against interest rate cuts and the economic policy framework of the Albanian Government.

Why did the RBA change the direction of its policy?

The reasons behind the RBA’s departure were, quite simply, an unexpected and dramatic change in economic conditions. The change was not the result of a mistake or previously misguided policy.

When the third rate cut for the cycle is made in August 2025, the RBA will confident Inflation is expected to remain close to the midpoint of the 2-3% target from late 2025 to the end of 2027.

This crucially positive inflation forecast was based on the assumption that the cash rate would decline further to around 3% over the forecast horizon. There was significant uncertainty about downside risks to global growth, driven by customs policy, geopolitical issues and a deflationary pulse from China, Australia’s dominant export market.

Some things have changed

What happened after the interest rate was economically extreme.

Both September and December quarters inflation results It was significantly higher than forecasts, and although there was an element of “noise” in these results due to rising prices of a number of government-managed items, the RBA was of the view that there were broader signals that inflation was rising.

Additionally, while the unemployment rate unexpectedly fell to 4.1% in December, the global economy remained resilient despite headwinds, especially from the United States. The RBA does not like the unemployment rate to be too low because it fears that full employment will create conditions that will unleash a spiral of wage-price inflation. (The truth behind this assumption is hotly debated.)

Simply put, economic realities have changed in ways no one predicted.

Nobody.

until February 2026 RBA Monetary Policy Board At last week’s meeting, it was clear that inflation was unexpectedly high, unemployment was unexpectedly low, and global economic conditions were unexpectedly calm and resilient compared to the end-2025 outlook.

Moreover, there were signs of upward economic momentum domestically, with household spending growth picking up, house prices rising strongly, credit growth picking up and the business investment outlook turning positive.

The argument against a rate hike in February was based on fewer elements; Falling job openings, slower wage growth and a clear cooling in public sector demand are important parts of the economic outlook. There was an element of so-called “statistical noise” in the inflation data that the RBA downplayed when assessing the inflation outlook, adding to the case for delaying the decision, but they were clearly overshadowed by other news.

Where to now for interest rates?

Financial markets and the majority of market economists expect one or two more 25 basis point rate hikes next year. cash rate It rose to around 4.25%.

Six months ago, markets expected interest rates to fall to 3%.

RBA Governor press conference Michele Bullock biased its interpretation towards further increases, but he notedAs is currently usual practice, future rate movements will depend on data, particularly on inflation and the labor market, and not on the RBA’s forecasts.

Suffice it to say that if the connection between job vacancies and the labor market is restored in the coming months, the unemployment rate will rise to 4.5% or higher. There could be a pause in changes in interest rates if inflation falls sharply as one-off managed price increases are erased from annual data and there are further signs of a significant slowdown in public sector demand.

In fact, it is not impossible to paint a picture in which there will be a sharp reversal in inflation in the second half of 2026 and the unemployment rate will rise, the RBA will take another turn and return to cutting interest rates.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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