Jump in forecast inflation clouds interest rate hopes
The central bank has massively upgraded its inflation forecasts after admitting its last forecast was wrong, ruling out rate cuts likely until the end of 2026 at the earliest.
Published as While the monetary policy board kept interest rates steady on Tuesday, the RBA’s updated economic forecasts suggest the fight against inflation is far from over.
Trimmed average inflation, which eliminates variable items and is the central bank’s preferred measure, is expected to rise to 3.2 percent by December and remain at that level until at least June 2026.
In its August update, the bank said it expected headline inflation to fall to the midpoint of the 2-3 percent target range and remain relatively stable.
Since then, inflation data for September came in at 1 percent, “considerably higher than expected,” and the annual figure has risen to 3 percent.
The rise in inflation was partly due to temporary factors such as volatile international travel prices and a one-off increase in council rates, as well as some items that were included in the trimmed average and will be excluded in future readings.
However, other factors point to ongoing inflationary pressures in the economy.
Although unemployment also increased in September, indicators such as low underemployment, high vacancy rates and an increase in the number of workers leaving their jobs voluntarily show that the labor market remains relatively tight.
“Overall, the latest data strengthens the possibility that there is slightly more capacity pressure in the economy than we previously assessed, which was defined as a risk in the August Statement,” the statement said.
The RBA’s forecast assumes interest rates will fall in line with money market investors’ expectations, taking the cash rate to 3.35 per cent by mid-2026.
However, the statement notes that there may still be some capacity pressures in the economy, assuming the cash rate follows the market path, raising the possibility that the RBA will keep interest rates on a long pause to bring the economy back into balance more quickly.
While headline inflation is the bank’s main focus, Australian consumers are more sensitive to headline inflation, which covers the entire price range, including variable items.
And Australians face a bumpy ride; The headline figure will rise to 3.7 percent by mid-2026 as the federal government’s energy rebates expire.
Unemployment is forecast to remain around 4.4 per cent after jumping to 4.5 per cent in September, while growth in Australia’s gross domestic product is expected to reach a trend rate of 2 per cent this year, down from the previous forecast of 1.7 per cent.
The RBA also noted that the global economy was more resilient than expected in the face of US President Donald Trump’s tariffs.
China, Australia’s largest trading partner, has managed to find alternative markets for its exports, but the slowdown in investment remains a risk to Australia’s economic growth outlook.
Much will depend on what Chinese officials decide on next year’s growth target and its five-year plan, which will be determined in the coming months.
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