The Reserve Bank of Australia believes the full impact of three interest rate cuts in 2025 is “yet to be seen” as it prepares for the possibility of hikes next year, minutes from its December meeting show.
The central bank left the cash rate at 3.6 per cent two weeks ago, with governor Michele Bullock at the time signalling rates will likely remain higher for longer amid an “uncomfortable” bout of inflation.
According to the minutes of the board meeting released on Tuesday, the RBA noted there were “conflicting signals” about the state of the economy and concerns about the recent pick-up in inflation.
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“Members expressed their concerns about the recent trend in inflation, the risk it could be more persistent than currently assessed and the potential for that persistence, if it crystallised, to contribute to an environment in which price pressures are more readily accepted and households’ purchasing power comes under further pressure,” the minutes said.
Members also noted the economy appeared to be operating with a “degree of excess demand” though it was still “too early to determine” whether inflation would be more persistent than assumed in November, when the RBA published its most recent macroeconomic forecasts.
“Members discussed the circumstances in which, should these trends persist, an increase in the cash rate might need to be considered at some point in the coming year,” the minutes read.
The RBA cut rates by a combined 75 basis points in February, May and August, and its focus is now shifting to taming renewed inflationary pressures amid a still-tight labour market and poor productivity growth.
The board acknowledged that the full impact of its easing “was yet to be seen”.
The RBA has held interest rates for the last three meetings at 3.6 per cent.
The board highlighted three metrics that were on watch at the December meeting — the extent to which aggregate demand exceeds potential supply, and the implications of this for the persistence of the recent pick-up in inflation; the outlook for growth in labour demand and economic activity; and whether financial conditions were still restrictive.
National Australia Bank group chief economist Sally Auld said in order for the cash rate to remain unchanged in 2026, the RBA board needed to conclude financial conditions were restrictive and for a significant part of the recent pick-up in inflation to be caused by volatile or temporary factors.
“By the February Board meeting, we think the RBA will have enough information to make an informed judgment on the persistence or otherwise of inflationary pressures,” she said.
It comes as Westpac ditched hopes for two interest rate cuts in 2026 and instead tipped RBA to remain on hold through the new year.
Meanwhile, fellow giants Commonwealth Bank and NAB have made shock calls for a February rate hike.
