Summary:
Australia’s inflation outlook has shifted sharply after the September-quarter CPI came in hotter than expected, prompting economists to warn that the interest rate cutting cycle may be over, and the next move could be up. The Australian Bureau of Statistics reported underlying inflation rising to 3.0%, above the 2.7% consensus forecast, marking the first annual increase in three years. Headline inflation also rose to 3.2%, driven by higher services, energy, and housing costs.
Key contributors included rising prices for travel, veterinary, hospital, and construction services, as well as the expiry of state energy rebates, which led to a 23.6% spike in electricity prices. Economists said businesses were passing on higher wage and power costs to consumers amid a still-tight labour market. The trimmed mean inflation, the RBA’s preferred measure, rose 1.0% for the quarter, exceeding Governor Michele Bullock’s “material miss” threshold and the RBA’s August forecast of 0.6%.
Markets reacted swiftly: the probability of a November rate cut collapsed from 80% to just 4%, as traders priced out further easing. Economists from CBA, Goldman Sachs, and Bank of America now expect the cash rate to remain at 3.6% through 2026, with potential hikes by mid-2026 if inflation persists. HSBC sees rates on hold until 2026, before an increase in 2027.
Treasurer Jim Chalmers sought to downplay the data, arguing inflation “remains much lower than its peak,” though opposition politicians accused him of complacency. Overall, the report underscores persistent inflationary momentum, likely forcing the RBA to delay or abandon further cuts and consider tightening again in 2026.
In Australia, the cash rate remained unchanged at 3.60%, while short-term funding costs eased, with the 3-month BBSW falling 7 basis points to 3.50%, suggesting ample liquidity and stable interbank conditions. Government bond yields rose modestly across most maturities, led by the 3-year yield, up 6 basis points to 3.37%, and the 10-year yield, up 4 basis points to 4.14%, reflecting expectations of a prolonged period of higher rates. The 30-year bond yield edged slightly lower to 4.83%, hinting at steady long-term inflation expectations.
A dovish pivot by the RBA could relieve pressure on indebted households, corporate borrowers, and property markets, where signs of stabilisation are emerging. However, global uncertainties — particularly the escalating U.S.–China trade tensions over rare earths — continue to cloud the economic outlook.
Figure 1: Market Expectation on Cash Rate
CASH ACCOUNT
Product Interest
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