Monetary Policy Board leaves cash rate unchanged amid persistent inflation concerns and resilient economic activity
The Decision: Patience and Data-Dependence
The Reserve Bank of Australia’s Monetary Policy Board has decided to hold the cash rate target steady at 3.60 per cent, maintaining its cautious stance as economic conditions present a complex picture of resilience and uncertainty. The unanimous decision reflects the Board’s assessment that economic data accumulated since August, combined with forecasts from the previous statement on monetary policy, suggests there is no immediate need for further rate reductions at this juncture.
This pause comes after a period of monetary easing earlier in 2025, during which the Board reduced rates in response to moderating inflation and softening labour market conditions. However, recent economic data has prompted the Board to adopt a wait-and-see approach, particularly given signs that inflation in the September quarter may prove higher than previously anticipated.
Global Conditions: Tariffs and Uncertainty
The international economic backdrop remains characterized by considerable uncertainty, particularly surrounding the implications of elevated tariff rates now in effect for many economies. Members acknowledged that while higher tariff rates imposed by the United States are now in force, the ultimate macroeconomic effects remain difficult to ascertain given their scale and potential for further change as negotiations continue with major trading partners.
Globally, central banks have adopted divergent policy paths. The United States Federal Reserve, the Bank of Canada, and the Reserve Bank of New Zealand have all reduced their policy rates further since the previous meeting, primarily driven by softening labour markets. This stands in contrast to expectations in the United Kingdom, euro area, and Japan, where rate path expectations have edged higher in response to lingering inflation concerns.
Despite these uncertainties, global trade has remained at elevated levels, reflecting significant shifts in trade patterns in response to tariff adjustments. Economic activity in Australia’s trading partners has remained resilient, with GDP growth stronger than expected in the June quarter. However, momentum in China’s economy has weakened notably, with growth in domestic demand slowing more than anticipated in July and August, particularly affecting fixed asset investment.
The Australian Economy: Recovery Underway
Domestically, economic conditions have shown signs of improvement following the monetary easing that commenced in 2025. GDP grew slightly more than expected in the June quarter, with the recovery led by a notable rebound in household consumption. This pickup in consumption has been broad-based across categories, suggesting the recovery may persist beyond temporary factors such as electricity subsidy unwinding and the rebound from weather disruptions.
The recovery in household consumption has been supported by a pronounced improvement in household disposable income. Real disposable income has risen strongly over the preceding year, bolstered by ongoing employment strength, growth in real wages, and the Stage 3 tax cuts. In per capita terms, real disposable income has recovered above pre-pandemic levels since late 2024. Despite this objective improvement in household finances, consumer sentiment remains subdued, a pattern the Board notes has persisted across many developed economies.
Private sector activity is beginning to support growth, consistent with the anticipated shift from public to private demand drivers. The composition of employment growth has also shifted, with the bulk of gains in the first half of 2025 occurring in the market sector, following concentrated non-market growth in 2024. This compositional shift aligns with expectations of moderating overall employment growth as the market sector is generally less labour intensive.
Labour Market: Tight but Stabilizing
The labour market remains characterized as a little tight, though considerable uncertainty surrounds this assessment. The unemployment rate held steady at 4.2 per cent in August, while the underemployment rate edged lower and other measures of labour underutilization remained broadly stable. Importantly, business surveys and liaison feedback suggest labour availability has been little changed, with approximately half of firms describing labour availability as tight.
Employment growth eased in August, though this was anticipated as population growth has moderated. Notably, the employment-to-population ratio and participation rate also edged lower but remain close to historical highs. Most indicators of labour demand have remained broadly stable or eased only marginally, with leading indicators such as job advertisements and vacancies continuing to point toward healthy labour demand in the near term.
Wage pressures appear to be moderating, with private sector wage price index growth remaining broadly steady after adjusting for administered decisions. However, preliminary liaison information and timely wage indicators suggest private sector wages growth could ease faster than previously expected. The Board has noted that growth in unit labour costs remains elevated, partly due to continued weak labour productivity growth.
Inflation: Concerning Signals Emerge
The inflation picture has become more complicated, with recent data suggesting that the September quarter inflation outcome may exceed the Board’s August expectations. Monthly CPI indicators for July and August, while partial and volatile, have pointed to stronger-than-expected outcomes. Of particular concern are the outcomes for new dwellings and market services inflation components, both of which have surprised to the upside.
Services inflation has proven surprisingly persistent, a pattern the Board notes is occurring across several other developed economies. The Board has highlighted the importance of understanding these international lessons, as persistent services inflation could signal broader supply capacity constraints than previously assumed. Shifts in the timing of electricity rebates are also expected to contribute to stronger headline inflation in the September quarter.
This combination of potentially higher-than-expected inflation and broadly stable labour market conditions could suggest that the staff’s assumptions regarding the balance between aggregate demand and potential supply may require reassessment. Members recognized this as a key consideration for policy deliberations ahead.
Financial Conditions: Easing in Motion
The Board’s August rate reduction has successfully eased financial conditions domestically. Reductions in the cash rate have been transmitted to bank funding costs and lending rates, with scheduled mortgage payments declining accordingly. The transmission of monetary policy to financial conditions has been broadly consistent with prior easing episodes.
Internationally, conditions in corporate funding markets remain buoyant, with debt and equity funding readily available on favourable terms. Equity prices in many advanced economies have reached new highs, partly reflected strong earnings but also indicated that equity risk premia remain near multi-decade lows. The Board notes that low risk premia continue to suggest market participants are placing little weight on potential adverse outcomes from trade and geopolitical risks.
The Australian dollar has appreciated slightly since the previous meeting, supported by widening yield differentials between Australia and other advanced economies. In real terms, the trade-weighted index sits close to estimates of equilibrium levels implied by long-run relationships with the forecast terms of trade and real yield differentials, suggesting this appreciation is not causing financial conditions to tighten beyond what interest rate levels already imply.
Credit and Financial Stability: Watch and Caution
Housing credit growth has picked up further, consistent with monetary easing throughout 2025. The pickup has been driven substantially by growth in lending to housing investors, which now exceeds post-2008 averages, reflecting investors’ traditional greater responsiveness to declining interest rates compared to owner-occupiers. However, riskier types of housing borrowing—including high loan-to-value, high debt-to-income, and interest-only lending—have not increased, suggesting prudent lending standards remain intact.
Business credit has continued to grow strongly, with banks and non-banks competing vigorously for market share. Nevertheless, overall corporate leverage remains low by historical standards. The Board has emphasized the importance of maintaining sound lending standards across housing and business credit, spanning both bank and non-bank sectors, to prevent vulnerabilities from accumulating in the financial system.
While household debt relative to incomes has only just begun to stabilize following a long period of gradual decline, households’ financial positions remain relatively strong. Mortgage payment shares of household disposable income remain above historical averages, yet extra mortgage payments continue to run ahead of 2023 and 2024 levels, suggesting households are maintaining high savings rates. The Board concluded that domestic financial stability considerations present no immediate constraints on monetary policy at this meeting.
Risk Assessment: Balanced but Sensitive
Members agreed that risks to the economic outlook exist on both sides of the forecast. On the upside, there is a possibility that the August forecasts underestimated the strength of consumption recovery or the extent of current capacity pressures. Conversely, on the downside, forecasts may not be sufficiently accounting for the persistent weakness in consumer sentiment, recent softness in employment growth, or emerging signals from timely wage indicators.
Globally, financial stability vulnerabilities warrant attention. Concerns about fiscal sustainability have become more prominent in several advanced economies, particularly given the absence of credible frameworks constraining fiscal deficits over the medium term. Risk premia in global equity and credit markets remain low despite these vulnerabilities and heightened geopolitical tensions, creating potential for sharp financial market adjustments if risk perceptions shift.
Key Takeaway: The Board’s decision to hold rates steady reflects a deliberate pause to assess conflicting signals of economic strength and inflation persistence. While consumption has recovered more robustly than expected and labour market conditions remain stable, emerging signs of higher inflation and persistent services pressure warrant continued caution.
Looking Ahead: Data-Dependent and Cautious
The Board has signalled that future decisions will remain cautious and data-dependent, with commitment to close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. Market pricing anticipates the cash rate reaching around 3.25 per cent by the middle of 2026, compared with 3 per cent at the time of the August meeting, reflecting the Board’s hold today.
The pace and sequencing of any future adjustments will be determined by the ongoing flow of information and the Board’s evolving assessment of the balance between demand and supply in the economy, the outlook for inflation, and progress toward full employment. As monetary policy transmission continues to work through the economy, the Board will remain focused on its dual mandate to deliver price stability and full employment, ready to adjust course as circumstances warrant.