RBA interest rates: Three metrics now on watch for chance of a rise next year, board’s December minutes show

Australia’s central bank board discussed the circumstances under which it would have to pivot to interest rate hikes in 2026 as inflation risks shift to the upside, while reiterating that any future moves will hinge on economic data, minutes of its December meeting showed. The Reserve Bank left its cash rate at 3.6 per cent two weeks ago and noted that there were “uncertainties” about the economic outlook and the extent to which monetary policy remains restrictive, according to the minutes of the board meeting released on Tuesday. “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 showed. Members also noted that 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. The RBA cut rates by 75 basis points between February 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 record of the meeting showed a central bank still trying to gauge whether its policy settings are right for an economy experiencing a renewed spurt in prices and explains why Governor Michele Bullock took further rate cuts off the table two weeks ago. It also underscores the cautious approach adopted by Australian policymakers, who have so far managed to navigate the economy to a soft landing, with unemployment historically low at just above 4 per cent. The minutes showed that members highlighted three judgments central to their decision at the December meeting: “If financial conditions were still slightly restrictive and evidence emerged that a material part of the apparent renewed pick-up in inflationary pressures reflected volatile or temporary factors, then holding the cash rate at its current level for some time may be sufficient to keep the economy close to balance,” the minutes showed. The RBA operates under a dual mandate that aims for inflation at the midpoint of its 2-3 per cent target while trying to keep the economy at maximum sustainable employment. New monthly inflation data released in late November showed headline CPI at 3.8 per cent. The next monthly report is due in early January with a more comprehensive quarterly set due at the end of that month. An upside surprise is likely to force the RBA’s hand, according to some economists. Even as inflation is showing signs of picking up, consumers remain cautious with real per-capita spending broadly flat and the savings ratio edging higher as households rebuild financial buffers. At the same time, the RBA’s staff analysis based on recent data provided greater confidence in the judgment that the labour market is still tight and the output gap positive. That makes for a challenging backdrop to setting monetary policy in 2026. Money-market pricing suggests the next move will be a rate increase that may come as soon as February. Economists at Commonwealth Bank of Australia and National Australia Bank are among a handful predicting a hike to 3.85 per cent at the RBA’s first meeting of 2026 in February. “Members agreed that there were conflicting signals about whether financial conditions were still restrictive or not,” the minutes showed, “and it was not possible to be confident in any assessment.” Bloomberg