Insights from the RBA December Cash Rate Announcement

Summary

•  Hawkish shift as RBA holds  
• Rate cuts off the table for foreseeable future  
• Inflation risks tilted to upside
  

RBA mulls upside risks to inflation 

In a unanimous vote, the RBA has maintained the cash rate at 3.6% amid the re-emergence of inflationary pressures. After the inaugural October monthly CPI report revealed headline inflation at 3.8%, market expectations have shifted from anticipating one more cut to the possibility of a tightening cycle starting as early as mid-next year. With inflation risks now tilted to the upside, the RBA must contend with balancing growth and inflation in an environment of improving consumer sentiment, strong asset prices and above-average credit lending.

Statement by the Monetary Policy Board

In the December Monetary Policy Decision, the Board shared its judgement that some of the recent increase in underlying inflation was due to temporary factors and there is uncertainty about how much signal to take from the monthly CPI data given it is a new data series. Nevertheless, they acknowledged that the data does suggest signs of a more broad based pick-up in inflation, part of which may be persistent and will bear close monitoring.

The Board noted the continued recovery of the economy, stating that private demand has strengthened, driven by both consumption and investment. Activity and prices in the housing market are also continuing to pick up. Otherwise, the Board noted that uncertainty in the global economy remains significant but so far there has been minimal impact on overall growth and trade in Australia’s major trading partners.

In her press conference, Governor Bullock conceded that the picture was murky. With regards to inflation she acknowledged ‘it’s very uncertain what is temporary and what is persistent’ and expressed that the RBA does not have a firm grip on whether interest rates are restrictive.

Our Take

A fourth consecutive inflation shock above the RBA forecast (see 'RBA Forecast vs Monthly CPI' graph above) is uncomfortable evidence that the current rate environment may not be as restrictive as expected. As the Board reassesses its view on the ‘neutral’ rate, the absence of excess capacity in the Australian economy highlights the significant upside risk to inflation amid the ongoing economic recovery. The private sector rebound has exceeded expectations, with public expenditure showing no signs of meaningful slowdown. This growth trajectory, in the absence of any productivity gains, will inherently drive inflation.

While the market has reflected a dramatic pivot to now expecting 2026 hike(s), there are a couple of factors that may moderate this outcome. Firstly, the US Federal Reserve remains in a politically driven easing phase. The disparity of rate environments between Australian and US economies may be an important thematic in 2026 and could act to limit the speed of domestic growth as the appreciation of the AUD restricts growth from exporting sectors, and constrains import-driven inflation. Secondly, the global environment is no less uncertain than it was at the start of the year. The global economy is not overly strong and remains vulnerable to an exogenous growth or geopolitical shock.

It’s not in the RBA’s nature to make decisions quickly and we expect they will patiently wait for their favoured quarterly CPI in February before explicitly acknowledging any change of direction. As the Board has repeatedly noted the socially destructive impact of inflation and the importance of price stability, there is unlikely to be any hesitancy to increasing rates if required next year.

Martin Wilkinson

Head of Investments

martin.e.wilkinson@allianz.com.au

Adam Downy

Senior Investment Associate

adam.j.downy@allianz.com.au

_{Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited ABN 27 076 033 782, AFSL 296559. This information contains opinions that are current as at November 2025 unless otherwise specified and is for general information purposes only and is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.}