Has the RBA’s inflation blame game stifled rate cuts?

A third consecutive rate hold from the Reserve Bank yesterday came with its well-worn line that poor data is at the centre of failure to control inflation.

The cash rate was held at 3.60% this week after the board met to deliberate on the state of the economy for the final time for 2025.

The lead up to the December decision was marred by a series of surprise events that saw the expectations jump from a cut to a hold to a feasible potential for a hike within two weeks. Why? Higher inflation is back, but it’s not yet clear whether it’s a blip or a pattern.

Speaking at a press conference following the cash rate decision, RBA governor Michele Bullock confirmed the bank did not consider cutting or hiking the rate, with supply and demand conditions a little too tight.

A potential rate hike scenario for 2026 was discussed however, with the board’s accompanying decision statement confirming its view that the balance of risks for inflation have tilted to the upside.

We know from recent Consumer Price Index (CPI) data that inflation is sticky and while the jobs market looks strong, this means door to any more rate cuts is shut.

“It will take a little longer to assess the persistence of inflationary pressures,” the decision statement read. “Private demand is recovering. Labour market conditions still appear a little tight but further modest easing is expected.

“It was appropriate to remain cautious.”

Vague outlook

Aussies waited four years for the first of the bank’s three, evenly spaced cash rate cuts in February. While it brought much-needed relief, the long-awaited easing from the bank has been peppered with criticism.

While other comparable countries cut rates faster this year, Ms Bullock has defended the bank’s gradual approach, saying the board wanted to lower rates sustainably to avoid an inflation spike.

Despite the careful approach, both headline and underlying inflation have risen outside its 2-3% target range, raising questions as to why the RBA’s forecasting has not been more accurate.

In its communications, lack of comprehensive data has been the answer given, with the bank consistently pointing to the Australian Bureau of Statistics’ monthly CPI indicator as too flawed to be reliant for cash rate decisions.

Instead, the bank laid its forecasts heavily on quarterly data and most specifically, the trimmed mean inflation figure that rules out the most volatile price changes.

Off the back of this, the ABS has adjusted how it produces and publishes inflation data. From last month, it now publishes a comprehensive CPI indicator.

Still in its infancy, the new dataset has already been pegged as the sticking point by the RBA.

“There is uncertainty about how much signal to take from the monthly CPI data given it is a new data series,” the decision statement read. “There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive.”

Deloitte Access Economics partner Stephen Smith says the reasoning of the board in its decision “balances the risks to inflation and growth while recognising the uncertainty in global markets”.

“It’s a measured statement which will temper the whiplash sentiment in markets, following recent higher-than-expected CPI data and last week’s GDP result,” he adds. 

While inflation data has taken the blame, the also RBA relies on other data to make its rates decisions. This includes labour market data – the unemployment rate, the Wage Price Index and the participation rate – along with quarterly GDP figures, househould consumption data, lending rates, and credit growth.

“The economy is still treading water, but the RBA’s fear is that if it does any better, it may re-ignite inflation,” Mr Smith says.

“We expect the bank to adopt a wait-and-see approach over the next few months until it can determine whether the current rate of economic growth is sustainable. 

“Inflation needs to be watched carefully, and the board’s statement today reflected that. This is not an easy situation to fix.”

Can inflation be tamed?

Wealth Within senior analyst Filip Tortevski says the re-emergence of inflation, whether a blip or a trend, “isn’t a policy failure” from the RBA.

“It just shows the limits of what interest rates alone can fix, especially around housing and the cost of living,” he adds.

“It’s important to understand that a big part of recent job growth is being driven by government spending, not the private sector, which is why many households still feel under pressure despite the headlines.”

No matter the old CPI data or the new readings, The Australia Institute chief economist Greg Jericho says the hold decision shows the bank is having to feel its way in the dark for now.

“The RBA doesn’t really know which way inflation is trending,” he says. “The RBA has chosen to wait and see. That’s at least a small mercy for mortgage holders a fortnight out from Christmas.”

The Australia Institute chief economist Greg Jericho. Picture: NCA NewsWire / Martin Ollman

While the decision means home loan repayments will not ease this side of Christmas, easing is likely well off the table until the RBA can get into a clearer rhythm interpreting the new inflation data.

“Expectations have shifted further out,” Ray White Group chief economist Nerida Conisbee says.

“A move earlier in the year now looks unlikely, with any easing more realistically confined to the second half, once inflation shows durable progress back toward the target band.”

This article first appeared on Mortgage Choice and has been republished with permission.

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