The Reserve Bank of Australia (RBA) has held the cash rate steady at 3.6 per cent after its September board meeting.
The central bank said that while inflation has fallen substantially since the peak in 2022, recent data, "while partial and volatile", suggests that inflation in the September quarter may be higher than expected.
The RBA's board said on Tuesday its decision was unanimous and that it was "appropriate to remain cautious" considering indications that inflation may be persistent in some areas.
"The Board remains alert to the heightened level of uncertainty about the outlook," it said.
However Treasurer Jim Chalmers acknowledged the decision would be met with disappointment.
"This is not the outcome that millions of Australian home owners would have wanted but it’s certainly the outcome that markets and economists were expecting," he told reporters.
Recent inflation indicators
Data showing a rise in the consumer price index (CPI) and an annual trimmed mean — a metric that smooths out certain volatile price movements — above the midpoint of the RBA's target band of 2-3 per cent had ruled out the possibility of a rate cut.
Inflation data released in two successive monthly reports by the Australian Bureau of Statistics (ABS) found the CPI rose 2.8 per cent in the 12 months to July and then up to 3 per cent in the 12 months to August — the highest inflation rate since July 2024.
The biggest drivers of the price uptick were food and non-alcoholic beverages, which rose by 3 per cent, alcohol and tobacco by 6 per cent, and housing by 4.5 per cent.
The RBA board also said domestic and international developments have driven uncertainties about the outlook for domestic economic activity and inflation.
The board said that domestically, people may have "become more comfortable consuming as real incomes and wealth rise", which could lead to businesses passing on cost increases.
However, a recent growth in consumption may not continue "particularly if households become more concerned about overseas developments".
Treasurer Jim Chalmers responds to RBA decision
Speaking following the RBA's decision, Chalmers said the choice to hold the cash rate was "not a surprise".
"Interest rates have already come down three times in six months this year," he said.
"The three interest rate cuts that are already in the system are already providing welcome relief to Australians with a mortgage."
Chalmers said the government expects inflation to "bounce around" but that the current interest rate, which is in the lower range for recent years, reflects the Albanese government's progress.
Economists at NAB, Deutsche Bank, TD Securities, Citi and Nomura have also dropped their prediction for another cut this year.
Since the RBA's last meeting, the economy has grown more strongly than expected, unemployment has stayed low and a material rise in services inflation has threatened the RBA's inflation forecasts, said Nomura's Andrew Ticehurst and David Seif.
"We expect (the RBA's) messaging to pivot back in a much less dovish direction, compared to the communication it provided in August," they said in a research note.
In August, the RBA handed down its third cash rate cut of the year of 0.25 per cent as inflation was expected to remain within its target but said the board "remains cautious given uncertainty is high and is ready to respond if needed".
With additional reporting by the Australian Associated Press.
