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.
Speaking after the decision, RBA governor Michelle Bullock said higher price levels affect everyone but they have been "especially tough on people on low incomes and the more vulnerable".
"This is why it's so important to keep inflation low and stable and unemployment as low as possible."
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 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.
Bullock said she still considers Australia's economy to be in a "good spot" considering these inflation figures and an unemployment rate of 4.2 per cent.
However, she reiterated the board's position to remain vigilant.
"Market services and housing inflation were a little higher than we were expecting. So, we're just being a little bit cautious about that. It doesn't suggest that inflation is running away but we just need to be a little bit cautious."
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 responds to RBA decision
Chalmers said the RBA's decision to hold the cash rate was "not a surprise" and global economic volatility weighed heavily on both the government and the RBA's decision-making.
"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.
However, Opposition treasury spokesperson Ted O'Brien said the bank's decision to hold the cash rate was indicative of economic mismanagement and a "spending spree" by the government
The chance of another interest rate cut this year
Economists at NAB, Deutsche Bank, TD Securities, Citi and Nomura have 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.
Chief economist at Betashares, David Bassanese, said the "hawkish" tone of the RBA board's statement released on Tuesday "potentially suggests the RBA is less inclined to cut interest rates in November than previously expected" but the CPI data for the September quarter will be critical to its outlook and decision-making.
Asked what she makes of these predictions, Bullock said economists see the same data as the RBA board.
"It will depend a little bit on what we see coming over the next few months and what our forecasts end up being. So, I can't say whether they're right or they're wrong," she said.
Bullock said that by the November meeting, the board would have more inflation data about the September quarter and the labour market, as well as more forward-looking indicators.
With additional reporting by the Australian Associated Press.
