The Reserve Bank of Australia keeps interest rates unchanged and raises inflation expectations

The Reserve Bank of Australia expects that core inflation will remain above the target range until mid-2026, due to consumer demand and rising housing prices growing faster than expected, limiting the scope for further interest rate cuts. The RBA on Tuesday kept the cash rate unchanged at 3.60% as expected, having cut rates three times this year in February, May, and August. The RBA stated in its announcement that recent data (including stronger economic growth, stubborn inflation, and a still tight labor market) indicate that the economy's potential capacity is more limited than previously anticipated. "These indicators present a complex picture of the financial environment, consistent with the assessment that policy is currently close to a neutral valuation."

In fact, the cash rate is now below the core estimates of neutral rates from some models. "The bank now expects its closely watched trimmed mean core inflation rate to accelerate to 3.2% by the end of this year, up from the current 3%, and a significant upward revision from the previously forecasted 2.6% to be maintained over the next few years. Core inflation is expected to return to the target range of 2% to 3% only by the second half of 2026, and to fall to 2.6% by the end of 2027."