RBA Will Move to the Sidelines Amid Rising Economic Complexities—Analysis

By James Glynn

SYDNEY--The policy-setting board of the Reserve Bank of Australia faces a troubling set of economic data this week, including surging inflation, rising unemployment and the fastest pace of house price growth in two years.

The increasingly complex outlook is almost certain to result in a decision on Tuesday to leave the official cash rate unchanged at 3.60%. The central bank is expected to signal that it won't revisit the prospect of further rate cuts until next year.

Inflation data for the third quarter, released last week, effectively removed any market expectations of an additional rate cut at this week's policy meeting. Some economists have ruled out further cuts altogether, with a few now pointing to a rising probability that the next move in interest rates could be upward.

Inflationary pressures remain broad-based, and some analysts argue they have been artificially restrained in recent quarters by government rebates aimed at offsetting soaring electricity prices.

Most concerning is that core inflation has returned to the top of the RBA's 2% to 3% target band--a development likely to unsettle a central bank that has been notably cautious about cutting interest rates so far.

Adding to the unease, home price growth accelerated in October at its fastest pace in over two years, with national dwelling values rising 1.1% over the month. It was the strongest monthly gain since June 2023 and pushed annual growth to 6.1%.

The upturn in housing prices has gathered momentum since the first interest rate cut in February, according to property research group Cotality.

RBA Governor Michele Bullock had emphasized that the central bank doesn't target asset prices or explicitly consider them in policy deliberations. Still, deteriorating housing affordability is already a major political issue--one that will inevitably influence discussions around monetary policy behind closed doors.

Government efforts to expand the housing deposit guarantee scheme for first-home buyers have further intensified competition in the market, pumping up capital city home values.

The combination of persistent inflation and surging house prices argues strongly for the RBA to stay on the sidelines for an extended period.

However, a recent sharp rise in the unemployment rate complicates the picture. Still, evidence of a modest recovery in the economy this year, should mean the labor market's weakness will likely be seen as a secondary issue for now.

The current unemployment rate of 4.5% is not alarming on its face. It remains a solid figure for an economy that weathered the pandemic and the steepest jump in living costs in four decades.

However, if joblessness edges toward 5.0%, fueled by disruptions in global trade--particularly those affecting China, Australia's largest trading partner--the RBA could soon find itself in a bind.

So far, 2025 has been a period of relative economic sunshine for the RBA, which has welcomed the combination of lower inflation, recovering economic growth and low unemployment.

But there are whitecaps on the horizon, suggesting rougher seas ahead.

To be sure, RBA has navigated through worse storms in recent years and managed to stay on course. It's just a trickier time ahead, and the leadership of the central bank knows it is coming.

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

November 02, 2025 21:11 ET (02:11 GMT)