Summary:
Australia’s inflation shock in October, headline CPI rising to 3.8% and trimmed-mean inflation climbing to 3.3%, has upended the previously optimistic outlook for interest-rate cuts. Only months ago, the Reserve Bank of Australia (RBA) appeared to have engineered a “Goldilocks” scenario: moderating inflation, stable employment, rising confidence and a housing recovery supported by earlier rate cuts. But the first full monthly inflation reading from the ABS now reveals a far less comforting reality.
The economy is expanding, yet it is hitting its “speed limit” much sooner than the RBA anticipated. Spare capacity is tightening, and growth is translating into renewed price pressures. The labour market remains near historically tight levels, unemployment jumped in September but fell back to a low 4.3% in October. House prices continue to surge, raising concerns for financial regulators. But it is underlying inflation that has most alarmed policymakers: trimmed-mean inflation has been running at an annualised 3.5% over the past three months and 4% based on October alone, far above the RBA’s target.
Services inflation is particularly stubborn, rising to 3.9% amid elevated costs for rent, healthcare and travel. Deputy governor Andrew Hauser recently warned that the economy was entering a cyclical upswing with far less slack than in previous cycles, a dynamic now clearly playing out.
Given this backdrop, the RBA will not cut rates in December nor anytime soon. Whether the next move is up or down depends on where “cracks” emerge. A rate hike becomes likely if remaining spare capacity is exhausted and inflation continues to rise. A cut would require either a significant deterioration in the labour market or weakening in consumer demand and housing activity caused by the prolonged restrictiveness of current policy settings.
Until inflation convincingly returns toward 3%, the RBA has no room to ease, and the risk of higher rates in 2026 remains firmly on the table. Goldilocks, it seems, has vanished.
Figure 1: Market Expectation on Cash Rate
CASH ACCOUNT
Product Interest
Rate p.a.Notes AMP Saver Account 4.45% This is the total variable rate which applies to balances up to $500,000, made up of the standard rate and the Bonus Interest Rate (subject to eligibility). ANZ Premium 0.05% $10,000 - $249,999 ANZ Progress Saver 3.05% To earn the bonus rate, you must deposit at least $10 in one transaction and not make any withdrawals or transfers during the month.Applies to balances up to $500,000 Arab Bank Online Savings 4.35% No minimum deposit or monthly conditions to earn interest.Applies to balances up to $499,999 for the higher rate Bankwest Hero Saver 4.00% Variable Hero rate on eligible balances up to $250,000.99. CBA NetBank Saver 4.45% 4.45% p.a. for the first 5 months (includes a 2.90% p.a. fixed bonus margin above the standard variable rate of 1.55% p.a. CBA Goal Saver Account 4.25% 4.25% p.a. when you grow your balance each calendar month (excluding interest and transactions initiated by the bank) Heritage Online Saver 4.00% get a 4 month Bonus Intro Rate* available for new members on balances up to $100,000. ING Savings Accelerator 5.00% To earn the bonus rate, you must deposit at least $1,000 into a personal ING account, make 5 eligible transactions with a linked Orange Everyday account, and grow the balance each month Macquarie CMA 2.00% Interest rates vary based on account balance tiers.applies $10,000,000 and above: ME Online Savings 3.60% Bonus interest applies to balances up to $250,000. NAB iSaver 4.45% for the first 4 months (includes a 3.15% p.a. fixed bonus margin above the standard variable rate of 1.25% p.a.Available to new customers or those who haven't held a NAB iSaver in the last 12 months. NAB Reward Saver 4.15% includes a 0.10% p.a. variable base rate and a 4.00% p.a. variable bonus rate).To earn the bonus rate, you must make at least one deposit on or before the second last banking day and no withdrawals. Rabobank PremiumSaver 4.65% On balances to $250,000. Balance increased by $200 a month. RAMS Saver Account 1.40% On balances to $500,000. Minimum $200 deposit each month with no withdrawals. Suncorp Growth Saver 4.30% Earn 4.30% p.a. Growth Saver bonus interest each month you grow your net balance by $200 or more (excluding interest) and make no more than one withdrawal. ubank Save Account 5.10% All you need to do is have a Spend account and deposit $500+ per month into any Spend, Bills, or Save accounts (not including internal transfers) to get the bonus interest rate. Easy. Up Savers Account 4.30% To earn the bonus rate, you must deposit at least $200 each month and make no withdrawals. Westpac eSaver 4.25% Fixed rate for the first 5 months for new eSaver customers.