The Reserve Bank of Australia’s decision to keep the official cash rate steady at 3.60% in September came as no surprise. However, stronger-than-expected consumer price index (CPI) figures for August have complicated the outlook, particularly for the central bank’s November meeting where a rate cut had previously been viewed as almost guaranteed. While Australia’s economy is showing signs of improvement, ongoing trade disputes and geopolitical risks remain a cloud over the broader picture. 

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RBA Keeps Rates on Hold 

As widely anticipated, the RBA left the cash rate unchanged at 3.60% following its September Board meeting. 

Back in July, the central bank surprised markets by opting against a rate cut, despite signs of moderating inflation. At the time, the RBA signalled it was waiting on the more comprehensive quarterly underlying inflation data to validate the start of an easing cycle. It’s likely this remains the case now, with September quarter underlying inflation figures due in late October. The next RBA decision is scheduled for 4 November 2025. 

CPI Inflation Reaches 13-Month High 

CPI inflation climbed 2.8% over the year to July and 3.0% over the year to August, exceeding market expectations of 2.9% and marking the highest annual reading since July 2024. The increase was largely driven by household energy costs, as government rebates rolled off. 

Although these monthly readings are unlikely to have shaped the September decision – given the RBA’s stronger emphasis on underlying inflation – they have prompted at least one of the big four banks to revise its interest rate forecasts. 

When Could the Next Rate Cut Come? 

Forecasts remain fluid, and market expectations are shifting quickly. NAB, which had previously tipped a 25 basis point cut in November followed by another in February 2026, now anticipates the cash rate will be held steady until May 2026. 

Meanwhile, Commonwealth Bank, Westpac and ANZ continue to hold their November rate-cut forecasts. CBA expects a single 25 basis point reduction, while ANZ believes a cut is “more likely than not.” Westpac projects three cuts – one in November and further moves in February and May 2026. 

Underlying Inflation the Key Driver 

Much of the divergence in forecasts comes down to underlying inflation, which has gradually eased over the past four quarters. Economists expect it to continue trending lower, to 2.5% in the September quarter, from 2.7% previously. 

Should this moderation continue, it would provide the RBA with the green light to begin easing in November. However, with July and August CPI running hotter than expected, there’s still a chance the quarterly print comes in above forecast. 

Housing Market Momentum Builds 

Housing values continue to climb, supported by stronger borrowing capacity, rising wages and low levels of advertised stock. The CoreLogic Home Value Index gained 0.9% in September, following an 0.8% increase in August – the fastest monthly growth since late 2023. 

Perth (1.6%) and Brisbane (1.1%) led the way, while Adelaide (0.9%), Sydney (0.8%) and Melbourne (0.5%) all posted solid gains. 

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Building Approvals Show Volatility 

Despite strong approvals in June, momentum weakened in July (-8.2%) and August (-6.0%). On an annual basis, approvals rose 3.0% year-on-year in August, though this was down from 6.6% the previous month. High material costs, labour shortages and subdued developer sentiment continue to weigh on the sector. 

Broader Economy Remains Resilient 

Australia’s GDP expanded 0.6% in the June quarter, marking the 15th consecutive quarter of growth and the strongest result since December 2022. Annual growth accelerated to 1.8% – above market forecasts of 1.6% and up from 1.4% in March. 

This compares favourably to the broader IMF advanced economies average, and growth is expected to strengthen further into 2026. The labour market also remains steady, with unemployment at 4.2% and employment growth running at 2.0% annually. 

Global Risks Persist 

Despite solid domestic conditions, Australia remains exposed to external risks. The S&P Global Australia Manufacturing PMI dipped to 51.4 in September, down from 53 in August, reflecting weaker export demand and new orders amid US tariffs. 

In the US, the Federal Reserve cut rates by 25 basis points in September, bringing the target range to 4.00%–4.25%. While further easing is expected, the timing remains uncertain. NAB forecasts the Australian dollar will end 2025 between US$0.65 and US$0.70 before strengthening into 2026. 

China’s slowdown also remains a key concern. While June quarter GDP growth of 1.1% was stronger than expected, it still underscored weaker long-term momentum. Commodity markets, particularly iron ore, remain volatile, though prices have stabilised somewhat in recent months. 

Looking Ahead 

Australia’s economy continues to grow steadily, even as global uncertainties persist. The RBA’s upcoming November decision will be pivotal, with the path of underlying inflation likely to determine the start of an easing cycle. But let’s jot forget there is much more to interest rates than purely focusing on the RBA. The government needs to consider its impact too. Housing starts are still ridiculously low, which puts upwards pressure on house prices. Productivity – over the past couple of years, most new jobs created are government, not private sector. This creates artificial inflation of sorts. These things need to be kept in check. And these policies are out of the RBAs control.  

At Broker.com.au, we continue to monitor economic conditions closely, providing businesses and property borrowers with the insights and finance solutions they need to navigate an evolving market environment. 

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