As was widely expected the RBA left the cash rate on hold at 3.60%. All economists in the Bloomberg survey predicted an unchanged cash rate and markets were pricing in no change.

Leading into this meeting we have been flagging that a cyclical upswing is now underway in the Australian economy, led by the consumer. As result we expected only one final rate cut by the RBA in November this year. Last week’s stronger than expected August CPI added further tension to the data flow.

Financial markets have been steadily unwinding their expectations for more rate cuts over recent weeks in response to the incoming data. As a reminder at the time of the August rate cut, markets saw the terminal cash rate at ~2.9%. Prior to the meeting today and post the August CPI it had risen to ~3.25%, closer to our terminal rate of 3.35%.

With a hold widely expected the focus at today’s meeting was always going to be on the accompanying statement. It read a little more hawkish than we expected, with this continuing into Governor Bullock’s press conference.

The first heading in the statement was “the decline in underlying inflation has slowed”. As we flagged, the August monthly CPI saw underlying components of inflation come in stronger than expected. The RBA seem to have interpreted the data similarly.

We flagged in the August CPI note risks to our 0.7% trimmed mean forecast for Q3 2025. We now crystallise these risks and upgrade our forecast to 0.8%/qtr. This would see the annual rate of trimmed‑mean inflation remain steady at 2.7% in the quarter. As a reminder, the Q2 trimmed mean printed at 0.6%/qtr and 2.7%/yr. Market services inflation was particularly strong in the August data. We now forecast the RBA’s preferred measure of market services inflation to print at ~1.1%/qtr and 3.0%/yr in Q3.

This upgrade to our near‑term forecast, together with the shift in tone from the RBA yesterday, mean we push out the next rate cut to February 2026. With a lift in trimmed mean inflation for the quarter and better activity data, led by the consumer and a still resilient labour market, we feel there are enough reasons to see the RBA remain on hold in the two remaining meetings in 2025.

Given the cautious and gradual easing cycle so far, we expect the RBA will want to wait and see evidence that inflation continues to head towards the mid‑point of the target band before easing further. By February the Q4 CPI print will be available, as will further evidence of how the economy has responded to the three rate cuts to date.

One last rate cut is not guaranteed though and the risks are building of a longer period with rates on hold. The Governor noted in the press conference that the RBA has to aim for inflation at 2.5%. It won’t be enough for inflation to sit above this target over the forecast horizon.

Looking beyond the Q3 CPI outcome, we still see inflation easing towards the middle of the target band. Wages growth is moderating, and we are still of the view that with the economy recovering to trend at ~2¼%, the unemployment rate remaining around full employment at ~ 4¼% and inflation looking at settling at 2.5% at the end of 2026 that the cash rate should be returned to around neutral levels, closer to 3¼% than its current rate of 3.60%.

If evidence builds that inflation will sit above the mid‑point, and businesses are able to pass on higher costs given an improved demand outlook, the cash rate may end up settling at slightly restrictive levels.

The press conference also highlighted the RBA is watching inflation developments offshore. The Governor highlighted sticky services inflation offshore and this could be giving the Board food for thought.

Overall though the press conference highlighted how uncertain the RBA is of the outlook. Monthly CPI data has proved to be volatile this year and there is risk of interpolating this to the quarter outcome. But as the Governor flagged, there is enough information in the first two months of the quarter to be confident inflation firmed in the quarter. And the economy has certainly improved more and faster than the RBA expected.

The November Board meeting will also see a forecast refresh. Forecasts will need to change given the data flow since August. We would expect GDP growth to be revised higher given Q2 actuals, inflation will need to shift. One caveat of course is the change in market pricing. As we noted earlier, markets have removed close to 30bp of easing since the last forecast update. This could minimise some of the surgery that may be needed to the forecasts, particularly on the inflation side. Markets are currently seeing a 40% chance of a rate cut in November.

The decision to leave the cash rate was unanimous today. This was unlike the July on hold decision with a 6‑3 split ahead of the August rate cut. As a reminder the Governor noted in the July press conference it was about timing and not direction for the cash rate. That was not repeated today and indicates the uncertainty of the outlook, the data dependent nature of the RBA from here and as you get closer to the end of the cash rate, fine tuning is challenging.

IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS

This content is prepared, approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the Bank) and a Market Participant of ASX Limited and Cboe Australia Pty Limited.  All information contained herein is provided on a factual or general advice basis and is not intended to be construed as an offer, solicitation or investment recommendation in any way.  It has been prepared without taking into account your individual objectives, financial situation or needs. Past performance is not a reliable indicator of future performance.  CommSec, the Bank, our employees and agents may receive a commission and / or fees from transactions and / or deal on their own account in any securities referred to in this communication and may make investment decisions that are inconsistent with the recommendations or views expressed within this communication.  Any comments, suggestions or views presented herein may differ from those expressed elsewhere by CommSec and / or the Bank. The content may not be used, distributed or reproduced without prior consent and any unauthorised use of the content may breach copyright provisions.  CommSec does not give any representation or warranty as to the accuracy, reliability or completeness of any content including any third party sourced data, nor does it accept liability for any errors or omissions.  CommSec is not liable for any losses or damages arising out of the use of information contained in this communication. This communication is not intended to be distributed outside of Australia.