October’s hotter-than-expected inflationary pressures have shifted the outlook, prompting some economists to argue that rate cuts are off the table this year, and that borrowing costs might even climb in 2026.
"I am pretty comfortable telling you that I think the rate cut cycle is over and that maybe what we should start to watch for is, and start to possibly plan for, the possibility that rates go up next year," Sally Auld, chief economist at National Australia Bank (NAB), said during a webinar attended by Australian Broker. "That's not in our forecast at the moment. But as you can see, there are a few things that are starting to flash orange."
The warning signs include a pickup in consumer spending that has widened profit margins. That’s good for businesses, but it also heightens the risk of renewed inflation.
"What's happening at the moment is that because consumer spending is picking up, businesses feel that they can more easily pass on cost increases," Hobart-based economist Saul Eslake told Australian Broker. "Consumers are clearly spending more after two years of really pulling their belts in, because real wages are now rising, people got tax cuts and there has been some interest rate relief. And surprisingly, consumer confidence rose very strongly in November, even though there was no rate cut."
In September Reserve Bank of Australia (RBA) Governor Michele Bullock warned that increased consumer spending could stall further interest rate reductions, since the spillover effects risk pushing inflation higher.
The RBA has slashed the official cash rate (OCR) three times so far in 2025, most recently in August. But the bank opted to hold interest rates at 3.6% during both its September and November meetings, driven by rising inflationary pressures.
Data from September's quarterly consumer price index (CPI) revealed that both headline CPI and annual trimmed mean inflationary rates were trending upwards. Headline CPI rose 3.2% in the year leading up to September, up from 2.1% in the prior quarter, year-over-year. At the same time, the trimmed mean annual inflation grew to 3% in the most recent quarter, up from 2.7% during the June print.
Both figures were outside the RBA's target inflation range, which the central bank said it needed to achieve in order to continue easing interest rates.
October's monthly CPI didn't offer much relief. Headline CPI rose 3.8% in the 12 months leading up to October, up from 3.6% in September. Trimmed mean monthly inflation was 3.3% during the same time period, up from 3.2% the month before.
But some economists, including Eslake, remain skeptical of rate hikes.
"I wouldn't say that the probability of [rate increases] is zero, but I think it is still very low," he said. "I think the issue is more, will the Reserve Bank cut rates again? And that's looking diminishingly less likely."
Eslake added that the central bank is likely questioning whether the recent jump in inflation signals more to come.
"If the rise in inflation over the past few months represents the beginning of a new upward cycle in inflation, then probably the right thing for any central bank to do would be to start raising rates again," he said. "But I think you would need a lot more evidence to support that claim than what is available at the moment.
Luke Yeaman, chief economist at Commonwealth Bank (CBA), added that rising inflation and September's unexpected rise in unemployment creates a "far more complicated" picture for the RBA to interpret.
"Near-term inflationary pressures around housing and market services, combined with a general lack of spare capacity in the economy, will prevent any further rate cuts," Yeaman said. "At the same time, given we don’t expect growth to rise above potential, we don’t expect inflation to lift further, avoiding the need for rate hikes. As a result, we are forecasting steady interest rates through 2026."
