The Reserve Bank of Australia (RBA) has once again held its cash rate steady at 4.35%, marking the ninth consecutive pause in its tightening cycle. This decision comes amid persistent inflationary pressures and slowing economic growth.

The market widely anticipated the rate hold, with the last hike occurring in November last year. That increase was the 13th since the RBA began its tightening phase in May 2022. While trimmed mean inflation has eased from over 5% year-on-year to 3.5%, it remains above the central bank’s target range of 2–3%, reflecting the challenges of managing a cooling economy.

Economic productivity has been a key concern. Data from the third quarter reveals declining output per worker and a sharp rise in unit labor costs, up 4.3% year-on-year. These factors, economists agree, are exacerbating inflationary pressures.

Paul Bloxham, chief economist at HSBC, attributes the persistence of inflation to a combination of cautious rate hikes aimed at preserving employment, expansionary fiscal policies, and supply-side struggles. “Our central case is that rate cuts will begin in Q2 2025, but we foresee only a shallow easing phase. The cash rate could fall to 3.85% by the end of 2025 and 3.60% in early 2026,” Bloxham said, adding that there remains a 25% chance that no cuts will occur in 2025.

Adding complexity to the RBA’s outlook is the unexpectedly robust labor market. Despite GDP growth slowing to an annual rate of just 0.8%—its weakest outside of the pandemic in decades—Australia’s unemployment rate remains at a low 4.1%. This resilience has surprised many, including CBA economist Gareth Aird, who noted that the labor market’s strength continues to sustain inflationary pressures.

“We anticipated a rise in joblessness given seven consecutive quarters of economic contraction on a per-capita basis, but the labor market remains a key source of inflation,” Aird said. He described the RBA’s rate hold as a straightforward decision and highlighted that GDP growth in the September quarter underperformed the central bank’s expectations.

Looking ahead, the CBA forecasts the RBA will begin cutting rates as early as February. However, other analysts expect cuts to be delayed until May, reflecting differing views on how quickly inflation and economic conditions might stabilize.

Rick Maggi CFP, Financial Advisor (Perth), Rick Maggi