The Melbourne Cup was the race that stopped the nation on Tuesday 4 November 2025, but the safest bet on the day was that the Reserve Bank of Australia would hold the cash rate at 3.60%. In betting terms, the odds that the cash rate would remain unchanged at the RBA’s November meeting shortened dramatically after the release of inflation data that came in above forecasts.
This raises the question, does rising inflation bring an end to the RBA’s current interest rate easing cycle?
Inflation surprise sets up an RBA decision that wasn’t surprising at all
Australia’s monthly consumer price index indicator rose to 3.5% across the year to 30 September 2025, up from 3.0% in August and higher than the 3.1% forecast. Driven by rising housing and transport costs, this marked the highest CPI figure since July 2024.
Given back-to-back months of the CPI Indicator increasing above expectations, it was not a shock that Australia’s underlying inflation for the September 2025 quarter also exceeded market expectations. Underlying inflation for the 12 months to 30 September was 3.0%, above the 2.7% forecast and the 2.7% reported in the prior quarter. This marks the first time that underlying inflation has increased on the prior quarter since December 2022.
These inflation figures were surprising to most and paved the way for a decision that was not surprising at all – the RBA leaving the cash rate unchanged at 3.60% off the back of their 4 November 2025 Board meeting.
When our economic update from just over a month ago was published, three of the big four banks were sticking with their tip of a 25 basis point cut in November. At the time, NAB was the lone member of the ‘big four’ to have revised their forecast, anticipating there would be no cut to the cash rate until May 2026. This is where their prediction remains, albeit noting a cut may occur sooner.
In the four weeks that followed, each of the big four banks, broadly, moved onto the same page, tipping that any further easing in the current cycle would not occur in 2025, if at all.
Westpac tips two further cuts in this cycle, occurring in May and August 2026. ANZ believes the RBA will act sooner, with one final cut in this easing cycle to occur in February 2026 at the earliest. Commonwealth Bank initially shared the view that ANZ currently holds, but has since revised its forecast from a February 2026 rate cut to now anticipating no additional cuts in this cycle.
What conditions would lead to further easing?
The predictions of the big four banks have not been this varied since the commencement of the current easing cycle. So, what would it take for the RBA to cut rates further?
Firstly, inflation would need to moderate, with both the CPI Indicator needing to return to the RBA’s target band of 2% to 3% and underlying inflation also trending downward.
The CPI Indicator is expected to moderate over the remainder of 2025, with a 2.5% forecast across the year to December 2025. This would place CPI inflation in the middle of the RBA’s target range, but it is worth noting that the previous two readings have come in higher than anticipated.
Underlying inflation is forecast to follow a similar trajectory, with the September 2025 quarter’s unexpected increase being treated as an isolated event. Trading Economics’ December 2025 quarter forecast is for underlying inflation to sit at 2.3% to round out the year.
However, the RBA’s forecast varies. While the RBA notes that some of the increase in underlying inflation in the September quarter was a result of temporary factors, the Board has underlying inflation rising above 3.0% in coming quarters. This modelling also relies on a technical assumption of one or more rate cuts in 2026.
Secondly, if inflation were to continue to sit at levels uncomfortable to the RBA, Australia’s unemployment rate would also likely need to rise significantly to facilitate further monetary policy easing. A rate cut in this situation would act to stimulate investment and consumption, thereby leading to job creation.
Australia’s unemployment rate increased to 4.5% in September from 4.3% in August 2025. Like both inflationary figures, the unemployment rate came in above expectations. It marks the highest jobless rate since November 2021 and the highest number of unemployed people since October 2021.
Unemployment is expected to decrease over coming months to finish the year at 4.2%, meaning it’s unlikely this indicator in isolation will force the RBA into reducing the cash rate in the foreseeable future.
Ultimately, should inflation forecasts prove correct, it is more likely than not that the easing cycle will continue in 2026, with at least one further cash rate cut. However, as recent data has indicated, inflation forecasts, like form guides, are far from perfect predictors.
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