Introduction to Interest Rates
The central bank will begin two days of talks on Monday in its final board meeting of the year, after which the official cash rate is expected to remain at 3.6 per cent. This decision comes after a series of rate cuts earlier in the year, which brought relief to borrowers.
Background on Rate Cuts
The Reserve Bank started 2025 with a rate cut, followed by two further easings. These cuts were intended to provide cost-of-living relief for borrowers during the year. However, an uptick in the consumer price index has reduced the likelihood of another interest rate reduction.
Impact of Inflation
A hot inflation reading in October has led economists to believe that the RBA’s current policy easing is now over after three rate cuts. The latest data showed annual inflation rising to 3.8 per cent from 3.6 per cent a month prior, well above the Reserve Bank’s target band of between two and three per cent. Trimmed mean inflation, which removes volatile price movements and is the central bank’s preferred measure, was at 3.3 per cent in the 12 months to October.
Causes of Inflation Spike
A rise in house prices and the end of state rebates for power prices have been blamed for the spike in inflation. This increase in prices has led to a shift in the distribution of risks to the monetary policy outlook, with some economists anticipating a more hawkish tone in the accompanying statement and press conference.
Future Predictions
Despite the current decision to keep rates on hold, some economists are still optimistic about another cut to the cash rate in 2026. Westpac economists are tipping rate reductions in May and August if inflation eases. Labour force figures for November will be released on Thursday, and CommSec economists have tipped the unemployment rate of 4.3 per cent will remain steady, with the Australian economy set to add about 25,000 jobs for the month.
Global Market Trends
US shares eked out minor gains on Friday as the release of delayed data buoyed expectations of an imminent interest rate cut by the Federal Reserve. The Dow Jones Industrial Average rose 104.05 points, or 0.22 per cent, to 47,954.99, while the S&P 500 gained 13.28 points, or 0.19 per cent, to 6,870.40. Australian share futures fell slightly, down 13 points or 0.15 per cent to 8620.
Local Market Performance
Local stocks scraped to a second straight week of gains as the S&P/ASX200 edged 16.2 points higher on Friday to 8,634.6, a daily increase of 0.19 per cent. The broader All Ordinaries crept up 19.4 points, or 0.22 per cent, to 8,926.1.
Conclusion
In conclusion, the Reserve Bank’s decision to keep the official cash rate at 3.6 per cent is expected, given the current inflation rate. While some economists are optimistic about future rate cuts, others anticipate a more hawkish tone from the central bank. As the global and local markets continue to evolve, it is essential to keep a close eye on interest rates and their impact on the economy.
