RBA December Meeting Preview: Policy Runway Just Got Longer but Not Clearer

Australia heads into the final RBA meeting of 2025 with an unwelcome trio — inflation re-accelerating, growth flattening, and a labour market that refuses to cool. The message has landed with markets: the path to rate relief is now longer, more complicated, and increasingly uncertain.

Inflation Flare-Up Leaves Limited Room for Policy Comfort

The disinflation trend that defined 2023 and early 2024 has stalled. Trimmed-mean and headline CPI prints have reversed part of the year’s progress, pushing inflation back above the 2–3% band and prompting a sharper shift in the Bank’s communication.

Recent commentary frames the upside risk as more than temporary volatility:
“headline inflation was significantly stronger than expected at the time of the August Statement. The increase was driven by higher electricity prices, more volatile items (like fuel) and higher underlying inflation.”

According to the September forecasts, headline inflation is expected to reach 3.7% by mid-2026, reinforcing the case for policy settings to remain tight — if not tighter — and leaving little urgency for further easing in the near term.

Growth Is Moderating, but the RBA’s Forecast Envelope Remains Intact

Australia’s economic momentum has softened, though not unexpectedly. The September quarter delivered 0.4% quarterly and 2% annual GDP growth — slower, but still tracking inside the Bank’s forecast range.

Labour market adjustment has also been measured. The unemployment rate eased to 4.3% in October, signalling rebalancing rather than deterioration. With growth broadly intact and inflation the central risk, the Bank has room to be patient — not to move faster, but to avoid moving too soon.

Source: RBA

A Longer Policy Runway — and a Market Repricing to Match

A December hold is widely anticipated. The uncertainty now revolves around how long policy remains restrictive into 2026.

Bond markets have repriced accordingly — ten-year yields have climbed, and one-year forward swaps have moved sharply higher, reflecting reduced confidence in a swift return to pre-inflation conditions. Investors are positioning for a policy runway that may extend much further than previously hoped.

And the implications are clear and have been reflected on the markets:

• Borrowing costs may stay elevated for households and businesses
• Property and equity markets may see reduced support from rate expectations
• The broader economy may experience a slower transmission of earlier easing

Against this backdrop, the recent ASX pullback may struggle to regain momentum until clearer evidence emerges that inflation pressures are genuinely receding.

December Is a Pause — Until the Runway Clears
The RBA is almost certain to hold at its final meeting of 2025 — but beyond that, clarity remains elusive. Persistent inflation continues to justify a cautious stance, steady GDP removes urgency for action, and rising yields show markets repricing both the timing and scale of any policy normalisation.

This meeting is less about the decision and more about the signal: Australia is not yet beyond inflation, and the policy runway into 2026 remains uncertain.

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