RBA interest rates: Reserve Bank may have underestimated Australia’s recovery

Australia’s economy is running hotter than the Reserve Bank expected in a sign that there’s no urgency to cut interest rates.

The RBA admitted on Tuesday that it may have underestimated improving consumer spending, the resilient jobs market, and the difficulty of landing a death blow on inflation.

The central bank’s board kept the official interest rate steady at 3.6 per cent at their meeting two weeks ago; and a fourth cut may be delayed or ditched depending on data.

It followed figures showing price pressure remains in building and services, with core inflation — which strips out volatility — of 2.6 per cent in the year to August.

Governor Michele Bullock’s board has not yet hit the panic button but minutes from the latest meeting suggest there’s concern that the cost of living fight may not be over as the economy bounces back.

The minutes showed the board was aware that staff forecasts may be “incorrect” about the balance between spending and production.

A stable jobs market and hot inflation would mean the economy does not need support from another interest rate cut — and the RBA will wait to see the effect of three earlier moves.

Citigroup national chief Mark Woodruff told Bloomberg he was “optimistic” about Australia’s economy and there may not be need for another rate cut in this cycle.

“I think people may have underestimated how much impact three rate cuts might have had and since then we’ve seen some winding back of the expectations” of further easing,” he said.

Also on the RBA’s radar was international evidence that services inflation was staying elevated and good news that spending was bouncing back more strongly than forecast.

“Growth in household consumption in the June quarter had been stronger than expected,” the minutes said.

The boost may be temporary but the RBA was optimistic that spending was up over a wide range of categories and would persist.

Disposable income is also up — now higher per capita than before Covid — thanks partly to wage growth and Stage 3 tax cuts.

That left the RBA trying to reel in hopes for further mortgage relief after signalling in August that further moves were likely.

The RBA’s next move, on Melbourne Cup day, will be guided by inflation figures due later this month.

Both Commonwealth Bank and ANZ on Tuesday tipped that borrowers would be waiting until February for relief.

“We expect a cautious and data dependent RBA to continue for the rest of 2025 with no change to the cash rate,” CBA’s Belinda Allen said.

“The risks are building that further rate cuts are not needed for the Australian economy.

“The NAB business survey today points towards an economy around trend already and the full force of the three rate cuts to date are not yet felt.”

That survey, released on Tuesday, showed business confidence was improving and cost pressures remained in the economy.

Most businesses were producing at close to their capacity, adding to the chances the economy was stronger than previously thought.