Inflation Still Too High: Shadow Board Recommends Lifting Cash Rate to 4.85%
Australia’s inflation picture has deteriorated. The consumer price index (CPI) rose by 4.3% in the 12 months to September, up from 4.0% in August, while trimmed-mean inflation increased to 3.6% from a revised 3.5%. Both measures remain well above the Reserve Bank of Australia’s 2–3% target range. The CPI rose by 1.3% over the September quarter, while the quarterly trimmed mean increased by 1.0%. Housing and transport were major contributors to annual inflation, with petrol prices rising sharply as higher global oil prices flowed through to Australian consumers. At the same time, the unemployment rate reached 4.7% in September and consumer and business confidence weakened. The November interest rate decision therefore comes against a backdrop of persistent inflation, softer domestic activity and continued uncertainty about the economic consequences of the war in the Middle East. After last round’s overnight rate increase, the RBA Shadow Board is confidently advocating another increase: it assigns a 63% probability that raising the overnight rate 25bps, to 4.85%, is optimal.
Labour market conditions have softened, although the latest data give a mixed picture. Seasonally adjusted employment fell by 39,300 in September, with a decline of 73,700 in part-time jobs partly offset by an increase of 34,400 in full-time employment. The unemployment rate was 4.7%, while the participation rate fell by 0.2 percentage points to 66.8% and the employment-to-population ratio declined to 63.6%. The trend unemployment rate, which smooths some of the volatility in monthly estimates, remained at 4.6%. The ABS notes that changes to its labour force survey and the composition of its sample may have affected the September estimates, although it considers the data fit for use. Taken together, the figures suggest some easing in labour market pressure, but the strength of full-time employment and the volatility of the monthly series counsel against drawing firm conclusions from one release. A sustained weakening in labour demand would help contain wage and price pressures but would also increase the risk that further monetary tightening weighs more heavily on employment.
The Australian dollar bought around US$0.71 on 29 October, with the trade-weighted index at 65.4. Government bond yields remain elevated, although longer-term yields have eased during October. On 29 October, the 10-year Australian government bond yield was approximately 5.18%, while the two-year yield was around 4.95%. The yield curve was therefore upward sloping between these maturities, with a spread of roughly 23 basis points. The spread is relatively narrow and does not, by itself, provide a clear indication of the future path of monetary policy: longer-term yields also reflect inflation expectations and the compensation investors require for holding longer-dated bonds. Australian equity prices have recovered some ground, with the S&P/ASX 200 closing at approximately 8,892 on 29 October. Financial markets remain sensitive to changes in the inflation outlook, geopolitical developments and expectations about interest rates at home and abroad.
Consumer sentiment has weakened further as households confront higher interest rates and fuel prices. The Westpac–Melbourne Institute Consumer Sentiment Index fell by 4.7% to 80.4 in October, from 84.4 in September, leaving pessimists substantially outnumbering optimists. The index measuring family finances compared with a year earlier fell by 8.0% to 66.9, while expectations for family finances over the next 12 months declined by 6.4% to 88.4. More than 80% of consumers surveyed expected mortgage rates to rise over the following year. Actual spending has been more resilient than sentiment, although it has also lost momentum: the ABS Monthly Household Spending Indicator was unchanged in August in seasonally adjusted, current-price terms, following a rise of 1.1% in July. Spending was 6.8% higher than a year earlier, a nominal increase that also reflects higher prices. Persistently weak confidence and pressure on household budgets could weigh on consumption in coming months, particularly if employment conditions deteriorate.
Business surveys also point to weak confidence alongside continuing cost pressures. The NAB Monthly Business Survey’s confidence index fell by four points to −13 in September, its third consecutive monthly decline, while the business conditions index remained at −1. Capacity utilisation eased to 82.3% but remained above its long-run average, suggesting that some firms still face constraints despite softer conditions. NAB reports that purchase-cost growth remains elevated and continues to exceed growth in final product prices, raising the possibility of further cost increases being passed on to consumers. More timely survey data suggest that activity may have weakened further: the preliminary S&P Global composite purchasing managers’ index fell to 47.7 in October from 51.3 in September, below the 50 threshold that separates expansion from contraction. The combination of weak confidence and activity, elevated capacity utilisation and high input costs presents a difficult picture for monetary policy. It suggests that inflation pressures have not yet dissipated, even as parts of the business sector face softer demand.
The global economy has proved remarkably resilient, but the outlook remains clouded by war, elevated energy prices and financial uncertainty. In its October World Economic Outlook, the IMF projects global growth of 3.1% in 2026, followed by 3.4% in 2027. It expects global headline inflation to rise to 4.7% in 2026 before easing to 4.1% in 2027, and judges that risks to growth are tilted to the downside. The Fund’s projections draw on information available through 1 October. The more recent October outlook from S&P Global also points to resilient activity but warns that commodity price pressures are broadening and that higher sovereign yields are tightening financial conditions. It expects Brent crude to average a little over US$100 per barrel in the final quarter of 2026. The continuing conflict in the Middle East and disruption to energy supplies remain central risks; the war in Ukraine also leaves energy infrastructure and supplies exposed to further shocks.
For Australia, higher oil prices are already evident in petrol prices and could add to inflation through transport, freight and other business costs. Some of the direct effect on inflation would eventually pass if energy prices stabilised, but a longer disruption would increase the risk that higher costs spread more broadly to wages and final prices. At the same time, expensive energy and tighter global financial conditions could weaken growth among Australia’s trading partners and reduce demand for Australian exports. The OECD notes that central banks can look through supply-driven increases in energy and food prices when inflation expectations remain well anchored, but that a broader rise in price pressures may require a policy response. For the RBA, the challenge is to contain persistent inflation without overlooking the effect of the same external shock on household spending, business activity and employment.
Following last round’s rate increase, the Shadow Board is again strongly advocating a rate hike: it assigns a 69% probability that raising the overnight rate above 4.60% is optimal, a 4% probability that reducing the overnight rate to 4.35% or below is appropriate, and a 27% probability that keeping the rate unchanged at 4.60% is called for. Accordingly, the mode recommendation (63% probability) is for a rate increase of 25bps to 4.85%.
Six months out, the Board attaches a 65% probability that the current cash rate should be higher than the current setting of 4.60%, a 19% probability that the cash rate should be lower, and a 16% probability that the current rate is optimal. Once again, the mode is for the overnight right to be higher by 25bps. At the 12-month horizon, probabilities are 18% for a rate hold (at 4.60%), 41% for a lower interest rate, and 41% for a higher rate. Three years out, the Board attaches a 77% probability of a lower rate being optimal, 8% to the current setting, and 14% to a higher rate.
The distribution for the current recommendation narrowed, from 4.10%–5.35%. For the 6-month horizon, the distribution merely shifted up by 25bps, ranging from 1.60%–5.60%. The distributions for the 12-month and 3-year horizons, narrowed by 25bps, ranging from 1.10%–6.10% in both cases.
