Assessing RBA Policy Path in Light of Sticking Inflation and Housing Pressures

The Reserve Bank of Australia (RBA) faces a delicate balancing act in 2025, as persistent inflation and stubborn housing market pressures challenge its ability to pivot toward easing monetary policy. With inflation remaining above the 2–3 per cent target range and housing price momentum defying cooling expectations, investors must prepare for a prolonged period of policy tightness. This environment will likely reshape equity valuations and real asset dynamics, creating both risks and opportunities for market participants.

Sticking Inflation: A Reluctant Pivot

The RBA's November 2025 Statement on Monetary Policy underscores a grim reality: inflation remains entrenched, with underlying inflation at 2.7 per cent and headline inflation at 2.1 per cent in the year to June 2025 according to the report. While headline figures are softened by temporary factors like lower fuel prices and electricity rebates, the central bank warns that annual inflation is projected to peak at 3.7 per cent by June 2026. This trajectory reflects structural bottlenecks, including tight labor markets (with unemployment at 4.5 per cent) and persistent capacity constraints in sectors like construction and services as reported.

The RBA's cautious stance is further reinforced by its revised housing market outlook. Core housing inflation has run at an annualised 4 per cent over the past six months, driven by strong demand. Despite affordability challenges and higher borrowing costs, the RBA has upgraded its housing price forecasts, citing "strong momentum" in the sector that supports household consumption and dwelling investment as the central bank notes. This suggests that policymakers view housing as a double-edged sword: a tailwind for growth but a risk to inflation stability.

Equity Market Volatility: Sectoral Divergence

Prolonged monetary tightening has already begun to reshape equity valuations. The S&P/ASX 200 Accumulation Index, for instance, fell 0.3 per cent in June 2025, with real estate, information technology, and consumer staples sectors underperforming according to analysis. Banks and rate-sensitive industries face downward pressure as higher borrowing costs erode profit margins and consumer spending. Conversely, the mining sector has shown resilience, buoyed by sustained global demand.

Utilities have also outperformed, benefiting from stable cash flows and infrastructure spending. This divergence highlights the importance of sectoral positioning in a high-rate environment. As the RBA signals a neutral policy stance with no rate cuts expected in 2026, investors must brace for continued volatility in growth-sensitive equities while capitalizing on defensive sectors.

Real Assets: A Mixed Bag of Opportunities

Real assets, particularly property and infrastructure, present a nuanced picture. While home prices have cooled due to affordability constraints, rental yields remain robust, with vacancy rates hitting historic lows. This duality has created a bifurcated real estate market: traditional sectors like construction and retail face employment declines, while build-to-rent developments and regional cities offer growth potential as highlighted.

Real estate investment trusts (REITs) have struggled, but niche operators like Summerset Group have shown resilience, driven by strong sales growth. Meanwhile, infrastructure investments-particularly in energy transition projects-are gaining traction as investors seek stable, inflation-protected returns according to market analysis. UBS Global Wealth Management Australia emphasizes that diversification across private equity, private credit, and infrastructure is critical for building resilient portfolios in a high-rate world as reported.

Strategic Implications for Investors

The RBA's hawkish tilt and the stickiness of inflation necessitate a recalibration of investment strategies. Fixed income markets, for example, offer compelling yields, with 5-year AUD investment-grade bonds trading at 4.60 per cent. These yields, combined with Australia's prudent fiscal position, make local bonds an attractive alternative to USD-dominated assets.

For equities, a defensive tilt toward sectors with pricing power-such as utilities and mining-may mitigate downside risks. In real assets, investors should prioritize infrastructure and regional real estate, leveraging government incentives for green and sustainable projects. As the RBA navigates the delicate path between growth and inflation, a diversified, long-term approach will be essential to weather the uncertainties ahead.

Conclusion

The RBA's policy path in 2025 is increasingly shaped by the twin challenges of inflation persistence and housing market resilience. With no immediate relief in sight for rate-sensitive sectors, investors must prepare for a prolonged period of tight monetary conditions. By reallocating capital toward defensive equities, high-yield fixed income, and strategically positioned real assets, market participants can navigate this environment while positioning themselves to capitalize on emerging opportunities.