RBA Stands Firm on 3.6% Cash Rate as Inflation Forges Ahead, Foresees Growth Support Despite Headwinds

Australia's central bank confronted a stubborn inflationary environment in September 2025, holding its cash rate steady at 3.6% despite unexpectedly hot Q3 CPI data that shattered conventional tightening cycle expectations. The headline inflation figure surged to 3.2% (all groups) from 2.1% in June 2025, with the trimmed mean measure jumping to 3.0%-its first increase since late 2022 according to ABS data. This inflation spike revealed a troubling dichotomy: while goods inflation spiked to 3.0% largely due to a 23.6% electricity price surge following rebate expirations, services inflation stubbornly remained elevated at 3.5%.

The RBA's decision to pause further rate hikes reflected its recognition that energy price volatility alone shouldn't dictate monetary policy, as underlying services inflation demonstrated persistent pricing power. With the central bank projecting inflation to peak at 3.7% in mid-2026, the unwinding of temporary energy rebates exposed the more concerning reality of sticky service-sector inflation that continues outpacing wage growth and threatening household purchasing power. This dual pressure pattern forced the RBA to break from traditional tightening cycles, prioritizing long-term price stability over reactive rate adjustments.

Despite stubborn inflation pressuring household budgets, a quiet engine of economic momentum is firing across the housing and trade sectors. Housing investment is proving remarkably resilient, acting as a key counterweight to broader price pressures. Construction permits are holding up better than expected, with the sector projected to drive roughly half the anticipated 2% annual GDP growth. This resilience persists even as wage growth struggles to keep pace with rising costs, squeezing consumer purchasing power. Parallel to domestic housing strength, strategic trade flows are gaining traction. China's economic engine remains surprisingly robust, with growth holding near 5% in 2025, providing steadier demand than many global forecasts anticipated. This combination of a determined housing sector and persistent Chinese demand creates a foundation for growth, even as central banks like the RBA maintain a cautious stance, projecting inflation to peak higher in the coming year before easing. Tight labor markets, with unemployment stubbornly around 4.5%, further underpin this picture by supporting underlying consumption capacity, even if it fuels some of the current inflationary tension.

Despite persistent inflation pressures and the Reserve Bank of Australia's insistence on maintaining its 3.6% cash rate through 2026, a closer look reveals strategic avenues for growth. The RBA's latest projections show headline inflation expected to breach 3% in late 2025 before stabilizing, while wage growth continues to lag behind price rises, squeezing household budgets. Yet this environment isn't devoid of opportunity. Mortgage spreads, sitting at historic lows 0.65 percentage points below pre-pandemic levels, signal a potential trough in borrowing costs even as rates hold firm. Simultaneously, businesses in key service sectors are demonstrating notable pricing power, suggesting they can navigate margin pressures better than feared. Compounding these domestic factors, China's resilient ~5% growth trajectory amid targeted stimulus appears poised to lift demand for critical minerals, offering a potent external growth lever. This confluence of factors – compressed mortgage financing costs, resilient services pricing, and China-driven commodity demand – forms the nucleus of a strategic positioning thesis that seeks sustained growth without succumbing to panic.

Australia's economic landscape is currently caught in a delicate balancing act between stubborn inflation and weakening growth momentum. The latest data shows headline CPI surging to 3.2% in Q3 2025, driven largely by a massive 23.6% jump in electricity prices, while the trimmed mean measure – a key focus for the Reserve Bank of Australia (RBA) – also rose sharply to 3.0% from June's 2.1%, its first increase since late 2022. This inflationary pressure, particularly in essential goods like energy, is directly squeezing household budgets as wage growth fails to keep pace, eroding real incomes across the board. The RBA has acknowledged these challenges, holding the cash rate steady at 3.6% in September 2025, signaling a cautious approach focused first on taming inflation before considering any easing. While the August policy statement hinted at potential rate cuts later in the year, the September holding and the projection of inflation peaking higher at 3.7% in mid-2026 suggest the central bank remains firmly on hold for now, prioritizing price stability over immediate growth stimulation. This prolonged period of high borrowing costs, combined with persistent inflation and slowing GDP growth, creates significant headwinds for businesses and consumers alike, demanding a defensive posture in portfolio positioning.