Is the Reserve Bank of Australia policy shift imminent? Inflation data disrupts interest rate cut expectations

The RBA’s easing cycle is likely coming to an end. Australia’s November inflation data unexpectedly rose, with an annual rate of 3.8%, exceeding market expectations of 3.6%. This data directly impacted market bets on subsequent rate cuts.

Inflationary pressures remain unrelieved, rate cuts are unlikely for now

Citi Macro’s latest analysis indicates that recent Australian price data send a clear signal — there are no signs of easing inflation. Due to persistent capacity pressures, the likelihood of rate cuts being on the central bank’s agenda in the short term is minimal.

The market generally expects the RBA to keep rates at 3.60% at the December 9 policy meeting. More importantly, if upcoming GDP data also reflect tight capacity, the end of the easing cycle will be almost certain.

Rate hike expectations emerge, policy may reverse next year

Opinions on the interest rate trajectory for 2026 are diverging among major institutions. UBS analyst Stephen Wu offers a more aggressive view — rising inflation is concerning, and the consumer price index is expected to remain above the RBA’s target range, implying that the central bank will face rate hike pressures in the last three months of 2026.

Barrenjoey Chief Economist Jo Masters agrees, although the threshold for rate hikes is very high, the possibility of the RBA raising rates next year cannot be ignored. She emphasizes that the final stage of tackling inflation may require more tightening monetary policy tools, and by 2026, there is no clear path to rate cuts.

Australian dollar against USD climbs, exchange rate rebound becomes focus

Market movements have responded first. On November 26, AUD/USD rose 0.6% to 0.6505, marking the fourth consecutive day of gains. Francesco Pesole, an analyst at ING, states that the Australian dollar is expected to be among the best performers in the G-10 currencies by 2026.

In his forecast, the RBA is expected to make only one more rate cut, which will position the AUD with the most competitive interest rate level among G-10 currencies by Q2 2026. Pesole adds that, especially considering improved trade relations and positive economic growth prospects, Australia’s transition is gradually taking shape.

Positive US economic data further supports the AUD’s upward momentum, with the December Fed rate cut expectations rising, directly impacting the USD. In contrast, the reality of the end of the RBA easing cycle makes Australian assets more attractive in terms of relative yields, which is the fundamental driver behind the AUD’s continued appreciation.