A chilling warning has been issued to Australians, highlighting a potential economic nightmare that could unfold if the Reserve Bank of Australia (RBA) takes an unexpected turn and slashes interest rates on Tuesday.
The money markets are predicting a 93% chance that the RBA will maintain the status quo at its upcoming meeting, given the recent data from the Australian Bureau of Statistics (ABS) showing inflation surging from 2.1% in June to a concerning 3.2% in September. This inflation spike is largely attributed to skyrocketing electricity prices as government subsidies were phased out.
The trimmed mean inflation, which represents the core 70% of price changes that the RBA considers when making interest rate decisions, has climbed to 3%, reaching the upper limit of the central bank's target band of 2-3%.
Warren Hogan, Managing Director of EQ Economics, warns that cutting the cash rate now would exacerbate inflation and pose significant risks to the Australian economy. He asserts, "To cut from here is a real problem, and they're not going to do that. If the RBA goes down this path, it will end in tears."
The odds of a rate cut in 2026 have also diminished since the release of the September quarter inflation data. Money markets now estimate a 41% chance of a cut in February, with the likelihood not surpassing 50% until August, when it reaches a 61.3% chance.
Hogan suggests that the RBA could dash expectations of near-term rate cuts on Tuesday and hints at the possibility of an upcoming rate hike. He explains, "The RBA's message tomorrow is crucial. If it's as strong as I anticipate, it will eliminate all those rate cut expectations because the signal will be that the next move in rates could well be an increase. That's the reality people need to grapple with."
Following the ABS's revelation of the inflation spike, some major banks have revised their cash rate forecasts. None of the major banks are predicting a cut this year, with the Commonwealth Bank of Australia and Westpac both adjusting their stances. ANZ anticipates one more cut this cycle at the RBA's February meeting, while NAB expects a cut in May. CommBank does not foresee further cuts this cycle, and Westpac is reassessing its forecast.
The cash rate, currently at 3.6%, was reduced by 0.25% on three occasions from the start of 2025. This followed a period of 14 months, up to February, when the RBA held the rate at 4.35% to curb post-pandemic inflation.
Richard Yetsenga, ANZ's Chief Economist, emphasizes the difficulty in predicting the exact timing of further cuts, given that Australia is in a "mid-cycle slowdown." He explains, "It's not a recession, nor is it a boom. In mid-cycle slowdowns, interest rates are in tricky territory. We haven't experienced aggressive easing sequences in Australia, with big 50-point cuts. The Reserve Bank has been delivering easing measures as needed, based on accumulating evidence."
This situation underscores the delicate balance the RBA must strike to navigate the economy through this challenging phase.
