Interest rate cuts? Don't hold your breath until 2026

The Reserve Bank today held the official cash rate steady at 3.60 per cent, a predictable decision following its 25 basis-point cut at the August meeting, the third such reduction in 2025.

In doing so, the Bank signalled a cautious approach, with Governor Michele Bullock noting that the information received since August "has not materially altered the outlook, the key judgments or the risks that the Board sees."

The decision was widely expected.

Over the past month, the flow of data has not pointed to any urgency to adjust monetary policy further.

If anything, stronger-than-expected growth and consumption have reduced the likelihood of additional cuts in 2025.

This has led markets to pare back expectations for further easing, which until recently had included a possible November rate reduction.

I had previously expected the RBA to deliver another cut before the end of this year, followed by one more in February 2026. As things stand, the chances of a 2025 move now look slim.

The earliest opportunity for a cut may well be February next year, and even then I anticipate just one 25 basis-point reduction before a prolonged pause.

The economic backdrop helps explain why the RBA is prepared to sit tight.

Economic growth and household consumption were both stronger than recent forecasts made by the Reserve Bank. Even per capita economic growth and productivity growth which have both recorded slumps over the past three years recorded growth over the quarter and year.

Household spending continues to lift, building approvals are trending higher despite month-to-month volatility and the unemployment rate remains low with job creation slowing over the month but persisting over the past year.

The housing market is also heating up with value growth accelerating and auction clearance rates recently reaching highs we haven't seen in four years.

At the same time as demand is increasing the overall volume of stock for sale remains quite low.

BresicWhitney CEO Thomas McGlynn said:"The RBA's decision to keep rates on hold doesn't come as a shock, and we should not be holding out for additional cuts over 2025, given upside surprises in inflation.

"What we are seeing now is very much a market where both buyers and sellers can expect to pay and receive a fair price, and we believe that lens will continue framing the path forward.

"The volume of property sold remains consistent, and auction clearance rates are reflecting healthy demand. But they only tell part of the story. There is noticeable strength within the market for homes sub-$2 million, due to first-home-buyer demand. In the mid-premium space, results are more nuanced. It's a reminder that the bigger picture is far more complex than a single data point can show.

"More properties are set to come online over coming weeks and it's likely November will house a peak of total property available. This means buyer depth will keep being tested. October could bring a short-term boost and injection of energy, but on balance, Spring in its entirety is unlikely to play out with the force that many thought it would.

"What remains perhaps most clear is that the Sydney market continues to move quickly, but the more meaningful, deeper shifts will occur over the longer term."

These housing pressures are likely to intensify further from tomorrow, when the new Home Guarantee Scheme commences.

This initiative will bring more first-home buyers into the market, increasing demand when supply is tight which in-turn will likely contribute to even stronger growth in housing prices.

Governor Bullock has been clear about the balancing act the RBA faces.

WATCH: Governor Michele Bullock explains the Monetary Policy Board's decision to lower the cash rate to 3.60 per cent in August

In her August statement she said, "Monetary policy has been working as intended ... the Board's cut the cash rate by 75 basis points since February this year as we've become increasingly confident that inflation is on track ... the forecasts imply that the cash rate might need to be a bit lower than it is today ... but there is still a lot of uncertainty so the Board will continue to focus on the data."

She has also acknowledged that while inflation is easing, the scars of the past two years remain.

"Because the price level has gone up so much during the period of high inflation ... households are still feeling the pain of those higher costs. This is why we're so determined to keep inflation down."

The Governor previously cautioned against expecting rapid or repeated rate cuts, emphasising the risks of easing too soon while inflation remains sticky.

Given all of this, the Reserve Bank is likely to keep rates on hold for some time. A single modest cut in February 2026 remains possible, but households hoping for a series of reductions will almost certainly be disappointed.

As a mortgage holder, I would welcome lower repayments, but the truth is that fewer cuts are a sign of a stronger economy.

That is, ultimately, a positive outcome.

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