Interest Rate Unchanged: Markets Brace for Hawkish Outlook Amid Rising Inflation

The Reserve Bank of Australia (RBA) is widely expected to leave interest rates unchanged at its next meeting on November 4, despite local inflation data showing signs of persistent pressure. Investors are bracing themselves for a hawkish outlook from the central bank, with RBA Governor Michele Bullock set to present her stance in a post-meeting address.

The RBA’s benchmark rate is currently set at 3.60%, following a cumulative 25 basis point cut this year amid some signs of cooling inflation and labor market weakness. However, recent data has shown a sharp rise in inflation growth during the third quarter, while the labor market remained largely resilient despite trade and economic headwinds.

RBA Governor Michele Bullock characterized the inflation data as "a material miss" earlier this month, setting expectations for a hawkish tone in her post-meeting address. Analysts from ANZ expect the RBA’s rate-setting board to unanimously agree on leaving rates unchanged, citing the magnitude of the recent inflation increase. In their recent note, they wrote:

"If the activity backdrop proves materially weaker than anticipated, the Board has the option of easing in December. However, in the wake of the CPI outturn, the hurdle for any easing this year is now very high and would likely require a further move higher in the unemployment rate (with an unfriendly mix of details) and a weak Q3 GDP."

ANZ analysts predict that the RBA will cut rates by 25 bps one final time in the first half of 2026, with rates remaining unchanged for the remainder of this year. Their forecast suggests a cautiously optimistic outlook, reflecting the recent inflation data.

Westpac analysts also expect the RBA to keep rates unchanged in November, attributing their stance to Australian inflation turning "too hot to handle." They noted that the RBA is likely to await further evidence of containment of third-quarter inflation before considering its next move. In their analysis, they stated:

"Given where the RBA’s attention is directed, we think it will keep rates on hold until it is satisfied that inflation from (the third) quarter is contained."

The Australian dollar has recently rallied following the hot third-quarter inflation data, although its gains were cut short by hawkish signals from the U.S. Federal Reserve. If the RBA presents a hawkish outlook in its post-meeting address, any upward momentum in AUDUSD might gain further support.

ASX 200 and Interest Rate Decision: Stocks Bracing for Unsettling Hawkish Outlook

The Australian stock market has been under pressure since the release of the third-quarter inflation data. The benchmark ASX 200 had traded below its record highs reached earlier in October and was nursing four consecutive sessions of losses as investors awaited the RBA’s decision.

A hawkish hold by the RBA is likely to have an unsettling effect on stocks, although losses are expected to be limited by strong September-quarter earnings and resilience in cyclical stocks. However, further gains may be difficult to sustain in the presence of a persistently high inflation environment.

Markets have various expectations about the implications of the RBA’s rates decision for individual stock performances. While some analysts predict higher stock prices driven by low interest rates stimulating business growth, others are warning of future vulnerabilities associated with high inflation or an over-heated market.

Why is Interest Rate Unchanged a Hawkish Signal?

The change in stance from being dovish to a hawkish signal has the potential to support or unsettle markets depending on investors’ expectations about how high interest rates will climb and any policy implications for business decisions. RBA’s policy setting is pivotal because it affects not only local businesses’ decision-making but also the entire value chain including export partners and customers that could lead to trade fluctuations impacting profitability.

With an uncertain global outlook, rising inflation, and mixed signals from investors about what policies central banks should prioritize, RBA’s monetary stance holds significant significance.