The Reserve Bank of Australia has held interest rates steady after a surprise surge in inflation potentially spelled the end of the cutting cycle for the next 12 months.

The unanimous decision leaves the cash rate at 3.6 per cent after 75 basis points of easing since February. 

Borrowers now face the possibility that the RBA may actually raise rather than lower rates in February next year.

RBA governor Michele Bullock said on Tuesday the board did not consider cutting rates during today’s meeting.

‘We basically just talked about holding, and reasons to hold, and then discussed strategy, moving out,’ she said. 

Ms Bullock said the board was concerned about employment and a ‘little more concerned’ about making sure inflation was reined in. 

‘As the forecasts show in the statement on monetary policy, this blip in September is going to stay in the inflation numbers for basically the next 12 months,’ she said.   

Underlying or trimmed mean inflation, which is the Reserve Bank’s preferred measure, jumped one per cent in the September quarter, which was materially higher than the bank’s forecasts, Ms Bullock said in October.

Despite unemployment also rising to 4.5 per cent in September, money markets significantly lowered the odds for further rate reductions after last week’s consumer price index print.

Traders have less than one cut fully priced in by the middle of 2026 and some market economists, including those at Commonwealth Bank, have predicted borrowers have already seen their last rate cut this cycle.

Ms Bullock was pressed by a reporter on whether there was ‘some risk that inflation could get away’.

‘It’s a very good question and we do think that there are mixed signals on the tightness of financial conditions,’ she responded. 

In the RBA’s updated staff forecasts, published alongside the cash rate decision, underlying inflation was expected to remain at 3.2 per cent until at least the middle of 2026 – above the bank’s two to three per cent target band.

That’s up from the RBA’s most recent predictions in August that the trimmed mean would ease to 2.6 per cent by the end of this year.

But at face value, the RBA’s forecasts preclude another cut for at least the next 12 months, given it will be hard-pressed to lower interest rates with the trimmed mean above the band.

The spike in inflation was partly down to temporary factors like volatile international travel prices and a one-off rise in council rates, as well as some items that were included in the trimmed mean that will be excluded in future readings.

But other factors indicate ongoing inflationary pressures in the economy.

Although unemployment also rose in September, indicators such as low underemployment, a high vacancy rate, and an increase in workers voluntarily quitting jobs suggests the labour market remains relatively tight.

‘Overall, recent data add weight to the possibility – identified as a risk in the August Statement – that there is slightly more capacity pressure in the economy than we previously assessed,’ the statement said.

The RBA’s forecast assumes interest rates will fall in line with the expectations of money market traders, which would bring the cash rate to 3.35 per cent by mid-2026.

But the statement notes that there would still be some capacity pressures in the economy, assuming the cash rate follows the market path, raising the prospect that the RBA keeps rates on an extended pause to bring the economy back into balance faster.

While underlying inflation is the bank’s main focus, Australian consumers are more attuned to headline inflation, which covers the full range of prices including volatile items.

And Australians are in for a bumpy ride, with the headline figure set to take off to 3.7 per cent by mid-2026 as federal government energy rebates come to an end.

Unemployment is predicted to stay around 4.4 per cent, after bouncing to 4.5 per cent in September, while growth in Australia’s gross domestic product is expected to hit its trend rate of two per cent this year, up from the previous forecast of 1.7 per cent.

The RBA also noted the global economy has been more resilient than expected in the face of US President Donald Trump’s tariffs.

China, Australia’s largest trade partner, has managed to find alternative markets for its exports but a slowdown in investment remains a risk to Australia’s economic growth outlook.

Much will depend on what Chinese authorities land on for next year’s growth target and its upcoming five-year plan, which are set to be determined in the coming months.