Financial markets have priced in around a 70 per cent chance of a November rate cut.
Lower-than-expected employment data has caused money markets to alter their forecasts for the Reserve Bank of Australia’s (RBA) next interest rate drop.
New labour data showed that the unemployment rate rose from 4.3 per cent to 4.5 per cent in September, the highest rate since the COVID-19 pandemic in 2021, according to the Australian Bureau of Statistics data.
Following the data’s release on Thursday (16 October), market expectations for a rate cut next month jumped from just under 40 per cent to around a 70 per cent chance.
The RBA’s monetary policy decision in November will likely be highly influenced by labour market data and the September quarter inflation figures, due on 29 October.
This week, several senior central bank staff hinted at the direction of monetary policy going forward.
Speaking at an event in Washington on Wednesday, RBA governor Michele Bullock suggested inflation had been higher than expected, potentially giving weight to the case to leave rates on hold.
Bullock described current monetary policy as “marginally tight” and said her job is not done regarding policy objectives.
In a separate speech to the Citi Australia & New Zealand Investment Conference 2025 on Wednesday (15 October), RBA assistant governor Sarah Hunter provided details around the RBA’s recent downgrade to productivity forecasts, noting the RBA expects medium-term output to grow at around 2 per cent per year, rather than around 2.25 per cent.
Hunter also noted that underlying inflation in the September quarter is likely to be stronger than we anticipated.
“This may suggest that the labour market, and economic conditions more generally, remain a bit tighter than we had assessed,” she said.
“Our forecasts imply that the tightness in financial conditions has eased, which will help to keep the economy in balance in the period ahead, with full employment and inflation moving toward the centre of the target range.”
The speeches come after the release this week of the minutes for the RBA board’s September meeting, where members unanimously opted to maintain the cash rate at 3.60 per cent, as widely expected by the market.
In the minutes, the central bank board revealed that monetary policy was “probably still a little restrictive but acknowledged the extent of restriction was difficult to determine”.
Higher unemployment ‘complicates the picture’
Economists from ANZ, which last week pushed back their expectations for the next cash rate cut to February 2026, said that a “higher unemployment rate complicates the picture”.
Adam Boyton, head of Australian economics, said: “With a surprise increase in the unemployment rate to 4.5 per cent, September’s labour force data point to a further easing in the labour market.
“Ultimately, the RBA’s monetary policy decision in November will come down to the balance between the labour market and inflation, with the September labour force print likely to be outweighed by an uncomfortably high Q3 trimmed mean outturn later this month.”
Westpac, the only major to not rule out a November rate cut, said weaker employment figures lend weight to its view that there is “still a good chance the RBA will cut rates in November”.
However, the major’s economics team cautioned: “That said, the Q3 CPI will be the ultimate determinant of the November decision.”
[Related: RBA signals cautious stance, says cash rate remains restrictive]
