Financial markets are recalibrating their expectations for Australian monetary policy after new data revealed a sharper-than-anticipated slowdown in inflation. The development is being closely watched by UK investors with exposure to global markets and commodity prices.
Inflation Cools, Prompting Rate Rethink
According to the Australian Bureau of Statistics, consumer price inflation eased to 3.4% in the year to November. This figure came in below market forecasts of 3.6% and represented a decline from October's 3.8% reading. The surprise dip has significantly altered the outlook for the Reserve Bank of Australia's (RBA) next move.
Immediately following the data release, financial markets adjusted their bets. Traders now price in approximately a two-thirds chance that the RBA will leave interest rates on hold when its board convenes in February. This marks a shift from earlier predictions by some major bank economists, who had foreseen a potential hike.
The market reaction was swift and clear. The Australian dollar softened against the US dollar, falling from 67.38 to 67.24 US cents. Conversely, the ASX200 equity index rallied, jumping from 8,700 to 8,734 points as investors welcomed the prospect of a more accommodative policy stance.
Drivers of the Slowdown: Discounts and Policy Changes
Several key factors contributed to the moderating inflation figure. A major influence was the impact of Black Friday sales, where retailers offered significant promotions.
- Clothing and footwear prices fell by 3.1% between October and November.
- Furniture prices dropped by a substantial 4.6% over the same period.
- Travel costs also declined, with domestic holiday prices down 4.1% and international travel costs unexpectedly slipping 0.6%.
In the health sector, a policy change helped reduce costs for households. The expansion of bulk-billing incentives on 1 November 2025 led to a 0.5% monthly fall in health costs, lowering out-of-pocket expenses for doctor visits.
Diana Mousina, an economist at AMP, suggested the recent price surges may be abating. "It’s good to see we are getting this moderation and the surprising price increase we have had in the past few months … could just be one-offs," she noted.
Persistent Pressures Keep 2026 Rate Rises in Play
Despite the positive November data, economists warn that underlying inflationary pressures remain, particularly in essential spending categories. This means further interest rate increases, while potentially delayed, are still considered likely in the medium term.
The housing sector continues to be a significant source of inflation. Overall housing costs rose 1.1% month-on-month and were up 5.2% over the year. This was driven by a 4% annual rise in rents, a 2.8% increase in new home construction costs, and a sharp 19.7% jump in electricity prices as government rebates came to an end.
Food prices also climbed, up 3.3% annually. Meals out and takeaway food rose 3.5%, reflecting higher wage and ingredient costs, while meat and seafood prices increased 3.9% due to strong overseas demand for Australian produce.
Paula Gadsby, a senior economist at EY, cautioned that inflation is expected to remain elevated in the upcoming December quarter data. "For the Reserve Bank to reverse this recent trend and get inflation moving back to [2.5% or] the mid-point of the target band, interest rates will need to be lifted in the first half of 2026," Gadsby predicted.
Stephen Smith, a partner at Deloitte Access Economics, advised a measured approach from the central bank. He argued that a rate hike in February would be "premature", stating, "Any policy response should be careful and cautious, rather than impulsive." ANZ economists similarly described the February decision as a "close call" but leaned towards the RBA holding steady.
