Minutes of the Monetary Policy Board Meeting

Hybrid – 8 and 9 December 2025

Members participating

Michele Bullock (Governor and Chair), Andrew Hauser (Deputy Governor and Deputy Chair), Marnie Baker AM, Renée Fry-McKibbin, Ian Harper AO, Carolyn Hewson AO, Iain Ross AO, Alison Watkins AM, Jenny Wilkinson PSM

Others participating

Sarah Hunter (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets)

Anthony Dickman (Secretary), David Norman (Deputy Secretary)

Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (Chief Communications Officer), David Jacobs (Head, Domestic Markets Department), Michael Plumb (Head, Economic Analysis Department), Penelope Smith (Head, International Department)

Financial conditions

Members commenced their discussion of financial conditions by reviewing developments in advanced economy equity markets. Market sentiment had deteriorated briefly amid concerns about elevated valuations, especially for global technology companies. Equity prices had fallen for a period but there had been a subsequent rebound in many countries. In the United States, this partly reflected expectations of additional monetary policy easing. However, the decline in Australian equity prices had been more persistent than in other markets, reflecting a shift higher in the expected path for the cash rate and a reappraisal of valuations in some market segments. Corporate bond yields had increased in some countries, but spreads to government bond yields remained low across the world. Members observed that investors in equity and corporate bond markets continued to price in a benign global economic and financial outlook and appeared willing to accept low levels of compensation for the risk of weaker outcomes.

Members noted that financial market participants expected the US Federal Reserve to cut its policy rate at its 10 December meeting, and to continue easing policy in 2026 as the immediate impacts of higher tariffs and prior fiscal stimulus waned. By contrast, the European Central Bank was not expected to cut rates further and the next move in policy rates in Canada, New Zealand, Sweden and Australia was expected to be up. The Bank of Japan was expected to continue gradually raising its policy rate amid persistent inflationary pressures.

Members discussed the rise in market-implied expectations for the policy rate in Australia in more detail. They noted that expectations had moved significantly higher in prior months, but the pick-up had been relatively smooth and progressive as a sequence of data releases showed the domestic outlook had strengthened and risks to the global economy had receded. That trend had continued since the previous meeting, as markets moved from pricing in a further 25 basis point cut in the cash rate by the end of 2026 to pricing in a 25 basis point increase. Members noted that this latest shift was in response to both communication by the RBA and the release of data on inflation, the labour market and GDP. These data had been interpreted by markets as suggesting that capacity constraints and inflationary pressures were building.

Trends in long-term sovereign bond yields had broadly mirrored shifts in policy rate expectations in Australia and abroad. Sovereign bond yields had declined in the United States in prior months but had increased in Japan, Germany, Canada and Australia. In Japan, the increase in bond yields was in anticipation of both fiscal stimulus and further monetary policy tightening by the Bank of Japan. Members noted that the rise in short-term bond yields in Australia was consistent with market participants expecting both a tighter outlook for monetary policy and higher inflation in the near term. However, market measures of long-term inflation expectations had remained anchored and consistent with the inflation target, implying that investors expected the Board would respond as needed to the evolving inflation outlook.

In China, total social financing had continued to rise faster than nominal GDP. This was driven largely by government borrowing, including because of efforts to shift debt from local government financing vehicles to local governments. Household demand for credit remained very weak, reflecting ongoing concerns about the property market.

Members turned to considering the extent to which current Australian financial conditions were restrictive. Taken together, the incoming data had reduced their confidence in their earlier assessment that monetary policy was still a little restrictive.

Members considered model-based estimates of the neutral cash rate, which reflect data on inflation, the labour market and bond yields. These implied that the cash rate was now around the average of the central estimate of its neutral level from the full suite of models maintained by RBA staff. Members acknowledged that model estimates of the neutral cash rate were subject to considerable estimation error and provided no direct guide to monetary policy.

Members therefore assessed the implications for financial conditions from a range of other indicators. The picture remained somewhat mixed but was consistent with a further easing in conditions over the preceding month. Extra mortgage payments were still at a high level and the aggregate household savings ratio was higher than its pre-pandemic average, both of which were consistent with monetary policy being a little tight. However, demand for credit had picked up significantly and household credit was now growing in line with disposable incomes, following a period in which households had deleveraged. This was most notable for housing credit to investors, which tends to be more responsive to interest rate cuts than housing credit to owner-occupiers. Growth in business debt had also remained strong and business debt relative to GDP had risen to be around pre-pandemic levels.

Members noted that the Australian dollar had appreciated only a little since the November meeting, despite the significant rise in the average interest rate differential between Australia and major advanced economies. Members observed that the limited response of the exchange rate to interest rate differentials was potentially contributing to easier financial conditions than otherwise. However, the real exchange rate had appreciated over preceding years, implying a decline in international competitiveness.

Economic conditions

Members began their discussion of economic conditions by considering trends in inflation. They noted that a range of data received since the November meeting pointed to the possibility that inflationary pressures could be a little more persistent than had been previously assessed.

Members welcomed the inaugural release of the complete monthly CPI. The new data showed that headline inflation over the year to October had increased to 3.8 per cent. Some of that increase reflected the cessation of government electricity rebates for some households; members noted that all federal and state government electricity rebates would cease by early 2026. Inflation for items such as new dwelling costs and market services had remained elevated, as expected by the staff at the time of the November projections. However, inflation of durable goods prices had exceeded expectations and inflation of domestic travel prices, which can be volatile, was elevated. Overall, the data suggested some upside risk to the outlook for underlying inflation in the near term, and it was likely that headline inflation would exceed the November forecasts in the near term.

Members noted that it would take time to understand the properties of the new monthly CPI data. Furthermore, as the November Statement had set out, monthly data are inherently more volatile than quarterly data, and the difficulty of seasonally adjusting some components at a monthly frequency (owing to their short history) would make the trimmed mean and other measures of the underlying monthly inflation rate less reliable for a period. As a result, the staff would continue to rely primarily on the quarterly CPI – which has a much longer history and well-understood properties – for a while to assess the underlying momentum in inflation. Members noted that inflation data for the December quarter would be available prior to the February meeting.

Members discussed a range of other data that were also signalling higher inflationary pressures. These data included various price measures from the recently released national accounts. Growth in average earnings and unit labour costs had risen in the September quarter and were stronger than had been expected. Model-based estimates of capacity pressures in the economy had been revised higher, and the NAB business survey measures of capacity utilisation had also increased since the middle of the year.

By contrast, the Wage Price Index (WPI) measure of wages growth had been broadly steady in recent quarters (after adjusting for administered wage decisions). Higher public sector wages growth had been offsetting an easing in private sector wages growth in the WPI, which had declined to its lowest rate since 2021.

Members considered what a broader range of indicators implied about balance in the labour market. The increase in the unemployment rate recorded in September had been unwound in October. Other measures of labour underutilisation also remained at low levels. Information from business surveys and liaison continued to suggest that a significant share of firms were experiencing difficulty sourcing labour. Members were presented with some refinements to how labour market indicators were being incorporated into the staff’s assessment of conditions relative to full employment. These refinements included: reviewing which labour market indicators provided the best information to assess full employment; improving the way in which cyclical movements are identified; and strengthening the methodology for aggregating this information to inform an assessment of the extent of labour market tightness. Members noted that the results from this new analysis provided additional support for the staff’s existing assessment that labour market conditions remained a little tight, rather than changing it significantly. The framework will be outlined in the February 2026 Statement.

Turning to momentum in the economy, members noted that year-ended GDP growth had picked up in the September quarter to around the staff’s estimate of potential growth, as had been expected in November. The composition of growth had also continued to shift from public to private demand. Members noted that the 1.2 per cent increase in private demand had been much stronger than the expectation of 0.5 per cent at the time of the November Statement, but the impact of this on overall GDP growth had been somewhat offset by a large and unexpected drawdown of mining inventories, and increased imports. Much of the unexpected strength in private demand was driven by investment in components that can be volatile from quarter to quarter and which are largely imported. However, members noted that investment in data centres (one component of the strength in the quarter) was likely to continue in the coming years and observed that, in turn, this could stimulate additional infrastructure investment. Momentum in dwelling investment also appeared to be rising and members noted that data revisions meant household incomes now appeared higher than previously recorded. Members observed that, while the easing in monetary policy since the beginning of the year had certainly begun to support conditions in the private sector, the bulk of the effect on activity was expected to be seen in 2026, helping to offset the decline in other drivers of growth. Business surveys also supported the expectation that the recovery in private demand would be sustained. Members noted that this, in turn, would support labour demand.

In the global economy, members noted that production and trade had been relatively resilient over preceding months and were again a little stronger than expected. The likelihood of a significant tariff-related slowdown in global growth had continued to recede, partly reflecting fiscal and monetary policy support in some economies and a significant realignment of trade flows. Very strong investment in the United States associated with artificial intelligence and new technologies more broadly had also been an important contributor to global economic activity. By contrast, fixed asset investment in China had been very weak. While the staff’s central forecast remained that Chinese authorities would provide the necessary stimulus to meet their GDP growth target, concerns persisted around excess capacity in some sectors of the Chinese economy and how that would be resolved.

Considerations for monetary policy

Turning to considerations for the monetary policy decision, members highlighted three judgements that were central to their decision at this meeting: first, the extent to which aggregate demand exceeds potential supply, and the implications of this for the persistence of the recent pick-up in inflation; second, the outlook for growth in labour demand and economic activity; and, third, whether financial conditions were still restrictive. Given the inherent uncertainty around each of these, members considered both their central outlook and whether their distribution of risks around the outlook had shifted.

Regarding inflation, members noted that the September quarter CPI release had been well above the forecast published in the August Statement. Moreover, the detail within the October monthly CPI data pointed to the possibility that inflation in the December quarter could also be higher than had been expected in the November forecast. Members noted that a range of other data from the national accounts were suggesting the possibility of a more broad-based pick-up in cost and price inflation: average earnings growth had been strong; unit labour costs had continued to grow quite quickly; and output price inflation was above its historical average.

At the same time, members noted several reasons to be cautious about how much signal to draw from these data. There was uncertainty around the extent to which the recent pick-up in the CPI inflation data across several components would be sustained. Members also noted that both average earnings and unit labour costs are typically quite volatile and had been influenced by some one-off factors in the September quarter. These considerations all suggested that it was prudent to be cautious before extrapolating recent strength in inflation too far into the future.

Turning to the outlook for the labour market, members noted that the rise in the unemployment rate reported at the November meeting had since unwound. They agreed that this had reduced the risk of a material easing in labour market conditions. Future labour demand was expected to be supported to some extent by the recovery in private economic activity. Members pointed to the various signs that suggested the lift in private demand would be sustained, including upward revisions to firms’ capital expenditure expectations. Members discussed the continued presence of downside risks emanating from the world economy and global asset valuations, but noted that global growth and trade had proven materially stronger than had been expected. Moreover, the risks to the outlook no longer appeared as pronounced as earlier in the year.

Regarding the extent of excess demand, members judged that the recent data and analysis by the staff supported greater confidence in their judgement that the labour market was still a little tight and the output gap still positive. Indeed, there was some risk that capacity constraints in the labour market could prove tighter than expected, especially if the recovery in activity strengthened further. In relation to the output gap, members observed that recent data on inflation and output growth had resulted in a rise in model-based estimates of excess demand. Members highlighted the independent signal from the NAB survey’s indicator of capacity utilisation, which also suggested that capacity constraints had increased further above historical averages. Members noted that the forecasts from the November Statement had been consistent with the output gap being broadly stable over the coming two years, so these developments posed some upside risk to that outlook. They acknowledged, however, that some other economic forecasters were more optimistic about the potential growth rate of the economy.

Turning to their judgement about the stance of monetary policy, members agreed that there were conflicting signals about whether financial conditions were still restrictive or not, and it was not possible to be confident in any assessment. Some members judged that, on balance, financial conditions were perhaps no longer restrictive. These members placed a reasonable weight on signs that banks were competing aggressively to lend, risk premia in capital markets were low and the response in the housing market to policy easing earlier in the year had been quite marked. Other members assessed that, on balance, financial conditions were a little restrictive. These members placed more emphasis on the fact that the unemployment rate had drifted up over 2025. Members acknowledged that the full impact of the easing in monetary policy through 2025 was yet to be seen. However, government bond yields had risen materially in prior months and it would be important to evaluate the impact of those changes in the February 2026 forecasts.

Members expressed their concerns about the recent trend in inflation, the risk it could be more persistent than currently assessed and the potential for that persistence, if it crystallised, to contribute to an environment in which price increases are more readily accepted and households’ purchasing power comes under further pressure. They noted that the November forecast already projected underlying inflation to remain above the midpoint of the target range until 2027, albeit on the assumption that the cash rate followed the November market path, which envisaged further easing in monetary policy. Members noted that the economy appeared to be operating with a degree of excess demand and it was not clear whether financial conditions were sufficiently restrictive to bring aggregate demand and supply back to balance. Members discussed the circumstances in which, should these trends persist, an increase in the cash rate might need to be considered at some point in the coming year.

However, members judged that it was too early to determine whether inflation would be more persistent than they had assumed in November, given the uncertainties about the reliability of the signal from the new data series at present. If financial conditions were still slightly restrictive, and evidence emerged that a material part of the apparent renewed pick-up in inflationary pressures reflected volatile or temporary factors, then holding the cash rate at its current level for some time may be sufficient to keep the economy close to balance. It was also important to evaluate the impact of the recent material rise in market rates at both shorter and longer term maturities. Overall, therefore, while recent data suggested the risks to inflation had tilted to the upside, members felt it would take a little longer to assess the persistence of inflationary pressures. As a result, they agreed it was appropriate to leave the cash rate target unchanged at this meeting and assess at future meetings how their judgements about the key considerations had evolved.

In finalising its statement, the Board agreed to continue to be attentive to the data and the evolving assessment of the outlook when making its decisions. The Board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.

The decision

The Board decided unanimously to leave the cash rate target unchanged at 3.60 per cent.