Minutes Of The December 2025 Monetary Policy Board Meeting

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, FinancialMarkets)

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

Meredith Beechey Osterholm (Head, Monetary Policy Strategy), Sally Cray (ChiefCommunications 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 economyequity 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 asubsequent rebound in many countries. In the United States, this partly reflected expectations ofadditional monetary policy easing. However, the decline in Australian equity prices had been morepersistent than in other markets, reflecting a shift higher in the expected path for the cash rate and areappraisal 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 inequity and corporate bond markets continued to price in a benign global economic and financial outlookand 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 atits 10 December meeting, and to continue easing policy in 2026 as the immediate impacts of highertariffs and prior fiscal stimulus waned. By contrast, the European Central Bank was not expected to cutrates further and the next move in policy rates in Canada, New Zealand, Sweden and Australia was expectedto be up. The Bank of Japan was expected to continue gradually raising its policy rate amid persistentinflationary 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 beenrelatively smooth and progressive as a sequence of data releases showed the domestic outlook hadstrengthened and risks to the global economy had receded. That trend had continued since the previousmeeting, as markets moved from pricing in a further 25 basis point cut in the cash rate by the endof 2026 to pricing in a 25 basis point increase. Members noted that this latest shift was inresponse to both communication by the RBA and the release of data on inflation, the labour market andGDP. These data had been interpreted by markets as suggesting that capacity constraints and inflationarypressures were building.

Trends in long-term sovereign bond yields had broadly mirrored shifts in policy rate expectations inAustralia and abroad. Sovereign bond yields had declined in the United States in prior months but hadincreased in Japan, Germany, Canada and Australia. In Japan, the increase in bond yields was inanticipation of both fiscal stimulus and further monetary policy tightening by the Bank of Japan. Membersnoted that the rise in short-term bond yields in Australia was consistent with market participantsexpecting 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 theinflation target, implying that investors expected the Board would respond as needed to the evolvinginflation outlook.

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

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

Members considered model-based estimates of the neutral cash rate, which reflect data on inflation, thelabour market and bond yields. These implied that the cash rate was now around the average of the centralestimate of its neutral level from the full suite of models maintained by RBA staff. Members acknowledgedthat model estimates of the neutral cash rate were subject to considerable estimation error and providedno direct guide to monetary policy.

Members therefore assessed the implications for financial conditions from a range of other indicators. Thepicture remained somewhat mixed but was consistent with a further easing in conditions over the precedingmonth. Extra mortgage payments were still at a high level and the aggregate household savings ratio washigher than its pre-pandemic average, both of which were consistent with monetary policy being a littletight. However, demand for credit had picked up significantly and household credit was now growing inline with disposable incomes, following a period in which households had deleveraged. This was mostnotable for housing credit to investors, which tends to be more responsive to interest rate cuts thanhousing credit to owner-occupiers. Growth in business debt had also remained strong and business debtrelative 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, despitethe significant rise in the average interest rate differential between Australia and major advancedeconomies. Members observed that the limited response of the exchange rate to interest rate differentialswas potentially contributing to easier financial conditions than otherwise. However, the real exchangerate 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 thata range of data received since the November meeting pointed to the possibility that inflationarypressures 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 headlineinflation over the year to October had increased to 3.8 per cent. Some of that increasereflected the cessation of government electricity rebates for some households; members noted that allfederal and state government electricity rebates would cease by early 2026. Inflation for items such asnew dwelling costs and market services had remained elevated, as expected by the staff at the time of theNovember projections. However, inflation of durable goods prices had exceeded expectations and inflationof domestic travel prices, which can be volatile, was elevated. Overall, the data suggested some upsiderisk to the outlook for underlying inflation in the near term, and it was likely that headline inflationwould 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 morevolatile than quarterly data, and the difficulty of seasonally adjusting some components at a monthlyfrequency (owing to their short history) would make the trimmed mean and other measures of the underlyingmonthly inflation rate less reliable for a period. As a result, the staff would continue to relyprimarily 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 forthe December quarter would be available prior to the February meeting.

Members discussed a range of other data that were also signalling higher inflationary pressures. Thesedata included various price measures from the recently released national accounts. Growth in averageearnings and unit labour costs had risen in the September quarter and were stronger than had beenexpected. Model-based estimates of capacity pressures in the economy had been revised higher, and the NABbusiness 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 offsettingan 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. Theincrease in the unemployment rate recorded in September had been unwound in October. Other measures oflabour underutilisation also remained at low levels. Information from business surveys and liaisoncontinued 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 intothe 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 foraggregating this information to inform an assessment of the extent of labour market tightness. Membersnoted that the results from this new analysis provided additional support for the staff's existingassessment 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 theSeptember quarter to around the staff's estimate of potential growth, as had been expected inNovember. The composition of growth had also continued to shift from public to private demand. Membersnoted that the 1.2 per cent increase in private demand had been much stronger than theexpectation of 0.5 per cent at the time of the November Statement, but the impactof this on overall GDP growth had been somewhat offset by a large and unexpected drawdown of mininginventories, and increased imports. Much of the unexpected strength in private demand was driven byinvestment 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) waslikely to continue in the coming years and observed that, in turn, this could stimulate additionalinfrastructure investment. Momentum in dwelling investment also appeared to be rising and members notedthat data revisions meant household incomes now appeared higher than previously recorded. Membersobserved that, while the easing in monetary policy since the beginning of the year had certainly begun tosupport conditions in the private sector, the bulk of the effect on activity was expected to be seen in2026, helping to offset the decline in other drivers of growth. Business surveys also supported theexpectation 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 overpreceding months and were again a little stronger than expected. The likelihood of a significanttariff-related slowdown in global growth had continued to recede, partly reflecting fiscal and monetarypolicy support in some economies and a significant realignment of trade flows. Very strong investment inthe United States associated with artificial intelligence and new technologies more broadly had also beenan important contributor to global economic activity. By contrast, fixed asset investment in China hadbeen very weak. While the staff's central forecast remained that Chinese authorities would providethe necessary stimulus to meet their GDP growth target, concerns persisted around excess capacity in somesectors 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 werecentral to their decision at this meeting: first, the extent to which aggregate demand exceeds potentialsupply, and the implications of this for the persistence of the recent pick-up in inflation; second, theoutlook for growth in labour demand and economic activity; and, third, whether financial conditions werestill restrictive. Given the inherent uncertainty around each of these, members considered both theircentral 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 forecastpublished in the August Statement. Moreover, the detail within the October monthly CPI datapointed to the possibility that inflation in the December quarter could also be higher than had beenexpected in the November forecast. Members noted that a range of other data from the national accountswere suggesting the possibility of a more broad-based pick-up in cost and price inflation: averageearnings growth had been strong; unit labour costs had continued to grow quite quickly; and output priceinflation was above its historical average.

At the same time, members noted several reasons to be cautious about how much signal to draw from thesedata. There was uncertainty around the extent to which the recent pick-up in the CPI inflation dataacross several components would be sustained. Members also noted that both average earnings and unitlabour costs are typically quite volatile and had been influenced by some one-off factors in theSeptember quarter. These considerations all suggested that it was prudent to be cautious beforeextrapolating 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 ratereported at the November meeting had since unwound. They agreed that this had reduced the risk of amaterial easing in labour market conditions. Future labour demand was expected to be supported to someextent by the recovery in private economic activity. Members pointed to the various signs that suggestedthe lift in private demand would be sustained, including upward revisions to firms' capitalexpenditure expectations. Members discussed the continued presence of downside risks emanating from theworld economy and global asset valuations, but noted that global growth and trade had proven materiallystronger than had been expected. Moreover, the risks to the outlook no longer appeared as pronounced asearlier in the year.

Regarding the extent of excess demand, members judged that the recent data and analysis by the staffsupported greater confidence in their judgement that the labour market was still a little tight and theoutput gap still positive. Indeed, there was some risk that capacity constraints in the labour marketcould prove tighter than expected, especially if the recovery in activity strengthened further. Inrelation to the output gap, members observed that recent data on inflation and output growth had resultedin a rise in model-based estimates of excess demand. Members highlighted the independent signal from theNAB survey's indicator of capacity utilisation, which also suggested that capacity constraints hadincreased further above historical averages. Members noted that the forecasts from the NovemberStatement had been consistent with the output gap being broadly stable over the coming twoyears, so these developments posed some upside risk to that outlook. They acknowledged, however, thatsome 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 conflictingsignals about whether financial conditions were still restrictive or not, and it was not possible to beconfident in any assessment. Some members judged that, on balance, financial conditions were perhaps nolonger restrictive. These members placed a reasonable weight on signs that banks were competingaggressively to lend, risk premia in capital markets were low and the response in the housing market topolicy 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 theunemployment rate had drifted up over 2025. Members acknowledged that the full impact of the easing inmonetary policy through 2025 was yet to be seen. However, government bond yields had risen materially inprior months and it would be important to evaluate the impact of those changes in the February 2026forecasts.

Members expressed their concerns about the recent trend in inflation, the risk it could be more persistentthan currently assessed and the potential for that persistence, if it crystallised, to contribute to anenvironment in which price increases are more readily accepted and households' purchasing powercomes under further pressure. They noted that the November forecast already projected underlyinginflation to remain above the midpoint of the target range until 2027, albeit on the assumption that thecash rate followed the November market path, which envisaged further easing in monetary policy. Membersnoted that the economy appeared to be operating with a degree of excess demand and it was not clearwhether financial conditions were sufficiently restrictive to bring aggregate demand and supply back tobalance. Members discussed the circumstances in which, should these trends persist, an increase in thecash 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 thanthey had assumed in November, given the uncertainties about the reliability of the signal from the newdata series at present. If financial conditions were still slightly restrictive, and evidence emergedthat a material part of the apparent renewed pick-up in inflationary pressures reflected volatile ortemporary factors, then holding the cash rate at its current level for some time may be sufficient tokeep the economy close to balance. It was also important to evaluate the impact of the recent materialrise in market rates at both shorter and longer term maturities. Overall, therefore, while recent datasuggested the risks to inflation had tilted to the upside, members felt it would take a little longer toassess the persistence of inflationary pressures. As a result, they agreed it was appropriate to leavethe cash rate target unchanged at this meeting and assess at future meetings how their judgements aboutthe key considerations had evolved.

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

The decision

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

More on the December 2025 monetary policy decision...

Monetary Policy Board Statement

At its meeting today, the Board decided to leave the cash rate unchanged at 3.60 per cent.

Media Conference

Governor Michele Bullock addresses the media after the monetary policy decision.

Source: RBA