Australia’s economy grew by 0.4% in the third quarter, which was lower than the Reserve Bank of Australia’s (RBA) prediction of 0.5%. However, the growth for the second quarter was revised upward to 0.7%, keeping the annual growth rate around 2%. Despite the lower GDP figures, the RBA is maintaining its current expectations for possible interest rate increases.

Labour Market Conditions

Recent reports show a tighter job market and rising inflation. This situation has made the RBA reconsider its approach to interest rates. RBA Governor Bullock mentioned that ongoing inflation concerns will likely influence future policy decisions. She noted that the job market is stronger than anticipated and highlighted a closed output gap, indicating that the RBA is ready to adjust policies if inflation measures rise. Ongoing inflation may prompt policy changes that could strengthen the Australian Dollar. Bullock’s comments reflect how closely the RBA is watching inflation data and its possible effects on their decisions. Any adjustments in response to inflation could bolster the Australian Dollar. As of December 3rd, 2025, the latest GDP figures show a modest growth of 0.3% in the third quarter. However, persistent inflation remains a key concern, with the Consumer Price Index (CPI) for October unexpectedly rising to 3.9%. This situation is making the RBA’s upcoming decision critical for the market. We’ve seen a similar trend before, especially in late 2023 when weak growth figures were overshadowed by inflation and a tight labor market. With the unemployment rate at a low 4.0%, the RBA feels justified in focusing on inflation control rather than stimulating growth. Consequently, the market anticipates a high likelihood of another rate hike in early 2026, despite softer economic numbers.

Australian Dollar Outlook

Given the RBA’s likely aggressive stance, we expect the Australian Dollar (AUD) to remain strong. Traders should consider using AUD call options or bull call spreads to manage expenses. The uncertainty around the timing of the next rate hike is also increasing short-term interest rate volatility, making options straddles on bond futures an appealing strategy. The current cash rate has been at 4.60% for most of 2025, but interest rate swaps now suggest a terminal rate closer to 5.0% by mid-next year. This indicates that strategies benefitting from rising short-term rates, like selling near-term bank bill futures, are becoming more attractive. We believe any hawkish statements from the RBA in the upcoming weeks will accelerate this trend. Create your live VT Markets account and start trading now.

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