The Reserve Bank of Australia (RBA) has kept the cash rate steady at 3.60%, with Governor Bullock stating that there will be no rate cuts soon. The RBA is considering either maintaining this rate or possibly raising it in 2026 if the economy and inflation improve. The RBA has observed pressures from capacity constraints due to economic recovery and sluggish productivity growth. Although the job market may loosen slightly, the bank is careful in balancing ongoing demand pressures against temporary factors affecting inflation. Governor Bullock mentioned that the RBA board is looking at either a prolonged pause on the cash rate or a hike in 2026, noting that risks to economic activity and inflation have increased. She emphasized the need to analyze the Q4 trimmed mean Consumer Price Index (CPI) data to separate short-term price spikes from lasting demand pressures. Currently, the RBA’s plan is to keep the cash rate unchanged through 2026. Even with the ongoing recovery, no major changes in demand pressures were seen in the Q3 GDP growth. Capacity issues might impact inflation, and if inflation and economic activity data continue to exceed forecasts, upside risks to the cash rate outlook remain. The RBA sees the job market as slightly tight, which means it would take a significant rise in unemployment to rethink economic risks. With the RBA maintaining the cash rate at 3.60%, the focus has shifted from potential rate cuts to the chances of a rate hike. The governor has clearly dismissed near-term cuts, making options strategies that bet on lower rates much less appealing. This hints that traders should reconsider any dovish positions. This cautious approach suggests that short-term interest rate futures will need to adjust, removing expectations for any easing in the first half of 2026. Instead, the market should start pricing in a reasonable chance of one last hike. This trend supports betting on higher short-term yields, possibly by selling Australian 3-year bond futures. Recent labour force data from the Australian Bureau of Statistics for November 2025 showed the unemployment rate holding steady at 3.8%, which is very low historically. This supports the central bank’s view that the labour market is “a little tight.” As a result, upcoming wage growth data will be closely monitored for signs that inflation may rise. Now, all eyes are on the Quarter 4 trimmed mean CPI data, expected to be released in late January 2026. This data is crucial for determining the RBA’s next move. Implied volatility on the Australian dollar is likely to increase as we approach this release, presenting opportunities for traders using options like straddles. Looking back at the interest rate hikes from 2022 to 2024, the market often underestimated the RBA’s commitment to combat inflation. This experience warns traders to be careful when betting against a hawkish central bank, even amid signs of a slowing economy. The risk is that ongoing capacity constraints and low productivity could keep inflation stubbornly high.

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