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Why the Latest Inflation Dip Keeps Interest Rate Hike Expectations Alive

Australia’s latest inflation data delivered a moment of relief but not reassurance. While headline inflation cooled more than expected in November, economists warn the battle against price pressures is far from over. The Reserve Bank of Australia (RBA) now faces a delicate balancing act: easing inflation without declaring victory too early.

This is why, despite the dip, interest rate hike expectations for 2026 remain firmly on the table.

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Inflation Slows – But Not Enough

Australia’s annual inflation rate slowed to 3.4% in November, down from previous readings and below market expectations. On the surface, this suggests progress toward taming inflationary pressures that have squeezed households for years.

However, inflation remains above the RBA’s 2–3% target band, and policymakers are wary of celebrating prematurely.

Key takeaway:

• The direction is encouraging
• The destination has not yet been reached

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Why Economists Are Still Concerned

Despite the headline improvement, economists point to three underlying risks:

1. Sticky Services Inflation

While goods inflation has eased due to lower fuel prices and improved supply chains, services inflation remains stubborn, driven by:

• Rents
• Insurance costs
• Healthcare
• Education fees

These are sectors less sensitive to short-term economic slowdowns.

2. Wage Growth Remains Elevated

Australia’s labor market remains relatively tight. Wage increases, while welcomed by workers, risk embedding inflation if productivity does not keep pace.

3. Inflation Momentum, Not Just Levels

Central banks focus not only on where inflation is, but how quickly it’s moving. Monthly volatility can mask longer-term persistence.

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Will the RBA Pause Or Push Further?

The slowdown has eased fears of a February rate hike, but it has not eliminated them.

Most economists now expect:

• A temporary pause in early 2026
• Followed by possible further tightening if inflation stalls above target

The RBA has consistently signaled it would rather overtighten slightly than risk inflation rebounding.

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Financial Markets React Cautiously

The ASX reflected this uncertainty:

• Tech stocks edged higher, benefiting from hopes of stable rates
• Energy and oil stocks declined, tracking softer global demand expectations
• Overall, the ASX posted only minor gains

Markets are increasingly pricing in a longer “higher-for-longer” rate environment, rather than rapid cuts.

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Global and Geopolitical Pressures Still Matter

Even as domestic inflation cools, external risks remain elevated:

War and Geopolitical Tensions

• Ongoing global conflicts threaten energy supply routes
• Any renewed oil price spike would quickly feed into inflation

Central Bank Coordination

• The US Federal Reserve remains cautious
• Jerome Powell’s tone continues to influence global rate expectations
• Diverging policies could weaken the Australian dollar, importing inflation

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Political Backdrop Adds Complexity

Prime Minister Anthony Albanese’s attendance at the funeral of a Bondi attack victim underscored the broader social pressures facing Australia cost-of-living concerns remain a dominant political issue.

Governments face rising pressure to:

• Provide relief without fueling inflation
• Support households while respecting RBA independence

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Weekly and Near-Term Forecast

Next few weeks outlook:

• Inflation likely to fluctuate around 3–3.5%
• RBA to maintain a hawkish pause
• Markets remain sensitive to:
• Wage data
• Oil prices
• US inflation and Fed commentary

A single data print will not change the policy trajectory a sustained trend is required.

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lta’s Opinion- A False Sense of Comfort

“This inflation dip is welcome but dangerous if misread,” says Alta’s.

The biggest risk now is complacency. Households may feel relief, markets may relax, and policymakers may feel pressure to declare success. But inflation has a history of re-accelerating when vigilance fades.

Alta believes:

• Rate cuts in 2026 are not guaranteed
• The RBA will prioritize credibility over popularity
• Households should prepare for prolonged financial tightness

In short: inflation is cooling, not conquered.

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What This Means for Australians

• Mortgage holders: relief may be delayed
• Renters: cost pressures likely to persist
• Investors: volatility remains the norm
• Consumers: spending power improves slowly, not suddenly

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FAQ’s- What People Need to Know

❓ Is inflation officially under control?

No. It has slowed, but it remains above the RBA’s target range.

❓ Will interest rates rise again?

Possibly. Economists believe further hikes remain an option in 2026 if inflation stalls.

❓ Does this mean no rate cuts soon?

Correct. Rate cuts are unlikely until inflation clearly and sustainably falls into target.

❓ Why doesn’t the RBA react to one good inflation number?

Because policy decisions are based on trends, not single data points.

❓ How do wars affect Australian inflation?

Through energy prices, shipping costs, currency volatility, and global supply chains.

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Final Thought

The latest inflation dip offers hope, not relief. For now, interest rate expectations remain alive not because inflation is rising, but because it hasn’t fallen far enough.

Australia is closer to the finish line but not across it yet.

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