The Reserve Bank of Australia faces a dilemma in its rate hike path: the job market is cooling faster than expected, but inflationary pressures remain persistent.

According to Golden Ten Data APP, Christopher Kent, Assistant Governor of the Reserve Bank of Australia, stated that the Australian labor market is showing signs of cooling more quickly than the central bank had anticipated. This underscores the dilemma faced by policymakers: striving to contain inflation while preserving the gains already achieved in the employment market.

Kent said on Monday, “Some indicators show that the tightness in the labor market is easing slightly faster than we had previously forecast.” He added that an important question is whether this is due to weakening demand or rising labor costs.

Data released last week showed that Australia’s unemployment rate in September was higher than expected. Although this prompted traders to scale back bets on further rate hikes by the Reserve Bank of Australia, Kent reminded that it is equally important to focus on the inflation figures to be published this week. He stated, “Let’s see how they interpret the inflation data. It’s very important to combine information from both of these aspects for analysis. That’s what we’ll do when we update our forecasts.” He was referring to the economic outlook that the Reserve Bank of Australia will release at its next policy committee meeting in November.

The Reserve Bank of Australia expects inflation to return to the mid-point of the target range by early 2028

Before Kent made these remarks, the Reserve Bank of Australia enacted its fourth rate hike of the year at the end of last month, lifting the cash rate to 4.6%, the highest level in 15 years, to curb persistently high inflation. Following this decision, remarks by Reserve Bank of Australia Governor Michele Bullock were interpreted as slightly dovish, in contrast with the more hawkish policy statement and September meeting minutes.

Luke Yeaman, Chief Economist at Commonwealth Bank of Australia, stated that this difference “reflects the Reserve Bank of Australia’s gradual approach to policy and the uncertainty over how the economy will handle a fourth rate rise. This doesn’t mean the central bank lacks determination to fight inflation.”

Reserve Bank of Australia Deputy Governor Andrew Hauser is also scheduled to speak this week, and his remarks will be closely watched for clues regarding the future interest rate path. Investors and economists are likewise eyeing the quarterly inflation report due next week to assess whether the economy is gradually returning to balance or if more rate hikes are needed.

According to swap market data, traders currently expect that the Reserve Bank of Australia will raise rates once more by May next year. However, the market assesses the probability of a rate hike at the November 2-3 policy meeting at about one quarter.

Inflation in Australia remains far above the central bank’s target

Additionally, Kent stated that both the cash rate and the expected rate path over the next 18 months are currently at the upper end of the Reserve Bank of Australia’s estimated range for the neutral rate. He said, “This means you can be reasonably confident that monetary policy is currently somewhat restrictive. But the question is, is this restrictiveness sufficient?”

This year, Australia is implementing one of the most aggressive monetary tightening policies among developed economies. The Reserve Bank of Australia has raised the cash rate by a total of 100 basis points and signaled that further rate hikes may still be needed.

Since the end of 2025, Australia has been dealing with renewed price pressures. Even before the US and Israel struck Iran—triggering a global energy shock—the Reserve Bank of Australia had already begun raising the cash rate. Kent noted that the Middle East conflict is currently the most significant adverse supply shock faced by the bank, “which makes balancing inflation, economic activity, and the unemployment rate even more difficult.”