Insights 
VT 
Australia’s economy expanded by 0.4% in Q3, falling short of the Reserve Bank of Australia’s (RBA) forecast of 0.5%. However, Q2 growth was revised upwards to 0.7%, maintaining an annual growth rate close to 2%. The RBA’s current expectations for potential rate hikes remain steady despite this softer GDP data.
Labour Market Conditions
Recent data indicates a tighter labour market and increasing inflation pressures, which have led to a hawkish re-evaluation regarding RBA rate expectations. Comments from RBA Governor Bullock suggest that ongoing inflation concerns could dictate future monetary policies. She acknowledged that labour market conditions are tighter than expected and noted a closed output gap, indicating readiness to adjust the policy should consumer price index (CPI) pressures increase.
Persistent inflation may lead to policy adjustments, possibly boosting the Australian Dollar. Governor Bullock’s remarks underscore the RBA’s vigilance towards CPI developments and its potential impact on the policy path. Any adjustments in response to inflation pressures could strengthen the Australian Dollar.
As of today, December 3rd, 2025, the latest GDP report shows the economy grew by a slightly disappointing 0.3% in the third quarter. However, we see this as secondary to the persistent inflation problem, with the latest monthly CPI figure for October unexpectedly ticking up to 3.9%. This backdrop is making the Reserve Bank of Australia’s (RBA) upcoming decision the market’s primary focus.
We’ve seen this pattern before, particularly back in late 2023 when similar weak growth figures were overshadowed by inflation and a tight labor market. The unemployment rate is currently sitting at a low 4.0%, giving the RBA justification to prioritize fighting inflation over stimulating growth. Consequently, the market is pricing in a high probability of another rate hike in early 2026, ignoring the softer economic output.
Australian Dollar Outlook
Given the RBA’s likely hawkish response, we expect continued strength in the Australian dollar (AUD). Derivative traders should consider positioning for this by looking at AUD call options or bull call spreads to manage costs. The increased uncertainty surrounding the timing of the next potential rate move is also elevating short-term interest rate volatility, making options straddles on bond futures a viable strategy.
The current cash rate has been held at 4.60% for most of 2025, but the interest rate swaps market now implies a terminal rate closer to 5.0% by the middle of next year. This suggests that positions that benefit from rising short-term rates, such as selling near-term bank bill futures, are becoming more attractive. We believe any hawkish commentary from the RBA in the coming weeks will accelerate this pricing.
