Australia’s central bank Governor Michele Bullock said the economy doesn’t need further interest-rate cuts, signaling policymakers are in a watch-and-wait mode now as they monitor the pickup in inflation.

The Reserve Bank’s board kept its cash rate unchanged at 3.6% for a third straight meeting on Tuesday in a widely expected decision, as price pressures regather strength and the job market remains tight. The decision was taken unanimously by the nine-member board.

Recent data suggest inflation risks have “tilted to the upside,” Bullock told reporters, adding that policymakers didn’t discuss a rate cut this week and instead were looking at what might drive a rate rise in 2026.

“I don’t think there are interest rate cuts in the horizon for the foreseeable future,” she said. “The question is, is it just an extended hold from here or is it possibility of a rate rise. I couldn’t put a probability on those but I think they’re the two things that the board will be looking closely at coming into the new year.”

The Australian dollar and policy-sensitive bond yields extended a rise after Bullock’s comments suggesting the next rate move would likely be a hike rather than a cut. The yield on three-year notes climbed as much as 12 basis points, the highest since Nov. 2024.

“The RBA statement makes clear that they are not jumping at inflation shadows and are probably less willing than markets to consider a rate hike,” said Sean Callow, a senior analyst at InTouch Capital Markets in Sydney. “A move in February seems quite unlikely, so Australia seems set for a long hot summer of 3.60%.”

Australia’s economy is operating close to capacity with unemployment at historically low levels and inflation pushing back above the top of the 2-3% target, forcing the RBA to the sidelines after three cuts this year. At the same time, consumers remain cautious with real per-capita spending broadly flat and the savings ratio edging higher as households rebuild financial buffers.

That makes for a challenging 2026 outlook. Money markets are now pricing in an almost 90% chance of a hike by May, up from roughly a coin-toss prior to the decision, according to meeting-linked swaps data compiled by Bloomberg.

Those at Goldman Sachs Group Inc., UBS Group and Barrenjoey are aligning with markets in predicting the RBA’s next move is likely up.

“The onus is on the data to stop the RBA from hiking with all the data since the board last met surprising to the upside,” said Su-Lin Ong, chief economist for Australia at Royal Bank of Canada. “The RBA is willing to wait for more data but further upside surprises will make it challenging.”

Australia is on track for one of the shortest and shallowest easing cycles in the developed world, outside Norway, having delivered just 75-basis points of cuts over six months after starting its campaign later than most peers.

Over in the US, traders are ramping up bets the Federal Reserve will deliver its third consecutive cut later this week following pressure from President Donald Trump for easier policy and the release of private data suggesting a softening jobs market.

The divergence has already driven a heavy selloff in Australian bonds with the yield premium they hold over Treasuries widening in the current quarter at the fastest pace since early 2020.

The RBA operates under a dual mandate that aims for inflation at the midpoint of its 2-3% target while trying to keep the economy at maximum sustainable employment.

A report last week showed the economy grew at a surprisingly softer pace last quarter even as the details pointed to still-elevated labor costs. Private data on Tuesday showed capacity utilization in the economy edged up to 83.6%, the highest level in 18 months, suggesting if growth accelerates it may further fuel price pressures.

“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy remains restrictive,” the rate-setting board said. “On the domestic side, the pick-up in momentum has been stronger than anticipated, particularly in the private sector. If this continues, it is likely to add to capacity pressures.”

The government this week announced it is scrapping power-bill rebates that have helped shield households from surging electricity prices. The policy has held down headline inflation in recent times and its termination is set to trigger a spike in upcoming CPI reports, though the central bank had already incorporated the change into last month’s forecasts.