Interest rate cut expectations are pared back as a moderate economic recovery unfolds

With tentative signs of a moderate upturn in the Australian economy, the RBA held interest rates steady at 3.60 per cent at its 30 September meeting. In explaining the interest rate decision, RBA Governor Michele Bullock indicated that the outlook for interest rates was ambiguous and in doing so, she hosed down expectations and market pricing for further interest rate cuts over the next few months.

Ms Bullock was also of the view that unemployment was low and the labour market relatively tight and that the outlook for inflation was no longer to the lower side of the RBA target band given the better than expected news on economic activity.

Global economic conditions remain positive but with a sense of caution as international trade disruptions, geopolitics and US debt / government operations remain high profile areas of uncertainty.

The quantum and size of global central bank interest rate cuts has been slowed in recent months and while further monetary easing remains likely in most countries, there is a growing narrative that the global interest rate cutting cycle will be near its end during the first half of 2026.

Australia

The economic pick-up since the end of 2024 continues to show up in a tentative manner, with the household sector the main indicator of what is still a patchy recovery.

Household spending rose 5.1 per cent in the year to July, the strongest increase in three years. At the same time, consumer sentiment remains well above the 2024 low, but is at a level where there are slightly more pessimists than optimists. The household sector is also benefiting from higher wealth which has been underpinned by a fresh record high for house prices and strength in share prices.

In terms of building approvals, there have been disappointing and sharp falls in the last two months totalling 15 per cent, which has unwound much of the upturn that was evident in the first half of the year. The faltering of housing construction presents problems not just for economic activity but also for much needed housing supply.

Headline inflation edged up to 3.0 per cent August, an upside surprise driven almost exclusively by the unwinding of government electricity subsidies and a rise in the excise on tobacco. The trimmed mean or underlying rate eased to 2.6 per cent, to effectively be in the middle of the RBA target band.

Labour market conditions continue to soften, reflecting the below trend rate of economic growth. Employment fell 6,000 in August to lock in four months of weaker jobs data, while the unemployment rate was steady in the month at 4.2 per cent. The number of job vacancies fell 2.7 per cent in August and are now down a hefty 33 per cent from the peak. Labour demand is softening.

New Zealand

The recovery scenario in New Zealand was dealt a blow with June quarter GDP falling an unexpectedly large 0.9 per cent. Other indicators are more favourable with retail spending and housing showing signs of stronger activity. The business sector remains weak while the unemployment rate is edging higher. The forward indicators for labour demand are stabilising which is pointing to a recovery in employment by year-end.

The shock GDP result has seen the market pricing in further interest rate cuts from the RBNZ in the months ahead on top of the 250 basis points of interest rate cuts delivered to date.

Currencies

Currency markets continue to see the AUD outperform the NZD, not least because of the significant difference in economic momentum between the two countries. The AUD has maintained a firm tone around 66 US cents while the NZD has weakened to 58 US cents. The AUD NZD cross has, as a result, moved to 1.14 with the cross approaching a decade high.