Cliff Notes: looking through the noise
Key insights from the week that was.
It was a historic week in Australia, marked by the ABS publishing the October CPI – the first complete set of monthly inflation data. In the event, it surprised markets materially to the upside on both a headline (3.8%yr) and trimmed mean (3.3%yr) basis, although headline came in marginally lower than our forecast of 3.9%. Base effects around electricity prices, due to government subsidies, was the chief culprit behind the lift in headline inflation. On the firmer trimmed mean result: around a third of the basket is running above 5%yr, but most of these components are administered prices, known supply shocks or volatile items, downplaying the impact of demand-side strength. Given this, we do not suspect such a pace of inflation to be sustained in 2026, so we retain our view on the outlook for inflation and interest rates.
Another surprise this week was APRA’s decision to limit high debt-to-income ratio mortgage loans. In this week’s note, Chief Economist Luci Ellis explains the policy change and why it is slightly dovish for the interest rate outlook.
In the run-up to Q3 GDP next Wednesday, we also received two partial indicators of investment.
Construction activity fell –0.7% in Q3, although this was mostly driven by an unwind in mining infrastructure installations. This is treated on a ‘completion’ basis and hence will not impact the National Accounts’ accruals-based estimates of construction activity. Rather, the strong lift in residential construction (4.2%) and bounce-backs in other infrastructure (3.1%) and non-res building (3.7%) point to a strong result for Q3.
Private CAPEX subsequently surprised to the upside, surging 6.4% in Q3 to be up 6.9% over the year. This latest move reflects a large pick-up in machinery and equipment spending (11.5%), centred on data centres and aircrafts. That said, strength was broad-based across many other non-structural industries, suggesting the cyclical upswing is broadening to businesses. The latest estimate to 2025-26 CAPEX plans were upgraded significantly off the back of the latest actual increase, and even after adjusting for inflation, the data suggests real investment intentions are on a firmer footing.
Together, these releases point to a stronger outcome for Q3 GDP. Our preview will be published later today on Westpac IQ.
In the UK, the government handed down the Autumn Budget touted as a classic ‘tax and spend’ budget. On taxation, the government announced a freeze on income tax thresholds until 2031 which will allow bracket creep to boost revenues over time. This is not dissimilar to Australia’s experience and, as we have previously discussed, can lead to a greater squeeze on household incomes over time. Other measures include a ‘mansion tax’ – a surcharge on properties valued above £2 million – and the removal of the two-child benefit cap, ending the limit on tax relief for families with more than two children. The government is also planning to raise the minimum wage by 4.1%, freeze fuel duty and rail fares and cut energy bills. All together, these measures aim to address cost of living measures while remaining fiscally prudent. The proposed budget provides the government with £22bn of headroom under its fiscal rules with borrowing expected to increase by £57bn over the forecast horizon.
Across the pond, the Fed’s Beige Book reported that even though consumer activity appears to have softened, manufacturing activity increased despite businesses remaining cautious about tariff activity. Respondents also noted that there was labour demand has weakened though businesses are opting for hiring freezes and similar strategies rather than outright layoffs. On prices, respondents reported an increase in input cost pressures though not all businesses are passing on these costs. They are being guided by “demand, competitive pressures, prices sensitivity and pushback from customers”. These comments highlighted to clear risks for activity, margins and potential inflationary pressure heading into 2026.
Closer to home, the Reserve Bank of New Zealand cut the OCR by 25bps to 2.25% reflecting greater spare capacity in the economy than previously thought. The RBNZ’s OCR track was revised down to a terminal rate of 2.20% (from 2.55% in August) with the first hike now pushed out to mid-2027. Current monetary policy settings are thought to be stimulatory and are expected to support an economic recovery. We anticipate 2.25% will be the low point for the OCR and the resulting stimulatory conditions will work to support the economy. Policy normalisation will be guided by the timing of recovery; we expect the first hike to occur in December 2026. You can read more about our RBNZ view here.
Finally, the Tokyo CPI print for September came in at 2.7% in headline terms and 2.8% excluding fresh food and energy, in line with market expectations. Food prices decelerated for a fourth month though rice prices, a key staple for Japanese consumers which shape inflation expectations and consumer sentiment, remain elevated. Prices of discretionary items in the CPI basket such as clothing and recreation items also remain high and could help justify another rate increase come December. This week BoJ dove Noguchi reiterated that the Policy Board remain on a path to raise rates but was tight-lipped on timing. Governor Ueda’s speech next week is anticipated to provide more colour on timing.
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