Cliff Notes: gaining confidence with inflation
Key insights from the week that was.
As Half Yours’ forged ahead to take the Melbourne Cup, RBA Governor Bullock and the Monetary Policy Board (MPB) made clear they are not willing to gamble on inflation’s return to target, opting to keep the cash rate on hold at 3.6% at their November meeting. The unanimous decision came as no surprise to market participants after annual trimmed mean inflation printed at 3.0%yr in Q3. The MPB conceded that some of this acceleration was due to “temporary factors”, but there was also “evidence of more persistence”. The RBA’s revised forecasts now see the unemployment rate at 4.4% over the forecast horizon (up from 4.3%), while underlying inflation holds above the mid-point of the target range through 2026, then draws close in 2027.
Highlighted by Westpac Chief Economist Luci Ellis in this week’s video update, with policy only mildly restrictive, the RBA can afford to keep the cash rate at current levels while it assesses the inflation trend for a couple more quarters without too much of a risk to activity. We expect two more 25bp rate cuts from the RBA, but not until May and August next year.
Turning to the outlook for the consumer. Our card activity data continues to point to a solid uptrend in consumer demand; however, the Q3 update on household spending muddied the waters, real spending surprising to the downside with a meagre 0.2% lift compared to Q2’s 0.9% gain. The susceptibility of household demand to sentiment and the cost of living was also called out by the RBA’s latest business liaison which characterised consumers as “value conscious”. We will receive a full update on consumer demand and household finances in the National Accounts release on 3 December, but this will only be for Q3. We may not get a full picture on the susceptibility of consumer demand to changing interest rate expectations until early-to-mid-2026.
The uncertainty over the timing and scale of further interest rate cuts notwithstanding, October’s Cotality data points to household wealth compounding at a rapid rate, with home prices across the major capital cities growing at a circa 12% annualised pace during the 3 months to October. The RBA believes these gains may boost spending in time. That said, one household’s gain is another’s loss vis a vis affordability; and an increase in spending ahead of income requires a willingness to dissave or take on additional debt. Bear in mind as well that the support afforded by rate cuts and policy measures such as the recent roll-out of the First Homebuyer Guarantee Scheme will fade in coming months as prices move higher. Tight supply, however, will remain a support for price growth for the foreseeable future.
Offshore, the data flow was again light as the current US Government shutdown became the longest ever. The ISM manufacturing and service PMIs point to soggy conditions, the headline indexes remaining below average and the employment measures consistent with an outright reduction in headcount in October. Challenger job cuts also spiked to the highest October reading in over 20 years, taking year-to-date job losses above 1 million. Challenger, Gray and Christmas report that the reductions have been concentrated in technology and warehousing and are in part due to AI adoption. Note that this measure is an estimate of gross job cuts. ADP private payrolls is, in contrast, a measure of net job creation. The latter survey reported a 42k job gain in October, leaving the 6-month average at a modest, but positive, 20k. Apart from Governor Miran, Fed speakers this week kept their options open for the December meeting, continuing to raise concerns over inflation risks as well as threats to the labour market.
Across the Atlantic, the Bank of England’s Monetary Policy Committee left the Bank Rate unchanged at 4.0%. The decision was a 5-4 split decision, and the communications carried a dovish tone. The minutes revealed that among the five members in the majority, four were concerned about the persistence of inflation. One member, Governor Bailey, judged that slack in the UK economy is rising; however, he preferred to “wait and see if the durability of disinflation is confirmed”. The forward guidance was explicit, stating that “Bank Rate is likely to continue on a gradual downward path” if the disinflationary process continues.
There were few changes to the BoE’s forecasts. CPI inflation is expected to fall below 3% around Q2 next year, then return to around 2% in Q2 2027 – a very similar path the August projection. GDP growth is expected to remain in the 1–1.5% range until early 2027, with some acceleration towards a 2% pace from late-2027. With Governor Bailey likely to favour a cut if current trends persist, we now anticipate a further 25bp policy easing at the MPC’s final meeting of the year in December and a 25bp rate cut per quarter through the first half of 2026.
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