Key insights from the week that was.
In Australia, the RBA delivered another 25bp rate increase at its November meeting, taking the cash rate to 4.85%. The move was widely expected, reflecting the Board’s continued concern around inflation following the recent run higher in global energy prices, firmer domestic capacity pressures and signs that inflation expectations have edged up. Inflation is now not expected to return to the mid-point of the target band until mid-2028. This is despite weaker growth expectations and the unemployment rate trending up to 5.1% by end-2028 on the RBA’s forecasts.
Importantly, though, the decision was not unanimous, with three members preferring to remain on hold given downside risks to activity and the restraining influence of slower growth. Governor Bullock’s suggestion that it was time to “take stock” after five rate increases also struck a less hawkish note, while the statement dropped September’s explicit reference to raising rates further “if needed”. In our view, February represents the next plausible opportunity for another hike, but we see this only as a risk.
Policy’s effect on housing is becoming increasingly visible. Cotality home prices fell a further 1.2% in October to now be 6.7% below March’s peak. The cumulative price decline is approaching the scale of previous housing corrections but appears to have regained momentum after September’s rate increase. Dwelling approvals saw a 5.1% headline gain in September, but this was driven by volatile unit approvals while detached house approvals fell sharply, suggesting higher rates and the established-market downturn are beginning to weigh on the construction pipeline.
Official data on nominal household spending meanwhile rose 0.6% in September and 2.1% for Q3; however, much of the recent acceleration looks to be price-driven, particularly for fuel. Real spending volumes expanded by a much more modest (but still solid) 0.7% in Q3.
The Westpac-DataX Consumer Panel provides a granular look at income, spending and saving flows. The latest update suggests that, beneath the resilient headline story, households are increasingly being squeezed, particularly those with low savings buffers. With another rate increase now delivered, housing wealth declining and sentiment weak, Q3 increasingly looks like the high-water mark for growth in consumer spending.
Lastly for Australia, in September the goods trade surplus widened sharply to $2.8bn, with non-monetary gold trade yet again adding considerable noise month-to-month. The most notable development was another exceptionally strong result for data-processing equipment imports, taking the Q3 total to $11.1bn. This is another clear marker of the scale of Australia’s data-centre investment boom, which should feature prominently in both business investment and imports in the Q3 National Accounts.
Offshore, the world has been focused on the US mid-term elections. In the House, Senate and a series of State Governor races, the Democrats experienced resounding victory. Come 2027, the Democrats will have a comfortable majority in both houses of Congress and are expected to make use of this strength to respond to voter concerns, particularly over cost-of-living pressures. The election result also limits President Trump’s ability to fund an extended military action against Iran. Notably, both immediately before and after the election, President Trump and the administration have exhibited a greater interest in furthering negotiations with Iran. It is therefore not a surprise that Brent oil has backed off its most recent highs around USD118 last Friday, although the scale of the drop to near USD93 yesterday is arguably too optimistic. Brent has since traded back up to above USD99, still 16% below Friday’s peak.
While the initial reaction to the US election result was a robust broad-based rally in major equity indexes, concerns over the potential for tighter regulation of AI and the related infrastructure buildout jolted US equities lower overnight – the Nasdaq falling 5.5% and S&P500 4.4%, both a multiple of the prior session’s gains. That said, US term interest rates and FOMC rate expectations have also been scaled back; so, while tech may come under greater scrutiny, a foundation for better outcomes across the rest of the US economy may become evident in time. US data out this week continued to suggest their economy is in robust health overall. And, if tensions in the Middle East abate, the FOMC’s concerns over US inflation should subside. Gaining enough comfort for the FOMC to not hike in December is a high bar, but the probability of further hikes in 2027 should continue to fall.
Turning then to the UK, the Bank of England raised Bank Rate by 25bps to 4.00% at their November meeting as expected. On the Bank’s baseline expectation, UK inflation is forecast to rise from 3.5%yr at September to 5.00% by mid-2027. Activity data has also surprised to the upside in recent months, though “there remains limited evidence of knock-on effects on other prices and wages”.
In the press conference, Governor Bailey recognised the nascent improvement in energy price pressures over the past 48 hours and the effectiveness of monetary policy but also conveyed that “Unless progress towards resolving the conflict is made, or there is other news which softens the risk to inflationary pressures, a further increase in Bank Rate may be warranted”. Governor Bailey’s tone and comments made in the minutes by other Committee members did not suggest this was a decision that needs to be made in December, but rather a risk to be judged as additional information is received. This points to further tightening being more likely in early 2027 than before, and only if conditions / risks warrant.
