We already believed the RBA cash rate was likely at a peak, even if RBA officials were less convinced. A deeper housing downturn and early signs of cracks in the consumer sector point to an even softer 2027. Fading inflation risks from oil also boost our conviction on rates being at a peak.
It was already our view that the RBA was likely done hiking the cash rate after the November increase. Since then, our conviction on that call has strengthened. Later today we will publish the November Market Outlook with revised forecasts. GDP growth, the labour market and housing market have all been revised down in 2027. Underlying inflation has been revised down slightly in the second half of 2027, bringing the year-ended figure for calendar 2027 more decisively inside the RBA’s 2–3% target range than our previous forecast round. The unemployment rate forecast has been revised up to peak above 5%. Based on this revised forecast profile, an increase in the cash rate from here would be unlikely and – we would argue – undesirable.
A range of considerations underlie this forecast revision. The housing market has undershot our forecasts over the past couple of months. Turnover and financing activity have been coming in under our earlier expectations. Mortgage loan inquiries have taken another leg down in October after the September rate hike, after finding something of a level in prior months, with the additional impact of the November rate hike still to come.
We are also seeing early signs of a turn in the consumer. Consumer income and spending have so far been quite resilient to pressures from fuel prices and rising interest rates. But our Westpac Card Tracker is starting to show that discretionary services spending is turning down again in Q4, joining the discretionary goods category that was already quite weak. We would not over-emphasise this point, but it does imply that the risks of further surprising resilience are fading.
Subsequent to the November Monetary Policy Board (MPB) meeting, business survey data has shown weaker conditions and a sharp decline in forward orders. They also show further evidence that current inflation is mostly a non-labour cost shock that is not being fully passed through to consumer prices.
As we noted following the November MPB meeting, oil and fuel prices are already materially lower than the track assumed in the RBA’s forecasts. Dated Brent is nearly one-fourth lower than on 28 October, the date the RBA’s forecasts were finalised, and spot Brent is around 15% lower. This significantly lowers the risk of a new wave of pass-through of fuel costs to other prices, as well as easing consumer inflation perceptions and expectations.
In the media conference following the November meeting, Governor Bullock flagged that it was a good time to “take stock” of the policy tightening to date. Both we and the market read this as a signal that the MPB would pause at the December meeting. The 6:3 split vote at the meeting also suggests that some external members are more attentive to downside risks than the internal members.
A rate hike in February 2027 cannot be ruled out but it is looking even less likely given signs in the data and surveys. The MPB will at least discuss a hike in February. The staff and senior officials remain sensitive to inflation risks and have a downbeat view of supply capacity growth.
Given what we are seeing in the economy now, though, a rate hike in 2027 would require either a material new inflation shock that has not yet occurred, or would constitute a policy error on the part of the RBA (something that we will never forecast as a base case, knowing the talents and capabilities of the staff and the Board). We concur with the dissenting voters in the MPB that the downside risks need more attention. Policy is clearly restrictive, and the risk of overdoing the inflation correction is growing. And by the time we get to February, we think there will be more evidence that the domestic economy is slowing materially, and the inflation outlook with it.
