RBA extends hold in December

The RBA left the cash rate at 3.6% for the third meeting in succession, signing off for 2025 with a hawkish tilt that effectively signals the end of the line for the easing cycle. The hot September quarter CPI report continues to reverberate through the RBA, with inflation risks now 'tilted to the upside'. Strength in the economy and labour market has also raised uncertainty over the restrictiveness of interest rate settings heading into 2026. A total of 75bps of rate cuts were delivered through the year - the full effects of which are yet to play out. Governor Bullock said at the post-meeting press conference the likely outlook for policy was either an extended pause or higher rates. Markets are pricing in a 25bps hike by next June with a follow-up hike by September - a significant hawkish repricing from expectations for one further 25bps rate cut after the previous meeting in November.   

Today's statement and press conference made clear that inflation is still driving monetary policy. With inflation reaccelerating in Q3, the RBA is waiting on additional data - the key question needing to be confirmed is whether one-off factors (including electricity rebates and other administered prices) were mostly responsible or if it more accurately reflected the underlying supply/demand balance in the economy. It is clear that the quarterly CPI (next due late January) is the key input for policy decisions, with the ABS having only just pivoted to the new monthly series. 

Given the rise in inflation and the pick-up in economic activity, with domestic demand rising strongly in Q3 (1.2%), the statement noted uncertainty around 'the extent to which monetary policy remains restrictive'. Labour market conditions continue to be assessed as being on the tight side, and there remains caution around the easing in wages growth given that unit labour costs remain at elevated rates. 

As the RBA now heads into its summer break, it will be closely watching the incoming data as well as developments offshore and in the markets. This will all feed into the RBA's next forecast round. The next RBA monetary policy meeting and the first in 2026 is on February 2. 

Preview: RBA December meeting

The RBA looks set to sign off for 2025 with a hawkish hold, leaving the cash rate at 3.6%. Incoming data has driven a hawkish repricing of the rates outlook in Australia to the point where a rate hike in the second half of 2026 is now seen as the RBA's most likely next move. That compares to expectations for one further rate cut after the November meeting. In light of this, a hawkish surprise from the RBA seems an unlikely scenario. The main question is whether the tone of the decision statement and Governor Bullock's press conference supports the hawkish repricing that has taken place. 

Last time out in November, the RBA's decision to hold was a straightforward one. The RBA raised its inflation forecasts after CPI in the September quarter rose to 3.8%Y/Y in headline terms and 3.3%Y/Y on a trimmed mean or core basis - material upside surprises. However, Governor Bullock's post-meeting comments were balanced enough for markets to still have an additional rate cut priced in to round out the easing cycle. Data on both sides of the RBA's dual mandate (2-3% inflation and full employment) has since altered that view. 

On inflation, headline CPI was clocked in the new monthly data series rising from 3.6% to 3.8%Y/Y in October, with the trimmed mean firming from 3.2% to 3.3%Y/Y. Although temporary factors (electricity prices, travel costs and fuel) are pushing up headline inflation, the RBA has also noted upward pressure from areas such as home building costs and in services. In October services inflation lifted from 3.5% to 3.9%Y/Y.  

An encouraging labour market report in October saw employment reaccelerate (42.2k) at a 6-month high, seeing the unemployment rate fall from 4.5% to 4.3%. The unemployment rate has trended higher through the year; however, it still remains at a level the RBA sees as consistent with its full employment mandate. Those conditions are currently generating wages growth of 3.4%Y/Y as of the September quarter - a solid pace without posing upside risks to inflation. 

Meanwhile, last week's National Accounts were stronger than they looked - despite quarterly GDP growth slowing to 0.4% (2.1%Y/Y). Beneath the hood, domestic demand rose 1.2% in the September quarter - fastest rise since Q2 2023 - on broad-based gains across consumption, investment and in the public sector. Meanwhile, household spending made a strong start to the December quarter surging by 1.3% in October.  

All in all, expect the RBA to remain on hold on the basis of the incoming data since the November meeting. In the post-meeting press conference, Governor Bullock will likely keep to her usual script by steering clear of validating any particular rate path, stressing optionality to respond to the data is key.

Macro (Re)view (5/12) | RBA outlook shifts

Equities markets mostly made modest gains, adding to last week's rally - though higher yields at the longer end of the curve were a headwind. Pro-cyclical currencies (EUR and AUD) rose against the US dollar, while the JPY strengthened on signals the BoJ is preparing to hike later this month. Next's week's Fed meeting shapes as the key risk event for markets heading into year-end. 

Expectations are firmly set on the Fed cutting by 25bps next week. But with inflation remaining elevated to the 2% target, the Fed could be non-committal on further cuts - somewhat of a risk for markets pricing in 100bps of additional easing. Backward-looking inflation data for September released late in the week matched consensus: the PCE deflator was 0.3%m/m and 2.8%Y/Y (from 2.7%), while the Fed's preferred core PCE measure was 0.2%m/m and 2.8%Y/Y (from 2.9%). On the other hand, the same report showed spending lacked punch in September slowing to 0.3%m/m in nominal terms (from 0.6%) and stalling (0%m/m) on a real basis. Softer consumption saw the Atlanta Fed model downgrade its estimate for Q3 GDP growth from 3.8% to 3.5%.  

Euro area inflation data for November likely keeps the ECB in a holding pattern. Headline inflation ticked up from 2.1% to 2.2%Y/Y and the core rate was steady at 2.4%Y/Y. Part of the ECB's caution to cut further relates to elevated services inflation, which lifted from 3.4% to 3.5%Y/Y. The economic backdrop in the bloc has consistently surprised with its resilience throughout the year, and that was reflected in Q3 growth being revised up to 0.3%, with growth through the year at 1.4%. 

In Australia, markets have signaled the end of the RBA's easing cycle ahead of next week's meeting, now pricing in a rate hike as the next move, likely in the second half of 2026. The hawkish repricing followed household spending accelerating by 1.3% in October - its fastest rise in more than 18 months - while GDP growth in the September quarter of 0.4% was stronger than it looked despite missing expectations (0.7%). Annual growth firmed to 2.1% - already above the RBA's year-end forecast for 2%. The rates curve points to the cash rate (3.6%) staying flat until well into next year amid renewed inflationary pressures, still-robust labour market conditions and a resilient domestic growth backdrop - dynamics that are eventually expected to see the RBA tighten policy. 

Household spending rose 1.3% in October - sharply more than expected (0.6%) - with early Black Friday sales and major events (live sport and concerts) driving a reacceleration in discretionary spending (1.6%) after a soft Q3. Real GDP growth slowed to 0.4% in the September quarter from 0.7% in the June quarter - partly due to softer household consumption (0.5%) as discretionary demand pulled back (-0.2%) - though it was inventories (-0.5ppt) and net exports (-0.1ppt) that weighed most heavily. 

Excluding those volatile components, domestic demand - a more accurate gauge of the underlying momentum in the economy - lifted by 1.2%, its strongest rise since Q2 2023. That included the household consumption gain (0.5%), while business investment picked up strongly (3.4%) on AI and cloud capabilities. Meanwhile, renewed strength in public demand (1.1%) and support from dwelling investment (1.8%) ensured the pick-up in domestic demand was broadly based. In other news from Australia, monthly data for October showed a 6.4% fall in dwelling approvals and a wider trade surplus of $4.4bn. Meanwhile, the current account deficit was broadly unchanged at a little above 2% of GDP in Q3.

Australia's trade surplus $4.4bn in October

Australia's goods trade surplus widened to $4.4bn in October from $3.7bn in September, slighty missing expectations for a $4.5bn surplus. Exports rose 3.4% in the month reaching a 2-year high. This outpaced a 2% rise in imports.     

The trade surplus was $4.4bn in October, averaging $3.1bn across the past 3 months. The 3-month average marked a low going back to September 2018, having fallen from $4.8bn 12 months ago. The Q3 balance of payments data published earlier this week (see here) highlighted that import spending has been steadily climbing while export revenue has been subject to volatility in commodity prices. That has seen trade surpluses track a declining trajectory. 

Exports lifted by 3.4% in October to $46bn, their highest level in 2 years. The non-monetary gold category continued to surge (14.2%), reflecting elevated prices on strong safe-haven demand for the commodity. The value of non-monetary gold exports is up 74% over the year. Meanwhile, non-rural goods rose 2.1% on the back of gains in iron ore (2.3%) and LNG (4.9%). Rural goods advanced 0.9%. 

Import spending rose for the third month in succession with a 2% gain in October. Annual growth advanced from 11.2% to 13.6%, its fastest pace since the start of 2023. As with exports, non-monetary gold was the key movement for imports rising by 80% in the month to record highs. Consumption goods increased by 1.6%, while capital goods pulled back from recent strength - highlighted by the surge in business investment in the Q3 National Accounts (see here) - falling 5.5% in the month.   

Australian household spending rises 1.3% in October

Australian household spending surged by 1.3% in October, its fastest rise since the start of 2024 and well above the expected increase of 0.6%. Sales and major events saw discretionary spending lift sharply (1.6%), making a strong start to the quarter after yesterday's National Accounts reported a pullback in Q3 (see here). Markets do not expect any further RBA rate cuts and have begun pricing in a rate hike late next year. 

Household spending lifted by 1.3% in October ($78.4bn), accelerating from a 0.3% rise in September. Annual growth firmed to a 25-month high of 5.6% from 5.1% previously. The overall rise in spending was broadly based. The main dynamic was discretionary spending surging to a 1.6% rise for the month, its fastest gain since January 2024. Meanwhile, non-discretionary spending rose by 0.8%, matching its gain from September. The composition of growth remained driven by goods, which rose by its most (1.7%) since September 2023, outpacing services (0.8%).     

As the chart (below) shows, all categories contributed to pushing up spending in October. Sales events supported growth in clothing and footwear (3.5%) and furnishings and household equipment (3%). Major sporting events and concerts drove the recreation and culture category (1%), leading to associated gains at hotels, cafes and restaurants (2.2%). Alcoholic beverages and tobacco saw its first rise in 11 months (1.8%). Smaller gains were posted in the health (0.4%) and transport categories (0.3%).         

Household consumption growth slowed in the September quarter, but that looks to be temporary given the strength of the October report. As highlighted in my review of the National Accounts, a rising saving rate and solid real income growth bode well for the spending outlook. While further RBA rate cuts look to be off the table, the full effects of the 75bps of cuts delivered this year are still cycling through the economy. 

In review | Australian Q3 GDP: Domestic demand accelerates

The Australian economy slowed in the September quarter to 0.4% from 0.7% in the June quarter, disappointing expectations (0.7%). However, that belied an acceleration in domestic demand (1.2%) - more reflective of the underlying momentum in the economy - with headline growth weighed by inventories and net exports. Economic growth was 2.1% through the year, up from a revised 2% previously, already slightly above the RBA's end-2025 forecast (2%). 

Similar to Australia, growth in many advanced economies has been resilient despite headwinds from trade and geopolitical uncertainties. Growth in the US was solid over the first half of the year (0.8%) before being impacted by the government shutdown in Q3. The euro area saw a slight rise in Q3 (0.2%) driven by France and Germany; however, the UK slowed (0.1%). Trade had varying effects on economies in Asia, with growth advancing in China (1.1%) but contracting in Japan (-0.4%).       

The slowdown in quarterly headline growth in Australia can largely be looked through given it was driven by inventories (-0.5ppt) and net exports (-0.1ppt), both volatile components. Underlying growth was stronger than the 0.4% rise in real GDP implies as domestic demand rose at its fastest pace (1.2%) since Q2 2023. All components of domestic demand contributed to its increase, notably business investment that surged (3.4%) on technology-driven capital expenditure on data centres.   

Another key theme is that hand-off from the public to the private sector as the main driver of growth in Australia has been smoother than anticipated. Private demand (1.2%q/q) rose by 3.1% through the year, well up from a 0.6% pace for the year to Q3 2024. That pick has coincided with public demand growth (1.1%q/q) slowing from 4.9%Y/Y to 1.3%Y/Y currently.  

Weaker aspects of the National Accounts included subdued growth in productivity (0.7%Y/Y) and GDP in per capita terms (0.4%Y/Y). This continues to pose downside risks to longer-term growth prospects in Australia. However, the current momentum of growth is solid. With the labour market remaining robust (despite a higher unemployment rate), and after the reemergence of inflationary pressures in Q3, the RBA is likely to reaffirm its on-hold stance at next week's meeting.  

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National Accounts — Q3 | Expenditure: GDP (E) 0.5%q/q, 2%Y/Y

Household consumption (0.5%q/q, 2.5%Y/Y) — Household consumption growth slowed to 0.5% in the September quarter following the 0.9% acceleration in the June quarter - its fastest rise since late 2022. Annual growth, however, lifted from 2.1% to 2.5%. 

The slowdown in Q3 was driven by a post-sales pullback in discretionary consumption (-0.2%), after it advanced strongly in Q2 (1.5%) supported by the extended Easter holiday period and end of financial year discounting. Meanwhile, consumption of essentials saw their fastest rise since late 2023 (1%). This profile and continued weakness in consumer sentiment suggests households remain cautious. 

That lingering caution is reflected in a saving rate that moved up from 6% to 6.4%, continuing its uptrend from very low levels over the past couple of years. However, increased saving combined with positive income dynamics bodes well for future consumption. Real disposable incomes managed to lift in Q3 (0.9%), despite renewed inflationary pressures (rising 0.9%q/q and 3%Y/Y according to the household consumption deflator). In annual terms, real disposable incomes rose at a healthy 3.9% pace, albeit down from 5.1% in the June quarter on base effects. A range of factors have supported real incomes including lower inflation; robust labour market conditions; Stage 3 tax cuts; and the RBA's easing cycle.   

Dwelling investment (1.8%q/q, 6.5%Y/Y) — Rose by 1.8% in Q3, lifting growth over the year from 5.6% to 6.5%. New home building activity was the key driver rising 2.6% to post its fastest quarterly gain since Q1 2021. This was supported by a 0.5% lift in alteration work. The sector has found form over the past year, with activity rising alongside the RBA's easing cycle. Meanwhile the capacity and cost pressures that constrained activity to a significant extent coming out of the pandemic have reduced.       

Business investment (3.4%q/q, 3.8%Y/Y) — New business investment accelerated by 3.4% in the quarter and 3.8% through the year, swinging from -0.6% previously. This was the strongest quarterly growth in business investment since early 2021 during the pandemic recovery, and the fastest in 8 years prior to that. Technology-driven investment in data centres to support AI and cloud computing capabilities saw machinery and equipment spending surge by 7.5%, its largest rise in 11 years excluding the pandemic. Growth in intellectual property products (2.4%) and cultivated biological resources (3.1%) picked up in Q3. Non-dwelling construction remained subdued with a 0.5% lift for the quarter. 

Public demand (1.1%q/q, 1.3%Y/Y) — Posted its strongest outturn in a year rising by 1.1% in the September quarter. Government expenditure rose by 0.8%, driven by state and local government spending on health and education portfolios. Public investment (adjusted for 2nd hand asset transfers) rose by 2.4%, but that followed declines in each of the previous three quarters. The public infrastructure pipeline has peaked and projects underway are moving towards completion. That has weighed on public demand over the past year; annual growth has slowed over the period from 4.9% to 1.3% currently. 

Inventories (-0.5ppt in Q3, -0.4ppt yr) — The change in inventories from Q3 (-$1.9bn) to Q2 ($1.7bn) produced its largest drag on quarterly growth (-0.5ppt) since Q2 2023. Non-farm inventory levels fell significantly as production in the mining sector declined, while robust domestic demand resulted in a drawdown on retail inventories. Public sector inventories also declined. 

Net exports (-0.1ppt in Q3, -0.1ppt yr) — Weighed very modestly on growth in the quarter (-0.1ppt) as exports (1%) were outpaced by imports (1.5%). Australia has been relatively less impacted by the volatility and uncertainty in global trade than many other countries following the US Administration's new tariff regime. 

Exports lifted 1% as goods advanced (1.3%) on the back of coal rebounding (6.9%) from declines in the past two quarters. Services were flat in the quarter but are up sharply over the year (9.2%), with the large number of overseas arrivals boosting the tourism and education sectors. A 1.5% rise in imports in Q3 was underpinned by the acceleration in business investment discussed above. This saw capital goods surge 6.7%, its strongest rise since the pandemic recovery in 2020 and before that Q1 2018. Services imports were soft (-0.2%) after a 3.3% rise in Q2.  

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National Accounts — Q3 | Incomes: GDP (I) 0.3%q/q, 2%Y/Y 

The GDP income measure lifted 0.3% quarter-on-quarter, down from 0.8% in the June quarter; however, year-ended growth lifted from 1.8% to 2%. Wage incomes continued to lift solidly, indicative of a labour markets that remains in robust shape - despite the unemployment rate trending higher since the start of the year. The compensation of employees was up by 1.7% in the quarter to be 7.1% higher through the year, lifting from 6.7% previously. The public sector wage bill (2.2%) outpaced the private sector (1.6%) in Q3, driven by state-based enterprise bargaining agreements coming into effect. In the private sector, wages were supported by redundancies and bonuses in financial and insurance services. 

Company profits increased by 1.5% in Q3, while a base effect swung annual growth from -2.7% to 2.2%. Private non-financial corporations saw their strongest quarter since Q1 2024, with profits rising by 1% (0.9%Y/Y). A key contributor to this was the mining sector, which benefitted from higher coal and iron ore prices. Profits for financial corporations rose 2.6% in the quarter - fastest gain in 3 years - and 8.8% over the year, supported increased loan activity and higher lending margins. Meanwhile, gross mixed income (small company profits) rebounded from a decline in the previous quarter to rise by 1.1% in Q3 and 5.5% through the year. 

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National Accounts — Q3 | Production: GDP (P) 0.4%q/q, 2.2%Y/Y

The GDP production estimate was 0.4% in the September quarter, with annual growth firming from 1.9% to 2.2%. In the goods sector, output rose 0.3% following a 1.2% lift in Q2, with annual growth up from 0.8% to 1.4%. Goods distribution led the way rising 0.6%q/q and 4%Y/Y. International travel boosted the transport industry (1.6%), and improving consumer demand lifted retail (0.4%). Output in goods production was broadly flat (0.1%); reduced output weighed on mining (1.8%) but that was offset by gains across construction, utilities, and manufacturing.   

For services industries overall, production increased by 0.4% in Q3 to be up 2.2% over the year. Household services expanded by 0.6% in the quarter (2.8%Y/Y). This was driven by health care (0.7%) and arts and recreation (0.7%). Business services saw a 0.3% lift, with financial and insurance services (1.6%) and rental, hiring and real estate services (1.6%) the key areas of strength. That was moderated by weakness in professional services (-1.9%). 

Australian GDP growth 0.4% in Q3

Australian economic growth slowed to 0.4% in the September quarter, defying expectations to match its 0.7% pace in the June quarter. The outcome is stronger than today's miss implies. Domestic demand accelerated at its fastest pace since Q2 2023 (1.2%), with inventories (-0.5ppt) and net exports (-0.1pt) weighing on the headline growth rate. Year-ended growth firmed to 2.1% from a revised 2% (1.8% prior) - already above the RBA's end-2025 forecast of 2%. This should reaffirm the RBA's on-hold stance at next week's meeting.    

After lifting to 0.7% in the previous quarter (revised from 0.6%), economic growth softened to 0.4% in the latest quarter. Despite the weaker outcome this quarter, growth was more broadly driven than in the June quarter that relied entirely upon a sales-driven boost to household consumption (0.9%). With discretionary spending pulling back (-0.2%), household consumption slowed to 0.5%. However, business investment (3.4%) rose at its fastest pace since the pandemic rebound in 2021 as firms ramped up spending on data centres, while dwelling investment (1.8%) was underpinned by the strongest lift in home building activity in 2 years. Renewed strength in public demand (1.1%) was also a key growth driver. That left inventories (-0.5ppt) and net exports (-0.1ppt) - both swing factors - holding back growth.  

The pick-up in domestic demand, and its broad-based composition, is a key theme from the September quarter National Accounts. Another is the resurgence in private demand, inverting from a year ago when public demand was the dominant driver. Over the past year, private demand rose from 0.6%Y/Y to 3.1%Y/Y, taking up the running as public demand slowed from 4.9%Y/Y to 1.3%Y/Y currently. 

More to come. 

Australian dwelling approvals fall 6.4% in October

Australian dwelling approvals fell by 6.4% for the month in October (15.8k), slightly worse than the expected decline of 5%. The result reversed some of the 11.1% rise in September (revised from 12%), the only gain in approvals in the past 4 months. Approvals remain at low levels despite supportive macro factors.   

Approvals nationally declined by 6.4% to 15.8k in October, down 1.8% on a year earlier. This, however, followed a large rise in the previous month of 11.1%. In October, both major dwelling types recorded declines: house approvals fell 2% to 9.4k (following a 4% rise in September), and unit approvals inverted 12.1% to 6.1k (after surging 22.2% in the prior month). 

Over the past 3 months, dwelling approvals averaged around 16k, with house approvals running at 9.4k and units at 6.6k - all low levels relative to previous cycles. The RBA's earlier tightening cycle as well as capacity and cost pressures have been headwinds; however, there are also fundamentals that should be supporting additional housing construction, including RBA rate cuts, rising housing prices and population growth. 

House approvals were weighed by weakness in New South Wales (-0.2%), Victoria (-7.8%), and South Australia (-2.3%). Gains came through in Queensland (1.7%) and Western Australia (2%).

In the unit segment, a reversal in the volatile high-rise category drove the decline in approvals in October. That was despite the low-rise and townhouse categories seeing some uplift. Unit approvals declined heavily in New South Wales, Victoria and Queensland.   

Australia Current Account -$16.6bn in Q3; net exports -0.1ppt

Australia's current account deficit widened to $16.6bn in the September quarter (-$13bn expected) while deficits in recent quarters swelled following revisions. Over the past couple of years, export revenue has been affected by volatility in commodity prices while import spending has been rising. This has seen the trade surplus narrow significantly from elevated levels, falling to a 7-year low ($2.5bn) in the quarter. Import volumes (1.5%) outpaced growth in exports (1%) in Q3, with net exports expected to deduct 0.1ppt from quarterly GDP growth.

The nation's current account deficit was $16.6bn in the September quarter (around 2.4% of GDP), widening from $16.2bn in the June quarter. The current account has been in deficit since the middle of 2023, exposed by a narrowing trade surplus and large income deficits.  

As noted earlier, volatility in commodity prices over the past couple of years has weighed on the nation's export revenue. At the same time, imports have remained on an upward trajectory. The trade balance is still in surplus (more is earned from exports than is spent on imports denominated in $A); however, surpluses (grey bars in chart below) have declined significantly, down from a peak of $41.4bn in the middle of 2022 to just $2.5bn in the latest quarter. That is a fraction of the primary income deficit (-$18.7bn), which is leading to this run of current account deficits. 

In Q3, export revenue lifted by 0.9%, driven by a 1% rise in underlying volumes as prices eased by 0.1%. Goods exports (1.3%) led the way on the back of major resources (1.5%), notably coal (6.9%), while services stalled (0%). Over the past year, however, services (9.2%) have dominated goods (2.3%), as the large inflow of overseas arrivals have boosted the tourism and education sectors. 

For imports, the total spend was up 1.1% in the quarter, with volumes lifting 1.5% to more than offset cheaper prices (-0.4%). Goods (2.1%) were again the key driver, with services falling (-0.2%). Capital goods lifted sharply (6.7%) to drive import volumes, and this lines up with the acceleration seen in business investment in the quarter. This came on the back of increased orders for aircraft (236%), ADP equipment (data servers etc) (13.5%), and machinery and equipment (6%). Meanwhile, intermediate goods (4.2%) lifted as fuel imports surged (9.8%). 

Overall, with import volumes (1.5%) exceeding exports (1%), the read-through is negative for GDP growth (imports deduct from a nation's GDP). The ABS reported that net exports (exports - imports) is expected to reduce Q3 GDP by 0.1ppt.