Australian Q4 Wage Price Index 0.8%; 3.4%yr

Australian wages growth was unchanged rising by 0.8% in the December quarter as the annual pace firmed from 3.3% to 3.4%. Both outcomes matched market and RBA forecasts. Following a 25bps rate hike earlier this month, markets are pricing in a further increase in the cash rate to 4.1%. A surprise - in either direction - in tomorrow's Labour Force Survey for January could see pricing adjust. 

The Wage Price Index, a quarterly measure of wage inflation in the Australian labour market, provided almost no surprises in today's release. Wages growth was 0.8% for the second quarter in succession - though the annual pace lifted from 3.3% to 3.4% after a downward revision was made to the prior quarter. Over the past year, wages growth has remained around its current pace, fairly modest by historical standards - though the RBA raised rates earlier this month maintaining that the labour market was tight and that the economy was more supply-constrained than thought. It also said that weak productivity growth meant that unit labour costs were putting upward pressure on inflation. 

Wages growth in both major sectors of the labour market - private and public - was 0.8% in the December quarter. However, a sharp divergence has emerged over the past year. Annual growth in public sector wages has climbed from a 2.8% pace a year ago to 4% currently, the fastest since Q2 2024. Meanwhile, annual private sector wages growth is currently 3.4%, virtually unchanged from 3.3% a year earlier.  

Analysis by the ABS in today's release shows that state government pay rises have been the impetus behind wages growth in the public sector. Over the past year, many state-based agreements have come into effect, which have frequently delivered multiple pay rises once backdated increases are included due to the time taken for these agreements to be negotiated and finalised. In the latest quarter, New South Wales saw public sector wages rise by 1.7% following a new agreement for frontline health workers. Overall, 29% of public sector jobs received a pay rise in Q4, with an average increase of 3.1% going through.  

ABS chart 

Government policy is also boosting private sector wages to some extent. The Commonwealth has funded pay increases to aged care and childcare workers, who typically work for private sector organisations. But wage dynamics in the private sector look to be moderate at best. Only 19% of private sector jobs saw a pay rise in the December quarter - higher than the 14% at the same time a year earlier - but the average pay rise of 3.7% was the same as a year ago. Two years ago, the average pay rise was 4.4% and at the peak in Q3 2023 it was 5.8%.  

Across industries, wages growth has picked up in household services, which reflects the boost to workers in aged care and childcare. By contrast, wages growth in the goods-related sector has remained on a slowing trajectory and has been broadly flat in business services.      

Preview: Wage Price Index Q4

Australia's Wage Price Index (WPI) for the December quarter is due to be published by the ABS today (1130 AEDT). A key measure of wage inflation in the domestic labour market, the WPI will be closely watched by the markets after renewed inflationary pressures prompted the RBA to hike rates by 25bps earlier this month. Although wages growth looks to have been fairly moderate in a historical context over the past year or so, a key distinction now is that the RBA sees the economy as more supply constrained than previously assessed, while ongoing weakness in productivity growth has persisted.   

December quarter preview: Steady as it goes  

The labour market was patchy through the middle of last year, but conditions appeared to strengthen over the final quarter. That was reflected in a pick-up in employment growth (73.8k in Q4) and a decline in the unemployment rate, which averaged 4.2% compared to 4.3% in the September quarter. However, the underlying conditions aren't expected to boost wage momentum. Quarterly wages growth is forecast to come in at 0.8% (range: 0.7-0.9%) for the third quarter in succession, which would see the annual pace remain at 3.4%.     

September quarter preview: Public sector steps up

Wages growth matched expectations rising by 0.8% in the September quarter, leaving the annual pace steady at 3.4%. In the quarter, the 3.5% increase to the minimum wage and awards as determined by the Fair Work Commission started to flow through; however, that was the smallest increase since 2021.

Private sector wages growth cooled to 0.7% in the quarter, slowing from 3.4% to 3.2% over the year - a low since the middle of 2022. By contrast, wages growth in the quarter was firmer in the public sector (0.9%) after a number of new state-based enterprise agreements came into effect. That lifted the annual pace from 3.6% to 3.8%, its fastest pace in over a year. 

Macro (Re)view (13/2) | Markets lock in on Fed cuts

A wide divergence across equity markets was evident this week as tech sector concerns continued to weigh in the US while semiconductor and AI infrastructure demand saw Asia surge. US labour market and inflation data supported the outlook for two Fed rate cuts this year, a headwind to the USD as Treasury yields fell across the curve. Political risk due to the ongoing uncertainty around PM Starmer was likely a factor in the underperformance of the GBP, while domestic influences on the EUR remain limited. 

Stronger-than-expected US labour market data has reduced the near-term urgency for Fed easing, though expectations for two rate cuts this year still firmed this week after a downside surprise on inflation. The delayed payrolls data for January delivered a surprise as employment surged by 130k (9-month high) relative to the 65k consensus. That pushed the unemployment rate down from 4.4% to 4.3%, beating expectations to hold steady, while the broader underemployment rate fell to a 6-month low (8%). Signs of a tighter labour market were notable as labour supply increased in the month, with the participation rate lifting from 62.4% to 62.5%. Meanwhile, wage pressures cooled to show average hourly earnings growth easing from 3.8% to 3.7%yr.

US CPI data for January indicated inflation eased broadly across the economy. Headline CPI of 0.2% month-on-month saw the annual rate decline from 2.7% to 2.4%, below the 2.5% pace expected and its slowest since May 2025. Core inflation printed at 0.3%m/m, slowing the annual pace from 2.6% to 2.5% (as expected), a near 5-year low. Key aspects latched onto in the report were core goods inflation (1.1%yr) continuing to imply modest tariff-related effects on prices, while core services inflation (2.9%yr) fell to lows since mid 2021.         

Public engagements by RBA officials reaffirmed that renewed inflationary pressures in Australia were behind last week's rate hike. At a Senate Estimates hearing, Governor Bullock said the incoming data would allow the Monetary Policy Board (MPB) to assess how entrenched higher inflation was likely to be, and whether or not further rate hikes would be required. Deputy Governor Hauser said that the economic conditions that required the RBA to be hiking now while other central banks were holding steady reflected its less aggressive strategy to return inflation to the 2-3% target. That strategy was implemented with the RBA's other mandate - maintaining the labour market at full employment - in mind. A speech by Assistant Governor Hunter highlighted that tightness in the labour market was consistent with above-target inflation. 

Australian housing finance rises 9.5% in Q4

Australian mortgage lending surged in the December quarter to reach new record highs on the eve of the RBA's February rate hike. The value of new commitments rose by 9.5% in the quarter ($108.3bn), underpinned by a 5.1% rise in loan volumes (149.4k). Key factors supporting demand included the RBA's easing cycle (75bps in 2025), first home-buyer incentives, and population growth - all reflected in housing prices that rose in the order of 8-9% on a nationwide basis in 2025 according to Cotality.  

Activity in the domestic mortgage market was very strong through the back half of last year - strength that has caught the attention of the RBA and APRA through earlier measures to curb riskier lending. Lending ended the year at a record high of $108.3bn on the back of a 9.5% rise in the December quarter, increasing by 21.5% across the back half of the year - compared to growth of just 1.5% in the first half. The acceleration looks to reflect the RBA's 3 rate cuts (75bps total), and expanded measures by the federal government to help buyers with low deposits enter the housing market.

Accordingly, first home-buyer lending surged by 15.5% in the quarter - the strongest rise since the Covid period - to $19.3bn, just short of the record high from 2021. But loan volumes to the segment, despite lifting 6.8% in the quarter to 31.8k, were still more than a third (34%) below the Covid peak - a combination of factors that point to affordability pressures. According to today's release, the average loan written to first home buyers was around $608k as of the December quarter.

Lending to the two major segments - owner-occupiers and investors - was at record highs. Owner-occupier lending was up 10.6% for the quarter - its fastest gain since Q1 2021 - to $65.3bn. That was matched by 4.8% lift in underlying loan volumes to 89k. In the investor segment, lending rose by 7.9% across the quarter ($43bn) and there was a 5.5% increase in loans written (60.4k).  

Australian household spending tails in December

Australian household spending tailed as 2025 wound down, notching its first monthly decline since March 2024 with a 0.4% fall in December - a downside surprise on expectations (0.1%). Spending rose strongly through October (1.4%) and November (1%) alongside an extended Black Friday sales period and a busy calendar of major events. That strength in consumer demand - a key factor in the RBA hiking rates at last week's meeting - translated into a 0.9% rise in quarterly volumes.   

The ABS's Household Spending Indicator (a high frequency measure of bank card spending) clocked spending declining by 0.4% in December - its first month-on-month fall since March 2024. Spending accelerated in October (1.4%) and November (1%) on the back of growth in discretionary sales (1.8% in October and 1.2% in November) during the Black Friday sales and associated discounting as well as major sporting and cultural events. Discretionary spending then pulled back in December (-0.3%), as illustrated in the chart below, with notable declines seen in furnishing and household equipment (-1.7%), clothing and footwear (-2.4%), and recreation and culture (-0.5%). Hotels, cafes and restaurants (0.5%) were able to resist that pullback.       

Household spending in nominal terms lifted by 2.2% across the December quarter - the strongest quarterly rise in 3 years. In real or inflation-adjusted terms, spending saw a 0.9% rise in the December quarter to be up by 2.4% through the year. Strong gains in the quarter were recorded in clothing and footwear (4.1%), furnishing and household equipment (3.6%), and hotels, cafes and restaurants (1.5%).     

The 0.9% lift in quarterly volumes is a solid guide to growth in household consumption (HCFE) - the largest component of GDP - in the National Accounts. However, the HSI does not capture the totality of bank card transactions, and it also excludes major items such as rents, electricity, insurance and education.     

Macro (Re)view (6/2) | Hawkish RBA supports AUD

The postponement of the key nonfarm payrolls release for January until next week left markets with second tier US data and reporting results to focus on. Tech-related plays hit US and Asian equities this week on concerns that capex plans are escalating amid uncertainty over the return on investment from AI infrastructure. This was a factor in the USD seeing a modest rebound (still down 9.6% on 12 months ago) - though the local AUD remained supported following a hawkish hike from the RBA - while the BoE was dovish in holding and the ECB offered little resistance to euro strength. Next week's highlight is that delayed US payrolls report (Wed) as well as CPI data for January (Fri).    

A largely uneventful ECB meeting saw the Governing Council leave rates hold - the key depo rate remaining at 2% - with President Lagarde reaffirming the existing view that policy settings are 'in a good place'. The main interest was whether any cracks would emerge in that stance given the strength in the euro - ostensibly a headwind for growth for the export-oriented euro area economy. But at the post-meeting press conference Lagarde downplayed the effect of the exchange rate, pointing to the fact that EUR/USD was currently around its average level since its inception. Market pricing was unchanged for the ECB to remain on hold through the year. 

In another tight decision (5-4 majority), the BoE went back to holding rates (3.75%) after cutting by 25bps in December. Pre-existing market pricing for a June rate cut was vindicated as the statement noted 'Bank Rate is likely to be reduced further', while new forecasts in the quarterly Monetary Policy Report were unambiguously dovish. The outlook for growth and the labour market were downgraded, and inflation is now expected to undershoot the 2% target in 2027 and 2028. Governor Bailey at the post-meeting press conference said the key judgement underpinning the view that there was scope for lower rates reflected diminishing inflationary pressures. Softer demand conditions and an easing labour market are expected to see wage growth continue to ease, while the impact of the National Insurance increase will also fade out.     

The RBA hiked the cash rate by 25bps to 3.85% this week, recent data convincing the Board that the economy was more capacity-constrained - and inflation pressures were more persistent - than previously thought. New forecasts in the Statement on Monetary Policy helped shape that assessment. The inflation outlook was raised to be above the midpoint of the 2-3% target band through the next couple of years, with the labour market now expected to be tighter and growth stronger in the near term. A hawkish repricing followed as markets adjusted to the scenario of the RBA potentially hiking twice more this year, up from the single additional hike already priced.  

The key shift in the Board's thinking was that there was an excess demand component to inflation overshooting the target (3.6% headline and 3.4% core), adding to the existing pressures from price rises deemed more temporary - such as electricity with government rebates ending. Governor Bullock's comments at the post-meeting press conference and at the parliamentary testimony later in the week indicated the Board will retain its existing strategy, using monetary policy to gradually turn the tide on inflation in order to preserve the labour market. Markets therefore think back-to-back hikes are unlikely, pricing in the next increase in the cash rate for the May meeting. For more on this week's meeting, please see my review here. Also in Australia this week, data updates for December showed a pullback in dwelling approvals (see here) and a widening in the monthly trade surplus (see here). 

Australia's trade surplus widens to $3.4bn in December

Iron ore exports drove a widening in Australia's trade surplus to $3.4bn in December - though that was slightly below expectations ($3.5bn). Resurgent demand, a key factor in the RBA hiking rates on Tuesday (see here), was reflected in a sharp rise in import spending in the December quarter (4.2%), compressing the quarterly trade surplus to $10.3bn - its lowest level in more than 5 years. 

Australia's trade balance - the spread between export earnings ($44.6bn) and import spending ($41.3bn) in goods trade, both in AUD terms - was in surplus to the tune of $3.3bn in the month of December, up from $2.6bn in November. The trade surplus remained on its narrowing trajectory in 2025. This continued the descent from the extraordinarily high levels reached during the pandemic recovery when export revenue flooded into government and company coffers as commodity prices soared and borders reopened. In the December quarter, the trade surplus was $10.3bn - down from $14.9bn in Q4 2024 and settling at its lowest level since Q3 2020. 

Export revenue increased by 1% in the month of December to $44.6bn, up 3.7% on 12 months earlier. The key movement was metal ores and minerals (predominantly iron ore), with the value of those exports rising by 3% to $14.2bn. ABS data indicated this uplift reflected a large rise in shipments to offshore markets, as prices of the commodity were recorded to have fallen in December. Meanwhile, rural exports - including meat and other produce - rose for the third month running (2.5%), lifting to a new record high of $7.1bn. Non-monetary gold exports notched back-to-back declines in December (-0.9%) but still had a stellar year, with exports more than doubling (107.9%) on the back of safe-haven demand and central bank buying.   

For the December quarter, exports rose by 3.3% - remarkably this was their strongest quarterly movement since Q2 2022 - to come in at $134.8bn, an elevated level but well off the record highs around $155bn a few years ago. The rise in quarterly exports looks to be almost entirely price-driven; the ABS reported last week that export prices increased by 3.2% in Q4. 

Spending on imports declined by a modest 0.8% in December to $41.3bn, which followed a 0.2% fall in November. But those movements belied the broader trend in the quarter, which saw spending accelerate by 4.2% - its fastest quarterly rise since Q3 2022 - to a record high of $124.5bn. According to the ABS, import prices were only up by a moderate 0.9% in Q4 - indicating that rising demand was the key factor behind the acceleration in spending. 

Consumption goods rose by 2.2% in the quarter on the back of gains in categories such as food (3.9%), clothing and footwear (0.9%), household appliances (0.9%) and vehicles (0.4%). Capital goods - associated with business investment - slowed (-0.9%) after surging in Q3 (4.1%). Meanwhile, intermediate goods posted a 3.4% rise in Q4 - despite a fall in fuels and lubricants (the largest category) as oil prices declined.   

RBA hikes cash rate in February

The RBA hiked the cash rate by 25bps to 3.85% in a unanimous decision by the Monetary Policy Board at today's meeting in Sydney. Inflation moving further above the 2-3% target band reinforced the RBA's concerns that capacity pressures are arising amid robust demand and labour market conditions, prompting today's hike. And more are likely to follow. The RBA lifted its inflation forecasts - core inflation is expected to remain above the midpoint of the band over the next couple of years - leading markets to price in price in two further rates hike this year - one more than previously expected. If delivered, that would reverse the RBA's three rate cuts from 2025.  

 

Today's meeting proved to be more hawkish than markets had expected - despite a rate hike being widely touted. Markets came into the meeting pricing in two rate hikes this year, but new forecasts published in the Statement on Monetary Policy - that factored in that outlook for interest rates - still showed materially higher inflation was now the base case for the RBA. Forecast inflation this year was lifted from 3.2% to 3.6% in headline terms and from 2.7% to 3.2% on a core basis. Upward revisions were also seen in the forecasts for 2027 (2.7% from 2.6% for both measures), with inflation still remaining slightly above the midpoint of the band into 2028 (2.6% headline and core). Furthermore, the forecasts also signalled a stronger near-term growth outlook and tighter labour market conditions are now expected by the RBA. 

In response, markets now expect a total of three rate hikes this year - the next two most likely going through at the quarterly 'forecast' meetings in May and August. At the post meeting press conference, Governor Bullock said the overall strategy of returning inflation to target without coming at the expense of its full employment objective was still guiding the Board - pointing to a gradual tightening cycle this year. That said, the reacceleration in inflation over the back half of last year has clearly surprised the RBA, as has the strength in the economy and the labour market.  

Last week's December quarter CPI data confirmed a further overshoot of inflation to the target band: headline inflation lifted to 3.6% year-on-year and the core rate rose to 3.4% year-on-year. Governor Bullock attributed part of the inflation overshoot to temporary price increases (such as electricity rebates unwinding and holiday travel) but also said that inflationary pressures in other parts of the basket (services and new dwellings) were more likely to persist. 

Elevated inflation indicated to the Board more generally that the pick-up in private demand from household spending and business investment was testing the supply capacity of the economy after years of weak productivity growth. That was backed up by GDP growth surprising to the upside at 2.1%Y/Y in Q3, while the labour market had remained tighter than expected - the unemployment rate averaged 4¼% in Q4, defying the RBA's November forecast to rise to 4.4%.   

On Friday (0930 AEDT), Governor Bullock and other RBA officials are set to appear for a parliamentary testimony hearing. The next RBA monetary policy meeting is scheduled for 16-17 March.