RBA pauses in June

The RBA left the cash rate on hold at 4.35% at today's meeting in a unanimous decision (9-0) by the Monetary Policy Board. This pauses the RBA's tightening cycle after interest rate hikes at its first three meetings of the year. Despite the US-Iran agreement to reopen the Strait of Hormuz and signs that tighter financial conditions are slowing the Australian economy, Governor Bullock said the Board is not ruling out raising the cash rate further. Markets are split on whether the RBA will hike again in this cycle. 

Today's decision was widely expected after the Board hinted following its May meeting that a pause was likely, with three straight rate hikes leaving monetary policy 'well placed' to respond to developments. That theme carried over into the decision statement by noting the Board would now watch how the domestic economy evolves and observe how the oil market responds with the Strait of Hormuz set to reopen.

Uncertainty over the outlook remains 'heightened' and the Board in its discussions concluded that there were still scenarios that posed downside risks to growth and upside risks to inflation. In that context, Governor Bullock's main message at the post-meeting press conference was that the Board was leaving all options on the table regarding policy. 

The earlier rate hikes are judged to have tightened financial conditions, weighed on spending and slowed the housing market. However, there was not too much concern expressed over soft GDP growth in the March quarter or in the uptick in the unemployment rate to 4.5% in April. In fact, Governor Bullock went as far as saying these are required outcomes for it to counter risks of second-round effects of energy-driven inflation.

Accordingly, the Board has left its implicit hiking bias in place 'to do what it considers necessary' to meet its policy mandates for 2-3% inflation and full employment. To avoid any communication missteps, the Board went to the additional measure today of inserting the line that this potentially includes 'increasing the cash rate target further if required'. The next RBA monetary policy meeting is on 10-11 August.  

Preview: RBA June meeting

The RBA is widely expected to hold the cash rate at 4.35% today - its first pause of the year after three straight rate hikes. The energy price shock stemming from the Middle East conflict on top of renewed inflationary pressures in Australia prompted the RBA to change course this year after it cut rates three times in 2025. Recent data have been patchy, while the US-Iran agreement to suspend hostilities and reopen the Strait of Hormuz should remove the risk of another hike for now. Even with a pause today, the RBA is likely to retain its tightening bias. Inflation is above target and still forecast to rise further. Market pricing factors in a high chance of one more hike this year.   

The Monetary Policy Board voted 8-1 to hike by 25bps last time out in May, raising the cash rate to 4.35%. That was its third straight hike following the split decision (5-4) in March and the unanimous verdict (9-0) that started the tightening cycle in February. Having now reversed all three of 2025's rate cuts, the Board's stance was that rates were now 'well placed' to respond as the economic outlook evolves, implying that it is comfortable with pausing. However, it maintained its implicit tightening bias through its commitment to 'do what it considers necessary' to return inflation to the target. 

The Board is now likely to move to wait-and-see mode. At a recent Senate testimony, Governor Bullock said the incoming data had 'not been materially different' to its expectations, with the next forecast round not due until August - after the key June quarter inflation report. That summation of the data leaves room for debate given downside risks to growth appear to have increased. GDP growth in the March quarter was lacklustre ahead of the full impact of higher petrol prices and rate hikes (see here), while the unemployment rate rose to a high since late 2021 at 4.5% in April (see here).  

Governor Bullock reiterated to the Senate committee that higher rates had been necessary as risk mitigation for potential second-round effects from the energy price shock. The RBA has sought to slow demand so that higher energy prices are less likely to drive a more widespread and persistent increase in inflation and wage pressures. Higher rates are unable to offset inflation from rising in the near term. The RBA forecasts inflation to peak by mid-year at 4.8% in headline terms and 3.8% on a trimmed mean or underlying basis, up from 4.1% and 3.5% respectively at present in the quarterly data to March. Governor Bullock did, however, point to softer conditions in the housing market as a sign that tighter monetary policy was starting to take effect. 

Macro (Re)View (12/6) | Wait continues

A US-Iran agreement, including the end of hostilities and reopening of the Strait of Hormuz, remains reportedly close but is yet to be signed. Those developments sent brent crude below US$90/bbl for the first time since March, while global bond yields declined in response. Markets have been expecting a full deescalation for some time and have become less reactive to headlines, so these latest positive developments failed to drive a more convincing rally in risk assets. As expected, the ECB hiked rates, with attention now turning to the Fed's meeting next week. The RBA is also due to meet but should pause after three consecutive hikes.    

The ECB hiked its three key rates by 25bps for the first time since 2023 this week, increasing the main policy rate to 2.25%. The move had been strongly signalled in ECB communications since the previous meeting, reflecting concerns over the energy price shock from the Middle East conflict sparking a broader inflationary episode. President Lagarde made two key justifications for hiking rates in the post-meeting press conference amid broader criticism of a policy error.

Firstly, the decision was unanimous amongst Governing Council members, and secondly, hiking was 'robust' across all forecast scenarios published in the ECB's latest macroeconomic projections. Those projections raised the outlook for inflation and lowered forecast growth in 2026 and 2027. Uncertainty lingers over rates moving forward. Post-meeting reporting quoting ECB sources indicated that a follow-up hike in July was possible while other reports suggested a pause was likely. Market pricing largely factors in two more rate increases by year-end. 

US inflation data on the eve of the Fed's meeting next week reaffirmed market expectations that the key debate is whether rates are set for an extended pause or if a hike will eventually be required. The post-meeting press conference will be the first for Kevin Warsh and will give markets a sense of how the new Fed Chair sees policy evolving. Headline CPI in May came in at 0.5%m/m, lifting the annual pace from 3.8% to 4.2%, a high since April 2023. Key drivers related to the energy price shock, with gasoline up 7% and airline fares rising 2.7%. Core inflation (excluding food and energy) was slightly softer than anticipated at 0.2%m/m and 2.9%yr, up from 2.8%.

Australian data was limited to consumer and business surveys. The Westpac-MI report showed consumer sentiment declined 2.9% in June, largely reversing the modest improvement (3.6%) in May. Sentiment has fallen almost 15% so far in 2026, with the RBA's hiking cycle a major concern for households, adding to cost-of-living pressures. The RBA is, however, widely expected to hold rates steady next week. The NAB Business Survey reported trading conditions remained slightly below average in May, with the major effects of the current backdrop being reflected in weak confidence. Margins are coming under pressure, with input costs rising by more than selling prices.

Macro (Re)View (5/6) | Fed outlook shifts on strong payrolls

US equities posted their largest weekly declines in at least a year after strong payrolls data drove a hawkish repricing, with markets now pricing in a 25bps hike from the Fed this year. This lent support to the USD, following market rates higher. The 2-year treasury yield rose to 4.15%, its highest since February last year. Meanwhile, the ECB is expected to hike next week. Whereas at the RBA, a weak growth outcome in the March quarter looks like putting the brakes on further hikes for now.    

An upside US nonfarm payrolls report now sees markets pricing in a Fed rate hike by year-end. Employment rose by 172k in May, well above the 88k consensus. Upward revisions of 93k over March and April lifted the 3-month average for payrolls growth to 188k, its highest since March 2024. The unemployment rate was steady at 4.3% for the third month running, while the broader unemployment rate declined slightly to 8.1%. 

The degree of tightness in the labour market is a key consideration for the Fed moving forward. This was a strong report, but the monthly figures (and the revisions) are volatile. Lower labour force participation has also played a role. After trending down since late last year, the participation rate, unchanged in May at 61.8%, held at lows since October 2021. 

The ECB is on track to tighten policy at next week's meeting, in line with recent guidance and market pricing for a 25bps hike. The tone of President Lagarde's press conference as well as updated economic forecasts will be key given markets are pricing in at least one further hike later in the year. This could hinge on the balance of risks between the outlook for growth and inflation, where the former has up until recently has held more weight with the Governing Council. 

Australian economic growth was softer than expected slowing from 0.9% to 0.3% in the March quarter, though annual growth was steady at 2.5%. The slowdown was driven by net exports (-0.8ppt), with the fuel price shock and RBA rate hikes yet to impact. These headwinds risk slowing domestic demand (1%) that was looking fairly solid in the March quarter, supported by surging business investment (5.7%) and moderate household consumption growth (0.5%). 

This was the strongest quarter for business investment in well over a decade, driven by the capex boom in data centres in tech- and AI-related industries. Much of the capital equipment required in data centre fit-outs is import-intensive, which weighs on GDP growth in the short term. Cyclones that disrupted the resources sector was another key factor behind the large deduction to growth from net exports. My full review of the March quarter National Accounts is available here. 

Slowing growth with risks to the downside has reaffirmed RBA rates outlook, with a further hike to the cash rate priced no higher than a 50/50 prospect. Speaking at a Senate testimony, RBA Governor Bullock said the 75bps of rate hikes delivered this year had been required to cool domestic inflation pressures, and to guard against the risk of the oil price shock sparking another broader inflationary episode. Bullock said there were already signs in the housing market that higher rates were taking effect.

Australia's trade balance returns to surplus in April

Australia's trade balance moved back into surplus in April ($1.8bn), after slipping into deficit for the first time in 8 years in March (-$1bn). Exports accelerated at their fastest pace (7.2%) since mid-2022, driven by the major commodities. That far outpaced a modest lift in imports (0.8%). Higher oil prices amid the blockade in the Strait of Hormuz saw the cost of fuel imports surge, but the capex boom in tech-related equipment eased.  

The trade balance swung from a small deficit in March (-$1bn) to a small surplus in April ($1.8bn). Across the past 3 months, the trade surplus averaged $1.9bn - its lowest since July 2018 - continuing the downward trend of the past few years.  

Total exports rose by 7.2% - their fastest increase since June 2022 - to come in at $47.2bn. That saw annual growth rise to 10% from -1.9% in the year to March. The major driver of this strength came from an 11% acceleration in non-rural goods exports ($33.6bn). This reflected strong gains across the key commodities: iron ore 18.5%, coal 15.2% and LNG 2%. Details from the relase indicated these gains were linked to a step up in export volumes, rebounding weather-related disruptions, as highlighted in yesterday's National Accounts (see here).  

Imports were held to a 0.8% rise in April, in at $45.4bn for a 12-month increase of 18%. Higher oil prices due to the Middle East conflict led to fuel imports surging by a further 41.4% in April after an even larger increase in March (53.6%). Over these past two months, the cost of fuel imports has more than doubled, up 117.1%.  

Capital goods pulled back (-16.4%) after rising strongly in March (29%). The main driver was a slowdown in ADP equipment, falling 41.7% following a more than 170% surge to facilitate the data centre build-out last month.

In review | Australian Q1 GDP: Net exports weigh capex surge

The Australian economy slowed in the March quarter, as cyclones and the tech-related capex boom saw net exports weigh heavily on growth. Domestic demand, however, picked up to rise by 1% in the quarter - but that was largely before the headwinds from the Middle East conflict and the resulting energy price shock as well as the RBA's tightening cycle had intensified. Real GDP was 0.3% in the quarter, slightly weaker than expected (0.4%) and down from 0.9% in the December quarter. Growth through the year held at 2.5%.  

The closure of the Strait of Hormuz following the conflict escalation in the Middle East was the latest shock to the global economy, as oil and energy prices soared in March. Given the timing, the impacts were mainly felt on sentiment, with growth across the OECD having picked up in the March quarter. Meanwhile, growth in China maintained a similar pace to recent quarters. 

In Australia, the conflict sent fuel prices up by 33% on average in March. Fuel prices have since fallen after the Federal Government halved the excise tax, but the support is temporary, in effect until the end of June. Meanwhile, the RBA had already raised the cash rate by 25bps in February, and with higher fuel prices increasing the risks to the inflation outlook, the Board hiked again in March and May. Those factors are yet to impact growth but will be headwinds moving forward. 

The slowdown in growth from 0.9% to 0.3% in the March quarter was driven largely by net exports (-0.8ppts), and to a lesser extent by inventories and public demand. Household consumption (0.5%) actually saw a slight increase in the quarter, but it was business investment (5.7%) that was the major contributor to growth.   

Business investment is on its strongest upswing in well over a decade on the back of the tech- and AI-related capex boom in data centres. The equipment required for data centre fit-outs are import-intensive, driving the negative contribution to growth from net exports.    

Risks to the growth outlook are weighted to the downside, with higher inflation and RBA tightening the major headwinds. Weaker demand will help ease the inflationary pressures the RBA has been concerned about, while surging business investment is a positive development in terms of turning the tide on productivity growth. Markets now price any further RBA hikes as a 50/50 call, and not until later in the year. 

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National Accounts — Q1 | Expenditure: GDP (E) 0.2%q/q, 2.6%Y/Y 

The expenditure GDP estimate rose by 0.2% in the March quarter. Annual growth eased from 2.7% to 2.6% but has doubled in pace since March 2025. 

Household consumption (0.5%q/q, 2.5%Y/Y) — Lifted by 0.5% in the March quarter, keeping annual growth at its 2.5% pace. This was a subdued outcome that was boosted by a spike in utilities (11.7%) as government rebates on electricity bills ended. However, it is also true that the rebates contributed to weaker consumption growth (0.4%) last quarter.

The drivers that supported the recovery in household consumption last year, including rising real incomes and RBA rate cuts, were starting to reverse in the March quarter. This was also largely before the fuel price shock hit. Consumption growth was driven by spending on essentials, up 0.8% in the quarter. Aside from utilities, food (0.8%) was boosted by stockpiling due to cyclones, while fuel purchases rose (0.6%) - despite significantly higher prices - amid concerns over supply following the closure of the Strait of Hormuz.   

Discretionary demand came close to stalling (0.1%), with cautious households pulling back across clothing and footwear (-0.5%), furnishings and equipment (-0.5%), and alcohol (-0.7%). However, discretionary demand is also being weighed by tobacco sales (-4.6%), with the ABS having difficulties accounting for the rise in demand for illicit products.

As alluded to earlier, key supports for consumption were starting to wane. Growth in gross disposable incomes slowed to a 0.4% in the quarter - its weakest rise in 3 years - weighed by rising income tax liabilities and the RBA's rate hikes in February and March. Households funded the rise in consumption (1.1% in nominal terms) by drawing down on savings. That saw the household saving rate fall from 7% to 6.2%. 

Inflation based on the household consumption deflator was 0.6% (3.1%Y/Y), implying that real incomes contracted by 0.2% in the quarter - their first decline since Q2 2024. Over the past year, household consumption (2.5%) has outpaced real incomes (1.9%).

Dwelling investment (0.7%q/q, 3.5%Y/Y) — Residential construction activity increased by 0.7% in the quarter, but annual growth slowed from 5.1% to 3.5%. New home building weakened (-0.8%) for the first time since the final quarter of 2023, slowing its upswing (3.5%Y/Y). Adverse weather may have played a role, but industry reports indicate that capacity pressures are again an issue. Weakness in home building was offset by rising alteration work (3.2%). The outlook for the sector is complicated. Population growth is underpinning strong demand, but cost pressures and RBA rate hikes are headwinds to bringing supply forward.

Business investment (5.7%q/q, 10.4%Y/Y) — Business investment surged by 5.7% - its fastest quarterly growth since 2012 - delivering the key contribution to economic growth in Q1. Annual growth accelerated from 4.5% to 10.4%. The tech- and AI-related capex surge in data centres is generating the strongest cyclical upswing in business investment since the mining boom in the early 2010s. Just as the mining investment boom was concentrated in certain states (Qld and WA), the data centre build-out is occurring in New South Wales and Victoria.  

The fit-out of data centres saw equipment investment rise rapidly by 14.7% in the quarter, its strongest increase since 2002. Over the past year, equipment investment rose by almost 23%, overtaking non-dwelling construction as the largest component of business investment. Non-dwelling construction was flat in the quarter, as a rise in building work (2.7%) was offset by a decline in the engineering segment (-2.5%).   

Public demand (0.1%q/q, 2.4%Y/Y) — Moderated to a 0.1% rise in the quarter, after rising strongly through the back half of last year (1.9%). A 0.2% decline in government expenditure - its first in over 4 years - drove the slowdown. That largely reflected a fall in spending by state and local governments (-0.8%) as electricity rebate payments wound down. Public investment rose by 1.1% in the quarter, bolstered by national defence spending. 

Inventories (0ppt in Q1, 0ppt yr) — Total inventory levels rose by $0.7bn in the March quarter after a $0.9bn increased in the December quarter. The change between the two was minimal (-$0.2bn), resulting in inventories having no impact on growth in Q1. Nonfarm inventories rose sharply ($1.5bn) on the back of the mining sector ($1.8bn) as cyclones hampered exports. That was offset by large fall in public sector inventories (-$1.9bn) due to exports of non-monetary gold.    

Net exports (-0.8ppt in Q1, -1ppt yr) — Imports rose by 2.1% and exports declined by 1.1%, resulting in the largest reduction to quarterly growth from net exports (-0.8ppt) in two years. The increase in imports (7.8%Y/Y) is being driven by the data centre investment surge, with ADP equipment up almost 90% in the quarter alone. Services imports (3.8%) also expanded as a stronger AUD supported offshore travel. 

Exports fell by 1.1%, seeing their first decline since Q4 2023. That mainly reflected weakness in resources (-2.2%) after cyclones disrupted shipments to offshore markets. Lower overseas arrivals weighed on domestic tourism and education.    

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National Accounts — Q1 | Incomes: GDP (I) 0.3%q/q, 2.4%Y/Y 

The income approach to GDP produced estimates of 0.3% and 2.4% for quarterly and annual growth respectively. Developments around incomes were somewhat mixed. Although there has been some loosening of conditions, the labour market remains robust and continues to support wage incomes. However, in the corporate sector a combination of commodity price falls, weaker demand and cost pressures weighed on profits.   

Wage incomes measured by the compensation of employees lifted by 1.2% in the quarter, a solid rise but still its slowest increase in almost two years. Annual growth softened from 6.3% to 5.9%. Key wage rises in the private sector (1.5%) were seen in professional services, construction, and administration and support. Public sector wages were flat in the quarter. 

Corporate profits were unable to extend recent increases, declining by 0.4% in the quarter (3.9%Y/Y). Although profits by financial corporations increased (2.4%), as the RBA's rate hikes in February and March supported deposit growth and lending margins, profits in the non-financial sector declined (-1.1%). 

Weaker demand and oversupply weighed on iron ore prices, while cyclones hampered coal producers, these factors combining to see mining sector profits fall. Meanwhile, higher costs and slower demand were headwinds in the hospitality industry. Gross mixed income - small business profits - were also under pressure (-0.6%).      

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National Accounts — Q1 | Production: GDP (P) 0.3%q/q, 2.6%Y/Y

Quarterly GDP under the production approach lifted by 0.3% and 2.6% over the year, up from 2.5% previously. Growth was driven by services-related industries, while output across goods-related industries was weak. 

  

Output in business services advanced by 1.2% to be up 3.6% through the year. Key contributors in the March quarter were professional services (1.6%) - reflecting demand for engineering and IT services - and administration and support (1.5%), led by events management services. Household services rose a modest 0.2% (2.4%Y/Y). Gains from education and training (0.5%) and other services (1%) were moderated by weakness in hospitality (-0.4%) and arts and recreation (-0.1%) as demand for dining out and gambling eased.  

Goods production fell 0.2% in the quarter (2.5%Y/Y). The main driver of the decline was the mining industry (-1.5%) where output fell sharply due to Cyclone Koji hampering coal production. This was partially offset by increased output in manufacturing (1.2%) and construction (0.9%). Goods distribution was also soft, down 0.1% quarter-on-quarter (2.3%Y/Y). The transport sector declined, as freight services were impacted following the weather-related disruptions that held back resources exports. However, both wholesale (1%) and retail trade (0.2%) lifted.

Australian GDP growth 0.3% in Q1

Australian economic growth slowed from 0.9% to 0.3% in the March quarter, just short of the 0.4% consensus forecast. Headwinds to the economy from the Middle East conflict and RBA rate hikes are barely reflected in today's figures, with the slowdown being driven by a large drag from net exports (-0.8ppt). That was the byproduct of rising imports (2.1%) associated with capex boom in data centres in tech- and AI-related industries, seeing business investment (5.7%) surge at its fastest pace since 2012.   

The March quarter National Accounts largely reflect conditions prior to the fuel price shock and before the RBA's tightening cycle gathered speed. GDP growth was 0.3% in the quarter, well down from the December quarter (0.9%) but enough to hold annual growth at 2.5%. 

Amid that backdrop, domestic demand was robust, lifting by 1% in the quarter and up 3.5% through the year, its fastest pace in 3 years. That was achieved despite growth in public demand (0.1%q/q) cooling over the past year (2.4%). Private demand (1.3%q/q) took up the running (4%), driven by a recovery in household consumption (2.5%) and surging business investment (10.4%).

In the latest quarter, business investment (5.7%) was the major driver of growth. Servers and processors needed for the fit-out of data centres saw equipment and machinery investment accelerate by nearly 15% - its fastest increase since 2002. 

Household consumption (0.5%) was a little stronger than expected, though that was partly due to electricity rebates ending. That saw household spending on utilities increase sharply (11.7%), while state government expenditure fell (-0.8%). More broadly, there are reasons to be cautious around the consumer. Real incomes were already going backwards slightly (-0.2%) before fuel prices surged and as the RBA continued to hike rates. The saving rate was also falling, down from 7% to 6.2% in the quarter. 

The 0.8ppt drag from net exports was its largest hit to quarterly growth in two years. As highlighted, sharp growth in imports (2.1%q/q, 7.8%Y/Y), which subtracts from GDP, has been driven the tech- and AI-related capex boom. Meanwhile, exports fell in the quarter (-1.1%) as cyclones hampered resources exports to offshore markets. 

More to come. 

Australian dwelling approvals fall 3.4% in April

Australian dwelling approvals fell a further 3.4% in April, exceeding the 1.5% decline expected, after plunging 10.5% in March. Approvals for houses (-0.9%) and units (-7.2%) fell, though both segments have risen strongly over the past year. The outlook for housing construction faces several uncertainties relating to the impact of the RBA's hiking cycle, cost pressures, and the tax changes announced by the federal government in the May budget.   

Dwelling approvals declined by 3.4% in April to 16.7k, their third decline in the first four months of 2026. But despite that, approvals are still trending higher, the 3-month average was 17.8k - its highest since October 2021. That was due to a very strong rise of more than 30% in February. 

House approvals posted their first fall (-0.9%) in 6 months, easing to 10.2k - but still up by 6.8% over the year. The result can largely be attributed to a decline in NSW where house approvals were down by almost 14%. 

In the unit segment, approvals fell by 7.2% in the month to 6.5k. Notwithstanding several large falls in recent months, these approvals have risen by 16% over the year. Approvals on a 3-month average basis have been gently rising across most dwelling types, including high-rise.  

Alteration approvals declined by 2.5% in the month to $1.3bn, up 10.5% over the year. Construction data through the March quarter showed that demand for alteration work increased solidly, expected to be confirmed in tomorrow's National Accounts.