By Trent Saunders, economist at CBA
The RBA left the cash rate on hold at 3.60%, as expected, but the accompanying statement carried a more hawkish tone.
- We crystallised some of the upside risk to inflation in our forecasts this week, upgrading our estimate for trimmed-mean inflation in Q3 from 0.7% to 0.8%/qtr.
- This uplift in our near-term inflation forecast, together with the shift in tone from the RBA, led us to push back our call for the next cash rate cut to February 2026.
- The US government shut down for the first time in nearly seven years. If the shutdown continues into the weekend, the crucial non-farm payrolls data will not be released.
- Domestically, the week ahead will provide Westpac-Melbourne Institute consumer confidence for October.
- Offshore, we have the FOMC meeting minutes, the RBNZ official cash rate decision, labour cash earnings for Japan and net employment change for Canada.
It was another busy week locally. The RBA left the cash rate on hold at 3.60%, as expected, but the accompanying statement carried a more hawkish tone.
This continued into Governor Bullock’s press conference, where she highlighted ongoing inflation risks following the stronger-than-expected August monthly CPI print.
We crystallised some of the upside risk to inflation in our forecasts this week, upgrading our estimate for trimmed-mean inflation in Q3 from 0.7% to 0.8%/qtr. This would keep the annual rate of trimmed-mean inflation steady at 2.7%. This uplift in our near-term inflation forecast, together with the shift in tone from the RBA, led us to push back our call for the next cash rate cut to February 2026.
Given the cautious and gradual easing cycle so far, we expect the RBA will hold steady until it has firmer evidence that inflation is moving back towards the mid-point of the target band. By February 2026, the Q4 CPI print will be available, as will further evidence of how the economy has responded to the three rate cuts to date.
On the fiscal side, the Commonwealth Government’s final budget outcome showed an underlying cash deficit of $10bn (0.4% of GDP) in 2024/25, which is a noticeable improvement on the government’s estimated deficit of $27.6bn (1.0% of GDP) from the 2025/26 Budget in March.
Most of the improvement came from higher revenue due to stronger labour market conditions. Spending was also a bit lower than expected, although this likely reflects delays rather than specific spending decisions.
To round out the domestic data, building approvals and home prices figures were also released this week. Building approvals fell by 6.0% to 14,744 in August, following a 10.0% fall in July. The more stable private detached home approvals were 2.6% lower in the month.
Still, approvals over the past 12 months totalled 189,000 dwellings–a solid improvement from the trough of around 165,000 in mid-2024. House prices also remain robust, with Cotality’s measure of national home prices rising by 0.8% in September and 4.8% over the year.
Prices have been supported by previous interest rate cuts and robust labour market conditions. However, affordability constraints and slower population growth are expected to keep a lid on price growth.
Offshore, the US government ‘shut down’ for the first time in nearly seven years. Markets remained sanguine despite the US Government shutdown continuing to delay economic data releases. President Trump also suggested using the shutdown to slash thousands of national government public servants.
The week ahead will be quieter on data releases.
Domestically, we have Westpac-Melbourne Institute confidence, which will provide an early read on sentiment following the RBA’s recent decision to keep the cash rate on hold.
Offshore, if the US government shutdown continues into the weekend, the crucial non-farm payrolls data will not be released.
Outside of this, the FOMC meeting minutes will provide further insights into the decision to restart cuts to the Funds rate. We also have the RBNZ meeting, labour cash earnings for Japan and net employment change for Canada.
