Subscribe now

Australia

Established housing market activity and prices in Australia have weakened considerably amid rising interest rates and, more recently, heightened uncertainty about the effects of changes to tax incentives for property investors.

Dwelling prices fell further in June in Sydney and Melbourne, with falls remaining most pronounced for higher-priced properties.

Read more

There wasn’t much new in the RBA Monetary Policy Board Minutes released today.

Just like the post-meeting communications, there was something for both the hawks and doves in the Minutes.

Read more

Subscribe now

Australia’s unemployment rate - at 4.4% - remains low by historical standards and below the RBA’s NAIRU estimate.

Nevertheless, labour market conditions have eased in recent months.

Employment didn’t grow in net terms over April/May and rose just 1% over the year to May. That soft growth has seen the employment-to-population ratio fall by nearly 0.5ppts over that period. The increase in average hours worked over the second half of 2025 has also stalled.

Youth labour market conditions have been hit the hardest.

Read more

Australia’s June CPI will be released on 29 July and will include Q2 trimmed mean inflation under the pre-October 2025 methodology.

This remains a key focus for the RBA.

We have honed our bottom-up Q2 CPI inflation forecasts following today’s May CPI.

Read more

Australia’s May CPI will be released next Wednesday, 24 June.

While headline inflation in April was below expectations, trimmed mean inflation remained relatively strong at +0.31% m/m and +3.4% y/y.

We will take a keen interest in the housing components of inflation in May, particularly with signs that new dwelling purchase inflation was picking up pre-conflict and evidence of strong construction material price hikes since the conflict started.

The May CPI will allow us to gauge with some confidence whether underlying inflation in Q2 is likely to have been as strong as the RBA expects. The Bank’s nowcast in the May SMP for Q2 trimmed mean inflation was higher than +0.9% q/q.

Key May CPI forecasts:

Read more

The RBA Monetary Policy Board left the cash rate at 4.35% today as widely anticipated. The decision was unanimous.

There was something for both the hawks and doves in the Board’s statement.

On the hawkish side, the Board noted that inflation is still too high, likely to remain high for some time, and is “in addition to the high inflation recorded around the start of 2026”. To get inflation down the Board said that demand growth “needs to slow”. Notably, the Board said that it will increase the cash rate target further if required.

In contrast, the Board noted that there are signs that the economy - including consumer spending growth - is slowing as expected and “momentum in the housing market has shifted” amid tighter financial conditions. Moreover, the jump higher in the unemployment rate in April surprised the Bank, though today’s Statement noted that “other measures of labour market conditions have been more resilient”.

Read more

• The RBA Board is likely to sit on the sidelines for at least several months.

• A 4.35% cash rate didn’t previously get the job done on inflation and our view has been that 1-2 more hikes would be necessary.

• Our conviction in that broader view has weakened amid heightened uncertainty on several fronts. Hiring tailwinds have also faded.

• It’s not clear, however, how much of the softening in activity indicators can be apportioned to higher interest rates or elevated uncertainty.

Read more

Each month we take a graphical deep dive into the Antipodean housing markets.

Subscribe now

Housing price growth in Australia remained multi-speed in May but slower growth is starting to spread.

Dwelling prices continued to decline in Sydney and Melbourne. It’s not unusual for prices in the two major capitals to exhibit more volatility than elsewhere.

Overall, nationwide dwelling prices were unchanged in May.

The slowing in dwelling price growth began before the RBA increased the cash rate in early February, but that is not unusual. Households’ appetite to buy housing has waned. Uncertainty related to both geopolitics and effects from changes to taxation are likely to also weigh on established housing demand in at least the near term.

Read more

Today’s Budget shows no improvement in the operating budget deficit - including on a structural basis - until 2027-28 which then relies on sharply lower government spending. The accuracy of recent Budget forecasts for operating expenses past the near-term has been relatively poor.

The structural operating budget deficit is still expected to be 1.5-1.6% of GDP in the current fiscal year and 2026-27.

Read more

RBNZ Governor Breman used her casting vote to maintain the OCR at 2.25% today. The 3 external MPC members all voted for a 25bp hike while the 3 Bank staff voted for a hold.

The disagreement was about the timing of policy tightening.

The Governor and the Monetary Policy Statement (MPS) made it clear that the MPC expects to increase the OCR at coming meetings.

The OCR track was lifted as expected and the policy rate is now projected to reach the 3% central estimate of long-run ‘neutral’ by early 2027. There are 3 more MPC meetings this year and an additional 2 meetings by March 2027.

The external MPC members seemingly sided with Prasanna Gai’s view - espoused recently here - that pre-emptive policy tightening is warranted when “a hub shock raises prices, coordinates beliefs, and may embed itself in the inflation process through the very act of firms trying to assess whether it will”.

Read more

Australia’s April CPI will be released next Wednesday, 27 May.

Lower fuel prices because of the cut to fuel excise and free public transport in Victoria and Tasmania will have weighed on headline inflation in April. Higher private health insurance premiums will have contributed to inflation.

While the April CPI will provide an early gauge of pass-through from cost increases related to the Middle East conflict, we think most pass-through will occur from May onwards.

Nevertheless, the extent to which home builders started passing through higher material costs to their prices is a key uncertainty. Holiday travel inflation is also very uncertain. April is typically a strong month but rising jet fuel prices and strong demand for some international routes may present upside risk to our nowcasts.

Read more

Communication from the RBA today all but confirms that the Board is in wait and see mode in the near term.

A cash rate change in June appears highly unlikely. The Board will be hoping for more clarity on the Middle East conflict by the 11 August Board meeting.

A bit restrictive

Today’s Board meeting Minutes reiterated - with the usual caveats - that the Board assesses the cash rate and broader financial conditions as now being “somewhat” restrictive.

“Having decided by majority to raise the cash rate target by 25 basis points, members considered what their deliberations implied for upcoming decisions. Members judged that, while it was still uncertain, financial conditions would probably be somewhat restrictive after this decision. They therefore agreed that the decision would give the Board space to see how the conflict in the Middle East develops and Australian households and businesses respond. They also agreed that any assessment of how the incoming data could change the outlook should acknowledge that monetary policy could not alter the near-term trajectory of inflation and, additionally, that output growth would likely be lower than potential growth for some time.”

Read more

The Australian Government released Budget 2026-27 tonight.

Last year’s Budget was delivered against an uncertain backdrop related to US tariff increases. This year, it’s the Middle East conflict taking centre stage.

Consequently, the Government is delivering modest cost of living support (fuel excise cut; worker tax offset) and is spending on aspects of the economy’s resilience (e.g. improving domestic fuel stocks over time).

Our two areas of focus in this Budget are:

• what does it mean for aggregate demand and inflation?

• will any policy reforms shift the dial on Australia’s productivity growth?

In short, net changes in this Budget are - at face value - unlikely to materially change the overall demand outlook in the near-term. For instance, the structural budget deficit is expected to be little changed as a share of GDP in 2026-27 - implying little federal fiscal impulse - compared with a noticeable deterioration in the current fiscal year.

At the same time, however, federal government spending is expected to remain at a relatively high share of GDP. Add in what might be best described as reckless spending by some state governments and the public-sector’s contribution to economic growth is likely to remain quite solid overall.

Moreover, prior budget forecasts of slower growth in federal government spending have proved wide of the mark.

The forecast slowing in real federal government payments growth remains significant from 2026-27. Achieving this, on the other hand, is a different matter, and relies heavily on successfully reining in NDIS-related spending growth.

On productivity, policy changes in the Budget are welcome but are likely to have only incremental effects on Australia’s productivity growth.

The Government should receive some kudos for tackling the spiralling cost of the NDIS as outlined in a recent speech by the Minister for Health. But to dress this up as “reform” is disingenuous when the reality is different. The significant expected budget savings associated with the NDIS - $37.8b over the 5 years to 2029-30 - are more akin to fixing something that is clearly broken rather than ‘reforms’ per se.

Without meaningful reform, the budget’s reliance on income tax as a source of revenue will only increase further, as it is forecast to in tonight’s Budget. This sets up the Government to announce income tax cuts in the lead up to the next election.

Read more

The RBA Monetary Policy Board raised the cash rate to 4.35% today as widely anticipated, including by us. The Board vote was split 8-1.

Governor Bullock noted in the press conference that the Board now assesses the cash rate as being “a bit restrictive”.

The Bank’s baseline underlying inflation forecasts - which assume that the conflict is resolved soon and fuel prices decline - were increased for the coming year. Nonetheless, the Board assessed that “the risks remain tilted to the upside”.

That’s hawkish.

But the Board is clearly also appropriately worried about the risk of adverse growth effects from a period of prolonged uncertainty and disruptions to commodity flows.

The Bank provided two scenarios along these lines which show even higher inflation and unemployment rate outcomes and weaker growth (than baseline outcomes). Importantly, however, those scenarios revolve around higher fuel prices and assume that Australia continues to receive enough imported fuel products to meet domestic demand.

The Board’s statement noted that “[h]aving raised the cash rate three times, monetary policy is well placed to respond to developments”. Governor Bullock noted in the press conference that that Board feels that policy settings now allow it to better assess both downside and upside risks to the outlook.

One interpretation of these comments is that the Board may currently be leaning towards sitting on the sidelines in the near term to see how the Middle East situation and economic data evolve.

A pause at the next Board meeting on 16 June, however, would mean that the next opportunity to change policy settings is 11 August, more than three months away.

Read more

Subscribe now

Housing price growth in Australia remained multi-speed in April but slower growth is starting to spread.

Dwelling prices continued to decline in Sydney and Melbourne. It’s not unusual for prices in the two major capitals to exhibit more volatility than elsewhere.

Overall, nationwide dwelling prices rose +0.3% m/m in April in Australia and just +0.2% m/m in the capital cities.

The slowing in dwelling price growth began before the RBA increased the cash rate in early February, but that is not unusual. Households’ appetite to buy housing has waned.

Read more

New Zealand’s Q1 CPI will be released next Tuesday.

The RBNZ upgraded their year-ended headline inflation forecast to +3% from +2.8% previously. This implies a quarterly outcome of +0.8% q/q.

The release of monthly price data for March allowed Q1 inflation nowcasts to be firmed up. See here for our wrap of the monthly price indicators.

While sharply higher fuel prices in the month of March will support headline inflation in Q1, the largest impact will show up in Q2 inflation if high fuel prices persist.

Read more

We have updated our comprehensive chartpack on labour markets in Australia and New Zealand.

Subscribe now

Labour market outcomes in coming months will be key to central bank policy deliberations against a backdrop of rising and above-target inflation and the Middle East conflict.

For now, central banks will fret about inflation and inflation expectations, particularly those in economies with little spare capacity, including the RBA which we expect to tighten policy further in coming months.

Any signs of weakening labour market conditions, however, will provide central banks with some assurance that first-round inflationary effects of the conflict won’t leak into damaging second-round effects on inflation.

Historically, a rising unemployment rate has typically seen the RBA (and Fed) initially holding interest rates stable for a period of time before easing policy.

While rising inflation due to supply-side factors creates complexities for central banks, our view is that they will ultimately find it difficult to not act if unemployment rates persistently rise.

For the RBA, however, the jobless rate is clearly below that consistent with “full employment” and will need to rise to tame inflation.

For now, labour market conditions in Australia remain tight by historical standards and compared with most other advanced economies. While market-sector firms have lifted their hiring there is a risk that prolonged uncertainty will weigh on their appetite to take on more employees.

Read more

Subscribe now

Housing price growth in Australia has become multi-speed in recent months. While growth remains strong in Perth, Adelaide and Brisbane, prices fell in Sydney and Melbourne in March for the second consecutive month.

That slowing began well before the RBA increased the cash rate in early February and has occurred amid some waning in households’ appetite to buy housing.

Read more

Australia’s March CPI will be released on 29 April and will include Q1 trimmed mean inflation under the pre-October 2025 methodology. This remains the key focus for the RBA.

We have firmed up our bottom-up Q1 CPI inflation forecasts following today’s February CPI.

March month nowcasts

Our nowcasts for the March monthly CPI and key categories are in the table below.

Read more

RBNZ Governor Breman’s speech this morning - Global shockwaves to Kiwi shores: The impact of the Iran conflict on New Zealand - pushed back against market pricing for the OCR.

Our view is that market participants have been getting way ahead of themselves is terms of the degree of OCR increases priced in for this year (up to +90bps).

The NZ economy has significant spare capacity and even though it has turned the corner, the adverse growth consequences of the Middle East conflict come at an inopportune time.

The Governor’s opening remarks said it all:

“…core inflation has been steady at 2.4 percent for some time. We are at the early stages of an economic recovery. Inflation expectations over the medium term remain well anchored, and wage growth is subdued.”

The starting point for underlying inflation - based on our quarterly seasonally adjusted measures - is low and broadly consistent with the mid-point of the 1-3% target.

Read more