A Good Surprise?

The RBA kept interest rates unchanged at 3.6%. It was a unanimous decision.

The RBA gets nervous when data comes in higher or lower than their forecasts. Since the last Monetary Policy Board meeting on 11-12 August, June-quarter GDP, the July monthly household spending indicator, and the August monthly consumer price indicator all surprised on the upside. Despite the higher than expected inflation result striking a note of caution for the RBA, the first two are welcome news as it shows a plucky Australian economy.     

What the RBA’s statement said

“Recent data, while partial and volatile, suggest that inflation in the September quarter may be higher than expected at the time of the August Statement on Monetary Policy.”

“Data for the June quarter show that private demand is recovering a little more rapidly than expected, taking over from public demand as the driver of growth.”

“With signs that private demand is recovering, indications that inflation may be persistent in some areas and labour market conditions overall remaining stable, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting.”

https://www.rba.gov.au/media-releases/2025/mr-25-27.html

What the governor said at the press conference

“On balance, domestic data since the August meeting has been in line or a little stronger than what we were expecting in our forecasts.”

“... there had been a bit of an upside surprise on some of the data, the inflation and the activity data, and I should say that is good news …  but it just makes us think it was a good decision today to hold.”

“... market services and housing inflation were a little higher than we were expecting, so we are just being a little cautious about that.”

“The labour market remains solid and although employment growth has been slower in recent months we judge it’s still a little tight relative to full employment.”

“I think we feel that it [the interest rate] is still a little restrictive."

“... there has been weaker than expected data from China but trade volumes have held up and it is still expected that authorities will provide support if needed”

August monthly inflation higher than expected

The RBA felt vindicated by the June-quarter inflation result prior to the last monetary policy meeting. But since then, the more-volatile (and less reliable)  monthly CPI series has shown headline inflation going up: from 1.9% in June to 2.8% in July, and now to 3% in August (see chart below). One month can be dismissed but two-consecutive months are concerning. At least the trimmed mean fell slightly in August.

Within the August increase, market services and housing inflation caught the RBA’s eye.

Services inflation remains sticky in most advanced economies. Total services inflation decreased from 3.5% to 3.3% in August, but is still above the RBA’s 2% to 3% target band.

The increase in housing inflation was driven by an increase in house prices rather than an increase in rents (see chart below). The Westpac-Melbourne Institute index for house price expectations hit a 15-year high in September. At the media conference, RBA governor Michele Bullock mentioned that increasing house prices will also help push up household spending through a positive wealth effect.

June GDP higher than expected

Providing context for the last two months' increase in monthly inflation was a stronger than expected June-quarter GDP result. The market and RBA expected an annual increase of 1.6% but the economy actually increased 1.8%. Private demand led the way contributing 0.4 percentage points to the 0.6% monthly increase (see chart below). Within this, discretionary spending was the biggest driver.

To underline the health of the Australian consumer, the monthly household spending indicator for July increased by a strong 0.5% compared to June.

The RBA has long predicted that consumer spending would increase as inflation decreased and real wages rose, but they did not expect consumer spending to grow so fast so soon.

Maybe the RBA can take some comfort in the September result for the Westpac-Melbourne Institute consumer confidence index. The leading indicator increased by 0.6% in July and 5.7% in August, but fell 3.1% in September. Consumer spending may just be peaking early. But it is hard to be sure given the volatility in the index since December last year (see chart below).

The labour market has eased but remains tight

The latest labour market  data and the Bank’s industry liaison suggests that the labour market continues to ease. For example, job vacancies continue to fall (see chart below). Further, the ratio of unemployed people to vacancies is now at its highest level since February 2021.

But the RBA believes that despite the easing, the labour market remains tight. Bullock said that she believed that the tight labour market likely contributed to the higher market services inflation in August.

This means the RBA can relax a little when it comes to wages but must keep an eye on the labour market.

China is doing ok

In her media conference, Bullock briefly pointed out that trade with China remains stronger than expected despite the domestic struggles of the Chinese economy and US tariffs on China. This is welcome news for the Australian economy and its importance should not be underestimated.

Australian Private Debt Market

Central banks are by nature cautious. The RBA’s caution antennas are twitching a little with the latest batch of economic data. That is why rates were left on hold. However, the RBA will have some more reliable data before its 3-4 November meeting. Regardless, the RBA would much rather deal with inflation and a fast growing economy than stagflation. The Australian economy remains in an enviable position.