The Reserve Bank of Australia’s decision to hold interest rates at 3.60% off the back of their September meeting was widely expected. However, consumer price index inflation figures for August were higher than expected, clouding the central bank’s next move in November, where a rate cut was considered a formality. Australia’s economic growth continues to pick up, but trade tensions and geopolitical uncertainty continue to cloud the outlook.
Reserve Bank of Australia keep rates steady
As expected, the Reserve Bank of Australia (RBA) kept the official cash rate at 3.60% at their September Board meeting.
In their unexpected move to not cut the cash rate in July, the RBA noted that despite June CPI inflation trending lower, the Board was keen to use the quarterly underlying inflation reading to validate their easing path. In our view, this is likely the case in this instance too, with the September 2025 quarter underlying inflation figures due for release in late October. The RBA’s next rate decision is on 4 November 2025.
Monthly consumer price index inflation hits highest level since July 2024
The CPI rose 2.8% over the year to 31 July 2025 and 3.0% over the year to 31 August 2025. The August result was both higher than the 2.9% consensus forecast and the highest reading since July 2024. The increase was primarily driven by rising household costs, as electricity prices surged with the roll-off of government rebates.
In our view, it is unlikely that these figures factored into the RBA’s September decision, given their reinforced reliance on underlying inflation. Additionally, consumer price index inflation remains within the RBA’s 2% to 3% target band, albeit at the top end. However, it has caused at least one of the ‘big four’ banks to alter their forecasts for when the next rate cut may occur.
When are we likely to see the next cash rate reduction?
When pulling together these economic updates, we often note the date on which they are drafted, given how fluid forecasts tend to be. The initial draft of this update included NAB’s forecast of a 25 basis point cut to the official cash rate in November, as well as a second in February 2026. This has since changed, with NAB now anticipating the RBA will hold the cash rate until May 2026.
Commonwealth Bank, Westpac and ANZ are sticking by their earlier forecasts despite the release of the CPI data – at least, for now.
CommBank is still tipping a 25 basis point rate cut in November, with ANZ maintaining that such an outcome is ‘more likely than not’. Westpac continues to project a 25 basis point rate cut in November, as well as further cuts in February and May 2026.
Underlying inflation remains the catalyst for further easing
It’s likely that three of the big four banks remain steadfast in their easing forecast given the RBA’s weighting on underlying inflation data. Underlying inflation has continued to gradually moderate for the past four quarters. This is expected to continue to 2.5% (from 2.7%) in the September quarter.
In our view, there is a chance that the September quarter’s underlying inflation comes in slightly higher than expected, thanks in part to the July and August CPI data. However, should underlying inflation continue to moderate as forecast, it paves the way for the RBA to continue its monetary policy easing cycle when they meet in November.
Australia’s housing market continues steady rise
Australia’s housing market continues to go from strength to strength, with the Cotality Home Value Index increasing 0.9% in September 2025, building on the 0.8% month-on-month increase in August. This marks the strongest monthly gain since October 2023.
Boosted borrowing capacity was a force behind this increase, given the RBA’s August rate cut. However, real wage growth (3.4% year-on-year in the June 2025 quarter) and historically low levels of advertised stock also contributed.
Perth (1.6%) and Brisbane (1.1%) were the overachievers in September. Among the other major cities, Adelaide (0.9%), Sydney (0.8%) and Melbourne (0.5%) performed strongly.
Building approvals fall sharply in July and August
After a strong month in June, building permit approval momentum couldn’t be maintained in July and August, resulting in an 8.2% and 6.0% month-on-month decline.
On an annual basis, total dwellings approved increased 3.0% year-on-year in August, slowing from 6.6% growth year-on-year in August and 28.0% growth year-on-year in June. While longer-term momentum remains positive, the volatility in monthly data reflects ongoing challenges in the construction sector, including labour shortages, high material costs and cautious developer sentiment.
Australian economy continues positive momentum
Australia’s broader economic outlook is positive. GDP grew 0.6% across the June quarter. This marked the 15th consecutive quarter of growth, and the largest increase since the December 2022 quarter.
Annually, Australia’s GDP growth rate was 1.8% over the year to 30 June, outperforming market forecasts of 1.6% and accelerating from the 1.4% growth rate over the year to 31 March 2025.
Australia’s GDP growth is continuing to improve, particularly off the back of a sluggish year in 2024 (1.0% full-year growth). Australia’s 2024 figure was particularly stark compared to the International Monetary Fund’s advanced economies average of 1.8%. However, Australia is expected to bounce back across 2025 (1.8%, compared to the 1.5% advanced economies forecast average) and 2026 (2.2%, compared to 1.6%).
Australia’s labour market remains strong, with unemployment steady at 4.2% and a 2.0% employment growth rate over the last year.
Unpacking global influences
Globally, Australia faces a number of external risks. Trade tensions, inflationary pressures and geopolitical uncertainty continue to cloud the outlook. However, we believe Australia’s relatively strong domestic fundamentals and diversified export base provide some buffer against these global challenges.
The S&P Global Australia Manufacturing Purchasing Managers’ Index, fell to 51.4 in September 2025, from 53 in August.
The Index is based on a monthly survey of around 400 manufacturers and reflects a weighted average of five components: new orders, output, employment, suppliers’ delivery times and stocks of purchases. The index ranges from 0 to 100. A reading above 50 indicates growth, while a reading below 50 indicates a decrease.
While the September figure marked the eighth consecutive positive month, new orders declined at their fastest pace during this period.
Export demand also weakened, with manufacturers pointing to US tariffs as the key headwind.
US economy showing signs of slowing
The United States Federal Reserve faces renewed challenges ahead after its recent rate cut. On 17 September, the Fed reduced interest rates by 25 basis points to a target range of 4.00% to 4.25%. In its statement on the decision, the Fed noted moderating economic activity across the first half of 2025, particularly an employment rate that, while low, has edged higher, as well as inflation that remains elevated.
Further easing is anticipated, but the timing of this remains open to speculation. As monetary policy continues to ease in the United States, it is likely the Australian Dollar will perform more strongly against the United States Dollar. One Australian Dollar is currently buying approximately 66 US cents, with NAB forecasting that we end the year in the US$0.65 to US$0.70 range. NAB’s forecasts then anticipate a climb to US$0.70 to US$0.75 by the end of 2026.
China’s slowdown also poses risk
China’s economic slowdown and deflationary pressures also pose risks, given the nation’s role as Australia’s largest trading partner – a concern we noted back in March.
Commodity prices, particularly iron ore, remains relatively volatile. Iron ore prices are critical to Australia’s trade balance, and any sustained downturn in Chinese demand could impact national income and the Australian dollar. While still a risk, it’s important to note that in the six months since our March economic update, iron ore prices have stabilised compared to the six months prior to that.
China’s economic growth also continues to grow well below long-term trends. However, June 2025 quarter GDP growth of 1.1% beat market forecasts of 0.9%. This was marginally down on the 1.2% growth the prior quarter.
The stronger-than-expected June quarter result can be attributed to domestic policy measures, such as interest rate cuts and liquidity injections. This was also assisted by the May meeting between China and the United States that saw a roll back the more outlandish tariffs both countries had implemented in their escalating trade war.
As Australia’s economy maintains steady growth amid global uncertainty, the RBA’s monetary policy remains balanced between inflation control and economic support. With softening building activity, international headwinds and a property market that continues to rise, the November rate decision will be pivotal in shaping Australia’s economic trajectory into 2026. As always, Trilogy Funds will leverage these conditions and continue to capitalise on opportunities as they arise.
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