Financial markets are increasingly anticipating that the Reserve Bank of Australia’s rate-lifting cycle is nearing its conclusion. After four increases this year pushed the cash rate to 4.60 per cent, bond traders now project less than one additional move, placing the peak near 4.85 per cent – a notable reduction from the 5 per cent implied just three weeks prior. This softening outlook stems largely from recent labour force data, which revealed the unemployment rate climbing to a cycle high of 4.7 per cent as the economy shed 39,000 jobs. This rise now sees the jobless rate exceeding the RBA’s published full employment estimate of 4.6 per cent.
Further pressure on Martin Place stems from escalating business failures and a significant correction in Aussie real estate markets. The Australian Securities and Investments Commission (ASIC) reported a record 1808 companies entering external administration in August, a substantial 66 per cent increase year-on-year. Concurrently, the combined capital cities index is sliding at a 16 per cent annualised pace, according to the latest Cotality house price data. Forecasts anticipate a circa 13 per cent peak-to-trough decline in national dwelling values. This housing sector stress comes after absorbing four RBA hikes, alongside de facto tightening from the government’s ban on negative gearing.
The RBA’s tightening cycle aims to create spare capacity and rein in demand. However, this monetary policy effort faces challenges from ongoing fiscal stimulus. Since May 2022, net overseas migration has added approximately 1.6 million people, with federal budget forecasts predicting over 2 million by June 2028. The federal deficit is also projected to balloon from $36 billion last financial year to $64 billion this year. This significant fiscal expansion is seen as working in direct opposition to the RBA’s anti-inflation efforts. Additionally, the spectre of credit rationing looms, as falling asset prices, particularly in property, could reduce maximum lending amounts and exacerbate price falls.
