Economics Weekly Briefing: 5 October 2026

While our weekly email delivers the top three economic insights in a quick, digestible format, this blog dives deeper and unpacks the trends, context and data behind the headlines.

If you'd like to go beyond the snapshot and understand the full story, you're in the right place.

Domestic insights

The RBA lifted the cash rate 25bp to 4.60% in September with upside risks materialising on inflation since its August meeting. The move was broadly expected among the market and economists. A combination of higher oil prices, growing concerns around the AI investment boom and the pressure created on domestic demand, and the upside surprise to inflation in the July CPI data drove the increase.

The press conference highlighted a tightening bias remains. The concern remains that a prolonged energy shock from the US-Iran war becomes embedded in inflation expectations and firms' pricing. The accompanying statement retained the phrase "The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed", a message Governor Bullock reinforced at the press conference. It was however stressed that the four hikes delivered so far will take 12-18 months to fully pass through, and this alongside the suggestion that the RBA may have hiked enough to bring inflation down has contributed to markets scaling back pricing for a back-to-back move.

Headline inflation jumped to 4.0% in August from 3.5% in July, but underlying inflation held steady. The lift came from a 14.8% monthly rise in automotive fuel prices, reflecting higher global oil prices and the roll-off of the remaining fuel excise relief. Fuel and electricity were both excluded from the trimmed mean, which held at 3.6% annually for a third straight month, and its 0.2% monthly rise came in below the 0.3% consensus, although the six-month annualised pace remains elevated at 3.9%.

The softer monthly core does not change our forecast for a 1.0% Q3 trimmed mean or our call for a November hike to 4.85%. That forecast sits 0.2 percentage points above the RBA's August SoMP projection, and with risks still skewed toward higher inflation, we think a print that elevated may warrant another increase on Melbourne Cup Day. Markets are less convinced, pricing only around a 25% chance of a November move and ~33bps of tightening by June 2027, after bond prices rallied further on the trimmed mean undershoot.

Job vacancies fell 0.9% to 325,000 in the three months to August and are just 1.3% lower over the year, pointing to a gradual easing in labour demand rather than a sharp deterioration. The decline was concentrated in the private sector, where vacancies fell 2.0% (5,800), partly offset by a 7.8% rise (2,800) in public sector vacancies. The number of unemployed persons per vacancy has risen to a post-pandemic high of 2.2 but remains below any pre-2019 period and slightly below the tightest point of the mining boom, supporting the RBA's view that the labour market is still a little tight.

The housing downturn broadened in September, with Cotality's national Home Value Index falling 1.1% for a sixth straight month to sit 5.2% below its March peak. Brisbane recorded the sharpest monthly fall among the capitals (-1.5%), ahead of Sydney (-1.4%), with Darwin (+0.4%) the only market to rise. Sydney continues to lead the correction at 8.6% below its February peak, with Melbourne around 7.5% below its peak. The pace of the slowdown remains broadly in line with past downturns, particularly the 2022-23 slowdown as the wave of rate increases commenced.

The ABS Household Spending Indicator for August was flat , but annual growth remains strong at 6.8%. The unchanged August outcome comes after three strong months which saw the level of nominal consumer spending increase by more than 3% (12% annualised quarterly growth). From this perspective it was a solid result indicative of decent retail sales and discretionary spending, which is somewhat at odds with other evidence from businesses and company reporting.

The RBA's October Financial Stability Review suggests the housing downturn poses little obstacle to further tightening. Fewer than 1% of borrowers are in negative equity, and a further 20% fall in prices would leave only around 5% of mortgages underwater. Financial stress among variable-rate owner-occupiers remains well below the highs seen in FY23 and FY24, with the estimated portion of households unable to cover repayments and essentials below 2%, increasing marginally since the 75bps of hikes at the start of 2026. For that reason and the improvement in LVRs across most states, we're expecting a more muted wealth effect from the downturn relative to the slowdown experienced in 2022-23.

Global and Market insights

Global bond markets remain under pressure as long-term interest rates hit new multi-decade highs last week. The Australian 10 year government bond yield, that is the benchmark 'risk-free' long-term interest rate, rose above 5.4% last week, the highest in 15 years. The long-term cost of capital is breaking new ground all around the world. In Germany the 10 year Bund yield is above 3.5%, the highest since 2008 while Japan's long term interest rates are the highest seen in 30 years (1996). The benchmark for the global cost of capital, the US Treasury market, is leading the 'mini crash' in government bond markets with persistent selling pressure taking the 10 year rate above 5.3%, the highest since 2002.

A soft US employment report on Friday night was not enough to arrest the sell-off in the US Treasury market. Non-farm payrolls rose 29k in September compared to an expected rise of 90k. Previous months were revised lower and the unemployment rate increased from 4.1% to 4.2%. Despite the weaker result, long term interest rates rose in the hours after the data was released and finished the week back near the highs around 5.3%. The renewed selling of US government bonds occurred despite the money markets reversing down the odds of a Fed rate hike in late October from a 50% probability to less than 25% currently. Something other than monetary policy expectations are driving long-term rates higher, most likely concerns about the US fiscal defect and long-term inflation.

The Australian dollar has fallen by more than 3% against the US dollar over the past month despite a local rate hike, rising commodity prices and the prospect of higher rates over the months ahead. The exchange rate is now below US70c after rising above US72c temporarily in early September. The trade weighted index, which measures the Australian dollar against a basket of currencies is down by about 2.5% reflecting weakness against the Yen while holding ground against the NZ dollar, the Euro and the Pound (UK). Commodity prices have generally been down in $US terms over the past month, which might be impacting $A market sentiment although energy prices are holding the gains of the past two months with Brent oil still above $US100 a barrel.

The week ahead

Westpac-MI Consumer Sentiment (Tuesday, 6/10) - Sentiment fell 5.2% to 84.4 in September. The October survey is the first to capture the September rate hike alongside higher fuel prices and falling house prices, so we expect further weakness.

Chart of the week: Further hikes aren't expected to significantly exacerbate the national price decline relative to prior cycles

With recent revisions and the speed at which things are playing out, the decline remains in line with historical episodes. The fear is that changes in the Federal Budget and further rate increases since the initial hikes at the start of 2026 will deepen the downturn, however the post-pandemic experience suggests declines may be capped at similar levels.

During the 2022-23 decline the cash rate rose 350bp, a far larger shock to household finances than the 100bp delivered so far - particularly across the smaller states, where LVRs have benefited from strong dwelling-price growth in recent years. Encouragingly, in 2022-23 the market troughed and began recovering even as the hiking cycle continued.

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