Australia faces a protracted inflation cycle, yet bond markets anticipate only one more interest rate increase. This contrasts sharply with the central bank’s trimmed mean CPI climbing at a rapid 4 per cent annualised pace in the September quarter. This market view likely reflects growing recession concerns: the NAB business survey showed August profitability at its weakest since 2020, and September’s business confidence plummeted. Rising unemployment, now at a five-year high of 4.7 per cent, further points to accumulating spare capacity.
The Australian housing market also signals significant adversity. Cotality, a provider of daily house price data, reports Sydney prices fell over 10 per cent, with the national capital city index down 8 per cent. Prices in major cities are declining at an annualised 17 per cent over three months, a pace akin to the Global Financial Crisis, foreshadowing potentially record peak-to-through falls. The Reserve Bank of Australia (RBA) must curb demand and lift unemployment to control inflation, a challenging task given its recent inflation-targeting track record.
Globally, central banks confront similar dilemmas. US core inflation remains about 50 per cent above the Federal Reserve’s target, yet the Fed held rates steady, influenced by political considerations. New Zealand’s central bank also unexpectedly opted against a hike. RBA Deputy Governor Andrew Hauser conceded the inflation outlook was “materially worse,” warning against the “central banker’s nightmare” of shifting inflation expectations. This creates substantial market vulnerabilities, evidenced by tech giants Alphabet and Amazon’s share price plunges following disappointing results. Despite robust US economic growth, persistent above-target inflation and a fully employed labour market suggest higher US interest rates are inevitable, threatening corporate earnings and increasing recession risk.
