Inflation slows but demand yet to budge

• • Unanimous decision reflects caution, not confidence
• • Momentum in housing market has shifted
• • Fiscal policy helps out with inflation fight

For the first time in the current hiking cycle, the RBA’s monetary policy statement has explicitly called out the current rate settings as being ‘somewhat restrictive’. The Board pointed to falling house prices, declining new loans and softer than expected labour market conditions as evidence that the three prior hikes are biting. However, despite this significant shift in language, RBA forecasts for inflation returning to the target mid-point have continued to push out until late 2027.

Just two weeks ago, Michele Bullock described a world that had become more ‘shock-prone’ in her speech at the Anika Foundation Fundraising Lunch. Now today’s RBA statement provides a milder assessment of the Middle East Conflict, noting that the impact on inflation has been less than expected. The Board also pointed to the AI-related investment spending as an offset to the global growth drag of this conflict. This softening in the geopolitical backdrop has come with statements that now tie further hikes to ‘if upside risks materialise’ suggesting the Board has slightly more faith in its updated forecast.

Another pause without much progress for the RBA Board today; however, the recently announced federal government’s tax reforms mark a genuine change in dynamic between monetary and fiscal policy. Unlike the recent trend of ever-increasing government spending, the negative-gearing and CGT reforms now reinforce the RBA’s tightening efforts rather than working against it.

We’ve written before about the housing wealth effect, the tendency for rising asset values to lift household spending via confidence and borrowing capacity. That relationship can just as easily run in reverse. RBA’s own research models a 10% fall in house prices reducing consumption by around 1.5% over time, operating through weaker sentiment and a reduced willingness (and capacity) to take on credit for spending. However, this is not a simple standalone link, with the strength of the effect also dependent on prevailing credit, employment and political conditions.

For now, the impact of these complementary settings is showing up almost entirely in softer data points and housing specific measures such as falling prices, consumer surveys and weaker auction clearance rates rather than in broader demand. Harder data points such as household spending and credit growth remain resilient, running above long-run averages.

The strength of domestic consumer spending, and other structural drivers of inflation are well embedded in the Australian economy. Bringing down aggregate demand and inflation will require other levers, or a materially larger shock than a moderate wealth-effect drag. Ceteris paribus, it’s reasonable to expect current policy settings to continue to disproportionately impact the residential property sector, without delivering the broader disinflationary progress the RBA Board is targeting.

Martin Wilkinson

Head of Investments

martin.e.wilkinson@allianz.com.au

Adam Downy

Senior Investment Associate

adam.j.downy@allianz.com.au

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