Don’t write off the RBA rate cuts yet – realestate.com.au

The interest rate outlook has shifted again, but this time the change is driven by a more complex mix of data.

A resilient labor market is pushing expectations of rate cuts further down, even as emerging weaknesses indicate that inflationary pressures could ease sooner than many forecasters expected.

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Consumer sentiment versus trust. Source: Ray White Group.

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October’s unemployment rate fell to 4.3 percent, reversing September’s increase and confirming that the labor market remains tighter than expected.

This is welcome news for employees. For the Reserve Bank, this complicates the case for short-term rate cuts. A labor market that refuses to soften meaningfully makes it harder to argue that inflation risks are fully contained.

Yet other sectors of the economy are now clearly losing momentum. Retail spending remains subdued, business surveys point to deteriorating conditions, and credit data shows continued pressure on small businesses and housing market segments. These weaknesses alone may not be enough to change monetary policy, but they do reinforce the view that underlying economic momentum is slowing, but not uniformly.

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Nerida Conisbee, chief economist of the Ray White Group.

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The construction sector is perhaps sending the clearest signal of where things are going. New analysis shows activity is cooling rapidly, with new project starts, wage pressures and material cost increases all declining.

The pipeline of new developments has shrunk dramatically, with the value of major projects entering the system falling by more than half in the past year. This marks one of the sharpest adjustments in a domestic inflation driver that has been hot for two years.

While some capacity is simply being phased out from completed infrastructure and commercial projects, there is far less work in the pipeline to replace it. This points to a softer outlook for the construction sector until 2026 and, importantly for the RBA, a meaningful reduction in cost and wage pressures that have contributed significantly to inflation.

In fact, one of the biggest drivers of inflation is shutting down, while households and parts of the business community are already feeling the pressure of higher interest rates.

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The inequality in the economy is also visible in consumer sentiment, with different measures painting a different picture.

The ANZ-Roy Morgan index remains firmly in pessimistic territory, suggesting households are still struggling with higher borrowing costs and continued cost of living pressures.

However, Westpac’s sentiment index, now positive for the first time in almost four years, signals rising optimism among some groups, particularly those with rising incomes or lower mortgage exposure. Confidence is recovering, but only cautiously.

All this leaves the RBA with a more complicated landscape than earlier this year. Some analysts now see the first rate cut being postponed until the end of 2026.

Others argue that the slowdown in the construction sector and mixed consumer conditions strengthen the case for faster easing once the central bank is confident that inflation is on a clear downward path.

The path to lower rates remains open, but as always depends on data. The stronger labor market may delay the timing, but the cooling construction sector suggests the broader economy is quietly doing some of the work for the RBA.

– Nerida Conisbee is chief economist at the Ray White Group.

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