Australian economic view – November 2025

Market review

Australian bond markets saw further repricing of the Reserve Bank of Australia (RBA) in October. The Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose 0.4%. The RBA maintained the cash rate at 3.60% at end September, as was expected. Three-month bank bills rose 6 basis points (bps) to 3.64% by month end. Six-month bank bill yields rose 13bps to 3.88%. Australia’s three-year government bond yields ended the month 6bps higher, at 3.60%, while 10-year government bond yields were unchanged at 4.31%.

The Australian economy is handing the baton of economic growth from the public sector to the private sector. There are inevitably conflicting economic signals through this process as the transition is unlikely to be perfectly timed. Amidst it all, inflation is rising, while the labour market softens. As this occurs, it is more likely that the markets vacillate on the expected interest rate profile. This was evidenced as views on the RBA went full circle in the month. RBA Governor Bullock was hawkish at their early October meeting, with a renewed focus on inflation risks and downplaying labour market softness. Post weak consumer confidence, soft job advertisements and most importantly a rise in the unemployment rate to 4.5%, easing pricing was partially returned. There was a further reversal post a significantly stronger inflation print than expected late in the month. Australian third quarter CPI rose to its highest level in over a year, to 3.2%yoy, and the trimmed mean rose to 3.0%yoy. These were both higher than the RBA had forecast, and lowered the probability of further easing until inflation proves less worrisome.

The dichotomy of rising inflation and slowing employment is not constrained to Australia alone. This theme is being felt in a number of advanced economies, including the United States. The US Federal Reserve lowered interest rates in October, as expected, due to weakening employment, but they warned on rising inflation. The US outlook is less clear, in part due to the ongoing government shutdowns, which mean there is no government economic data releases.

Market outlook

With inflation higher than the RBA are comfortable, markets priced out much of the last phase of the easing cycle. There is one more easing priced in through 2026. We pushed out our expected base case for easing to H1 2026, reducing it to two more cuts to 3.10%. This leaves policy above our estimate of neutral. Our low case reflects a weaker economic outcome and the RBA easing by a total of 250bps. We allocate a modest weight to the low case. We hold a relatively neutral duration position, while we remain vigilant through the volatility to take advantage of two-way mispricing.

Monthly focus – Intertwining of long-term themes

The world is awash with a number of big economic themes. These global themes, whose impacts on economies will be fully felt over years, not just months, are however, playing out in the current economic data and shaping financial market expectations. Inevitably, the inherent conflicting influences generate volatility in data and financial markets. This makes forecasting more complicated, but it also creates opportunities. We take a brief run through a number of the key themes currently in play.

This month the focus was on the boom in artificial intelligence (AI), and how this is going to shape economies, as well as investments. The economic benefits of profound technological change tend to take years to develop in full. There are question marks about the rapidity of AI adoption, and the fact that it may be faster than prior technological change periods. If true, higher productivity and potentially lower employment may come faster. Capital expenditure necessarily also needs to rise, and this impact is currently in play in some countries.

The economic impacts of climate change, both the transition to a less carbonised world, as well as warming itself, continues. We wrote about this last year. The capital required to facilitate the transition is now competing with, and in some instances, complimenting the energy needs of the AI transformation. We can expect higher capital expenditure and higher inflation from this theme.

Recent months have highlighted the deglobalisation theme, in the guise of trade disruptions. Less global geo-political co-operation is more likely to result in sub-optimal economic outcomes. Higher tariffs and trade barriers have historically led to lower economic growth and higher inflation. This can take time to flow through, and the present cycle does appear to be slow to show up, but it is having an impact. China’s international trade is rotating away from the US and US inflation experiencing higher tradeables inflation are just some examples. We should expect these themes to continue through the coming year.

Fiscal policy and high levels of government debt in some major economies is also having a strong influence on markets. Many governments did not take steps to reduce net government debt post the global financial crisis (GFC). This has led to less sustainable debt levels post the pandemic. Penalties are being extracted in the economies with high levels of both government debt and poor external balances. The existence of so-called twin deficits has seen higher bond yields. Japan, the United Kingdom and France are some examples. This theme is likely to remain, and potentially worsen, until such time as deficits are addressed. Australia is comparatively well positioned, but slippage would be unwelcome.

A related theme is fiscal dominance, where the existence of significant government debt levels influences sub-optimal policy in other spheres, such as monetary policy. Setting monetary policy in such a way as to address debt levels, explicitly or implicitly, rather than inflation targeting, has consequences. This theme has become a topic of conversation amongst economists as a possibility, rather than being evident at present. In a World where sub-optimal policy can no longer be dismissed, markets are attuned to any possibility of fiscal dominance.

Economic inequality is a further trend driving economic outcomes and creating uncertainty. This is being referenced as the “K” economy and explains some of the outcomes in the US where it can be applied to the AI economy versus the rest of the economy. In Australia, speak to any cohort with a build-up in assets and they are doing well. Wealth is rising and confidence is higher. Contrast this with cohorts without a build-up in assets, and the feeling isn’t necessarily mutual. There is uncertainty over employment, concerns over the high cost of living and poor housing affordability. This is borne out by a rise in the Gini co-efficient in Australia post the GFC, but also more pronounced in countries such as the US. Rising inequality has the power to influence geopolitical outcomes, but also create anomalies such as low consumer confidence and stronger consumer spending.

Demographics, including ageing and migration, are also influencing current economic outcomes, and will be doing so for decades to come. The rapid migration cycle through and post the pandemic continues to influence economic growth, and labour markets, in a number of economies. Population growth is expected to modestly ease further in Australia, where it has already reduced monthly labour replacement needs. This weighs on supply, but also demand. Alongside this, overall ageing demographics alter savings demand and supply, as well as labour supply and demand.

Through these crosscurrents we find it is best to track what underlying fundamentals and historical precedent advise us about how economies behave. Anomalies will come, and go, deciphering the news from the distraction is key.

^{Views as at 1 November 2025.}