“Easy asset gains are over” – expect a tougher year for the Australian economy

Headlines about falling house prices, high inflation and weak Australian productivity are hardly encouraging signs for the economy. Add spiking oil prices as the conflict between the US and Iran escalates, along with the prospect of the first US rate hike in more than three years, and the pressure is mounting.

The next RBA rate decision is Tuesday 29 September, and investors (along with anxious mortgage holders) may well wonder whether this points to a hike or a hold.

My Bui, an economist at AMP, believes another rate hike in 2026 is all but guaranteed. The question is whether the RBA will make that call in September or wait until its November meeting.

The data to watch and what it means

The RBA has two monetary policy objectives: price stability and full employment. It aims to keep inflation between 2% and 3% while maintaining the highest sustainable level of employment.

At present, Bui highlights inflation as the most pressing concern.

"The inflation measures that the RBA focuses on most are annual and monthly trimmed mean inflation. They haven’t been good. They’ve been tracking around 3.5–3.6% for a few months, which is an increase from the start of the year despite the three rate hikes", says Bui.

She highlights that persistent inflation has a range of domestic and external drivers. While investors may assume that the US–Iran conflict and resulting fuel-price spikes are responsible for a significant portion of it, Bui says that is not the case.

“Domestically, we have really high building and services costs, along with rising entertainment, healthcare and education costs. We haven’t seen a massive fuel-price increase in the inflation data. The main impact has been through fuel surcharges, while the fuel-excise cut cushioned some of the direct impact.” she explains.

Consumer spending has remained strong too.

This is despite the three rate hikes and Roy Morgan data showing that 19.8% of owner-occupier mortgage holders were ‘Extremely at Risk’ of mortgage stress in the six months to June 2026, up from 16.7% in December 2025 and 19.3% in June 2024 (before tax cuts became effective).

The RBA also watches employment data. While there have been some signs of weakening, Bui notes that the labour market has not deteriorated to recessionary levels.

“Australia had unemployment between 5-6% pre-COVID, and it’s currently 4.5%. This may feel weaker than last year, but it’s still better than in the past so is unlikely to be a primary concern for the RBA at the moment,” says Bui.

Property and resources: do these matter to the RBA?

The Australian economy has traditionally been dependent on rising house prices and resource exports, and the RBA do look at this data as part of their decision, though it doesn’t necessarily sway it.

Investors would be aware of falls in housing prices, with national home values down around 5% so far this year, according to Cotality's Daily HVI (as at 14 September). 

“It is a sign of the economy weakening. When the housing market falls, people do less renovations, spend less on construction and other related services see a fall. 

"There’s a negative wealth impact so consumer sentiment can fall, but the current falls haven’t been enough for the negative wealth impact to hit the broader economy because we have low unemployment,” Bui says.

She explains the RBA would be watching, but concerns would be greater if the falls reached a particular tipping point, such as a decline of 10-15%. At this stage, the housing downturn is unlikely to sway the decision.

Bui points out that house-price declines have historically been less than 10% from peak to trough.

“We think it could fall more than that this time, around 11%, but it’s still not at a tipping point where we believe the RBA would be worried.”

On the resources side, Australian exporters have largely benefited from global energy shocks in recent years, so are less of a focus for the RBA right now, barring any potential impact on domestic inflation and the fuel supply chain.

To hike or hold?

“Markets are pricing in around 2-3 more hikes due to oil prices, but I think one more rate hike taking the cash rate to 4.6% p.a. is likely. More would be overkill for the economy,” says Bui.

She suggests a 70% probability of the hike occurring at the September meeting, although some board members may lean towards a hold to determine whether the July inflation print was an outlier (there was a spike in July last year too) and due to weakness in consumer sentiment and the housing market.

Bui highlights that the three rate hikes this year are beginning to take effect.

“They don’t need to go much further. We’ve seen weakness in the housing market, in consumer sentiment and business conditions as well. For the first time since Covid, the NAB business conditions index has turned negative. Things are starting to slow, just not slow enough yet for the RBA,” Bui says.

AMP expects the cash rate to peak at 4.6% and sees potential for cuts in the second half of 2027, given the RBA has already described current settings as restrictive.

Other things for investors to note

Rate hikes are likely to dampen the economy in the coming year, and AMP believes that GDP growth will slow to around 1.5% p.a. To put that in perspective, Australia’s economy has historically grown by around 2.5–2.75% a year, while the RBA estimates trend growth at around 2–2.2%.

What this all means is a tougher year ahead.

“The environment of easy asset gains is over,” Bui says, noting a tougher environment with high inflation and higher government debt driving up bond yields and threatening asset valuations.

Although share prices have continued to rise, supported by earnings, higher interest rates can weigh on company revenues and business investment. Those effects may become more apparent over the coming year.

Bui suggests energy and mining stocks may still have further upside, while recent falls in consumer discretionary and consumer staples stocks may reflect a more subdued earnings outlook for 2027.

Do you think the RBA will hike in September or wait until November? Let us know how you are investing as the rate outlook changes in the comments.