One big macro disagreement investors can't ignore

There are two irrefutable facts about the Australian economy at the moment – yet the views on what they mean and how they should be handled are highly disparate.

The first is that Australia has an inflation problem.

Trimmed mean inflation, the RBA’s preferred measure, remained at 3.6% in July 2026, above the RBA’s 2-3% target. This is despite three rate hikes already this year.

The second is the near certainty of a rate hike next week, both priced in by markets and seemingly confirmed by recent hawkish statements from RBA governor Michelle Bullock.

Where this becomes contentious is what happens next and the persistence of inflation, AI’s role in inflation and whether there is a risk of ‘overtightening’. Frankly, it’s an issue that investors shouldn’t ignore and has wide-spread implications for the coming year.

It was also the source of lively discussion between the three panellists on Livewire Live’s Signal or Noise panel facilitated by Livewire’s Chris Conway on Tuesday, 22 September 2026:

• Diana Mousina, Deputy Chief Economist, AMP
• Roy Keenan, Co-Head of Australian Fixed Income, Yarra Capital Management
• Damien Boey, Portfolio Strategist, Wilson Asset Management

To hike or not to hike? Inflation is the question

Inflation is higher than target, has remained persistently so and the key tool available to the RBA comes down to rates. A hike is effectively a no-brainer, but is it the right decision? Mousina and Boey have conflicting views on the need to further tighten.

Mousina views the key risk to the Australian economy is not tightening enough, pointing to the resilience of the consumer despite rate hikes.

“We have a genuine inflation problem here, which comes down to the fact we have very high wages growth. We have government spending that is too elevated and other countries we compare ourselves to are not in the same situation,” Mousina said.

She believes rate hikes will be necessary to avoid inflation running hot for the next few years.

“The RBA will probably have to raise rates a few more times and that does mean we are going to see a slowing in growth and further decline in house prices,” she said.

“We’ve been very lucky that the unemployment rate is still so low, close to a 50-year low actually. Unfortunately, I think we do need more pain in that sector to actually get inflation down to a sustainable number.”

By contrast, Boey believes that the RBA already risks overtightening. His concern is that much of the RBA’s messaging around future inflation centres on the AI-narrative as a driver and reason to raise rates. The RBA is not alone is this pervasive messaging, other central banks have expressed their own concerns.

“The problem is, if you think AI really is going to be productivity enhancing, then the maximum rate the economy can grow without causing inflation is a lot higher than what the RBA believes. It’s higher than 2% and also means there’s more spare capacity in the economy,” Boey said.

“If you’re operating on an old model, you’re actually slowing the economy way too much relative to that baseline,” he added. His view is that while the RBA is likely to tighten next week, it probably shouldn’t.

Whichever way you stand, Keenan reminded investors that “the market and the RBA get it wrong”. 

“They made a policy mistake last year when the economy was humming and we were cutting rates.”

The market has priced in 2.5-3 tightenings and Keenan thinks it is likely that the RBA will follow suit.

Cracks in the economy

In the wake of rate rises, investors typically watch housing prices (and mortgage stress), the employment market and credit markets.

Mousina and Keenan were relatively comfortable with the state of housing, while Boey noted risks in the buffers for the housing market.

Mousina highlighted that, across the board, we’ve seen falls of around 4-5% in Australian housing prices, which is not solely due to rate hikes but also influenced by fiscal policy changes. She anticipates a total top-to-bottom fall in prices of 11% and that prices will start to pick up in the second half of 2027.

She also noted that the employment rate has actually been positive, though slowing growth should see some increase in the unemployment rate.

Keenan noted there hasn’t been changes in RMBS credit spreads and low supply gives a measure of confidence.

“The only area we’ve seen an uptick in arrears is the cohort which is really cheap. They got into trouble last time and went into arrears when interest rates rose a couple of years ago,” he said, noting that this is a small cohort.

Boey is concerned about the resilience buffers for the housing market – bank equity and valuations.

“Are those buffers declining? The answer is banks are expensive relative to the baseline and buffers are going down. Even before you get to a negative scenario, there are issues for equity valuation,” he said.

Is the government undermining the RBA?

There is significant government spending at present and some across the market view this as undermining the RBA’s attempts to reign in inflation.

Boey is concerned that this story is creating more problems.

“If people are already uncertain about where inflation is at and you feed a narrative into that where the government is undermining the central bank’s ability to target inflation – whether that is true or not – you actually fan that further.”

He explains there is a further consequence to this where the growing investor uncertainty drives a positive correlation in bonds and equities, forcing bond yields to go up further to compensate for the lack of diversification benefit.

Mousina points out that government spending is around a record high of about 28% of GDP.

“Fiscal policy is not helping our economy at the moment,” she said, also concerned about the recently released Intergenerational Report which indicates the economy will only be able to grow at around 2% for the next 40 years.

“You have the public sector competing for resources, which is people and materials, and then you have the private sector that's also trying to grow. Of course you're going to get this unwanted inflation.”

Taking advantage of inflation and interest rates

The RBA’s path may be a difficult and contentious one, but it still opens opportunities for investors, particularly in bond markets. On this aspect, the panellists were in agreement.

Boey is using long duration bonds, with the view that the RBA will need to cut rates in 2027, and from an equity perspective, aiming for ‘short duration value’ – more resilient parts of the equity market. He also likes tier 2 bank debt.

“The banks here are basically a protected species, yet if you invest in their debt, you actually get a higher yield than the government. If you were to invest, for example, in Commonwealth Bank debt going out to 20 years and fix the rate, you could actually get a yield close to 7% fixed for 20 years. It's phenomenal.”

Keenan notes that Australia is already benefitting from higher interest rates and a stable government environment, making it appealing to overseas investors and markets have priced in coming hikes.

“Australia’s credit markets are in the best shape I’ve ever seen in my career,” Keenan said.

“If you compare Australia from a credit risk profile – a 10-year Triple B US to a 5-year Triple B Australian bond, you pick up 40-50 basis points for half the risk.”

Keenan also reminded investors that the fundamentals for Australian companies on the whole looked good, despite volatility, but it's important to make sure you are being paid for any risks you are taking on for investment.