Strong growth data cements rate hike bets in 2026 | Close of Business | ABC News

Key Concepts

• Australian Economic Growth: September quarter GDP rise of 4%, fastest annual pace in two years, driven by private sector investment and household spending.
• Private Investment: Strongest growth in almost 5 years, particularly in data centers.
• Household Spending: Focused on essentials like rent, power, and insurance.
• Savings Ratio: Increased as Australians put away more of their earnings.
• Economic Drag: Mining and gas companies selling off stockpiles during maintenance, imports growing faster than exports.
• Reserve Bank of Australia (RBA): Expected to keep interest rates on hold in the near term, with potential for hikes next year due to elevated underlying inflation.
• Underlying Inflation: Elevated, with a forecast to come back into the RBA's target band.
• Unemployment Rate: 4.3%.
• Interest Rate Hikes: Financial markets pricing in a 60% chance of a hike by mid-next year and 100% by the end of 2026.
• Domestic Demand: Stronger than headline GDP, up 1.2% in the September quarter.
• Capacity Constraints & Labor Market Tightness: Potential drivers of inflation if demand continues to rise.
• Monthly CPI: Key data point for RBA decisions.
• Housing Market: Sellers' market in 2025 with 10 consecutive months of price rises, but potential slowdown due to rate hike threats and affordability issues. Perth, Brisbane, and Adelaide leading gains.
• New Lending Limits: From February, banks can only lend 20% of new home loans to buyers borrowing more than six times their annual income.
• AI Expansion: OpenAI opening an office in Sydney and partnering with local tech companies for data centers and AI training.
• Chargebacks: Fraudulent claims for refunds by customers, impacting small businesses.
• ASX 200 & All Ordinaries: Market traded sideways, with slight gains.
• US Interest Rates: Expected rate cut influencing global markets.
• Japan Interest Rates: Expectation of a rate hike in December.
• US Dollar: Weakening against a basket of currencies, impacting commodity prices and foreign investment.
• Santa Claus Rally: Potential positive market movement between Christmas and New Year's.
• Premier Investments: Shares under pressure due to falling short of earnings expectations, particularly impacted by the Smiggle brand.

Australian Economic Performance and Outlook

The Australian economy experienced a 4% rise in the September quarter, which, while below expectations, represents the fastest annual pace in two years. A key positive takeaway is that this growth is largely driven by the private sector, with private investment showing its strongest growth in almost five years. This investment is particularly evident in areas like data centers.

Household spending also contributed, primarily on essentials such as rent, power, and insurance. Encouragingly, Australians have increased their savings ratio, indicating a more prudent approach to their earnings.

However, the economic picture is not entirely rosy. A significant drag on growth came from mining and gas companies selling off stockpiles while undergoing maintenance. Additionally, imports grew faster than exports. The weaker-than-expected GDP figures also highlighted a contraction in non-essential spending by households.

Reserve Bank of Australia (RBA) and Interest Rate Outlook

The current economic conditions mean that households cannot expect immediate relief from the Reserve Bank of Australia (RBA). The consensus among economists is that the RBA will keep interest rates on hold at its upcoming meeting. However, there is a possibility of rate hikes next year, driven by elevated underlying inflation.

RBA Governor Michelle Bullock, speaking prior to the GDP release, defended the central bank's strategy, citing the unemployment rate of 4.3% and an inflation rate of 3.2% (forecast to return to the target band). She stated, "I think the strategy still is alive."

Financial markets are actively pricing in a shift in the RBA's stance. There is a 60% chance of a rate hike by mid-next year and a 100% chance of a move higher by the end of 2026.

Expert Analysis on Economic Trends

David Bassine, Chief Economist at Betshares, explained the shift in market sentiment from anticipating rate cuts to considering hikes. He attributed this to two main factors:

1. Higher-than-expected inflation numbers for the September quarter, with underlying inflation growing at a 1% pace (4% annualized).
2. Strong economic demand in the third quarter, as indicated by the national accounts.

Bassine noted that the market is concerned that this economic recovery might lead to a pickup in inflation, prompting the RBA to "rein in the economy and raise interest rates." He described this as a "sea change in thinking."

Regarding the GDP data, Bassine highlighted that while the headline figure was modest, the domestic demand across consumers, businesses, and the public sector was strong, up 1.2% in the quarter. He cautioned that if this strong demand leads to capacity constraints or a tight labor market, it could fuel inflation, presenting a "juggling act" for the RBA.

The possibility of a single bad jobs report significantly altering the rate hike outlook was discussed. Bassine suggested that it would likely require a "run of months of data" to change the trajectory. He emphasized that if the monthly CPI shows inflation annualized above 3%, the RBA would likely be compelled to raise rates. Conversely, if inflation remains high but the economy weakens, interest rates might stay on hold.

Westpac has taken a different view, flagging the possibility of two rate cuts next year, arguing that much of the high inflation is in sectors outside the RBA's direct control through interest rates. However, Bassine countered that the RBA must target inflation regardless of its source, as prolonged high inflation could embed into expectations. He suggested that some recent inflation might be due to businesses restoring profit margins, which could be a one-off increase.

Bassine's prediction for rates in 2026 aligns with the Westpac view, anticipating the next move in rates to be downwards, contingent on inflation falling below 3%. He believes that if inflation drops, interest rates, currently at restrictive levels, could be moved to a more neutral stance. He indicated that May would be a more likely timeframe for a potential cut than February, requiring a sustained period of data to confirm the inflation trend.

Housing Market Dynamics

The Australian housing market has experienced a sellers' market in 2025, with 10 consecutive months of price rises. However, the threat of rate hikes and poor affordability could temper home values in the new year. Perth, Brisbane, and Adelaide are currently leading the price gains, with momentum flagging in Sydney and Melbourne.

The market is characterized by high demand and very limited stock, leading to intense competition and price increases. In Perth, the number of available properties is more than 40% below average.

Nationally, prices rose 1% in November and 7.5% over the year, with the median home value exceeding $880,000. While November saw a slight slowdown in the pace of growth, this was not unexpected, as much of the market momentum was fueled by anticipated rate cuts in 2025. The shift in outlook, with rate cuts now off the table and a potential single cut in 2026, is influencing buyer decision-making.

New Lending Limits and Future Outlook

New lending limits, effective from February, will restrict banks to lending only 20% of new home loans to buyers borrowing more than six times their annual income. Experts view this as a preemptive measure that is unlikely to significantly cool prices in the short term, as currently only about 5-12% of new originations are on those terms.

The outlook for the new year suggests a slowing pace of price growth due to an accumulation of headwinds.

In Sydney, despite talk of interest rate hikes, prices are expected to continue rising due to persistent supply and demand imbalances. Factors such as "old money," equity release, parental gifting, and the 5% home deposit scheme are fueling demand.

Issues in the Aged Care System

The aged care system is facing scrutiny over alleged kickbacks in home care packages, a practice banned in other government-run programs. Emails have surfaced showing some providers attempting to coerce commissions from suppliers who assist senior Australians.

This situation arises after changes introduced last month that slashed home care package providers' fee commissions from up to 30% to a maximum of 10%. Some providers are reportedly trying to recoup these losses through demands for rebates and payments from suppliers in exchange for inclusion on exclusive lists.

Suppliers argue that these demands erode their slim profit margins and ultimately limit choice for seniors. Home care is a significant sector, with government expenditure in the support at home market reaching approximately $8.8 billion.

The situation has led to financial stress, with two providers recently going out of business. Tying up equipment suppliers to exclusive arrangements is seen as infringing on individuals' right to choose. This practice is explicitly banned in programs like the NDIS, which prohibits commissions and kickbacks and requires disclosure of conflicts of interest.

Artificial Intelligence Expansion in Australia

Following the launch of Australia's national AI plan, US tech giant OpenAI has announced its expansion into the country. OpenAI has opened a new office in Sydney and entered into a multi-billion dollar deal with local tech company NextDC to build a large data center in New South Wales.

OpenAI will also partner with the Commonwealth Bank to offer AI training to small business customers. The company notes that over 40% of Australians use ChatGPT, and there are 30,000 developers building on their systems in Australia.

NextDC expects the new data center to be fully operational by 2027. This facility, the S7 site in Sydney, will include an AI campus and a supercluster for graphics processing units (GPUs). This initiative is part of OpenAI's broader Australian program aimed at promoting widespread AI adoption and encouraging infrastructure investment.

Market Performance and Currency Trends

The Australian market traded sideways this week as investors processed stronger economic data and considered the interest rate outlook. The ASX 200 closed up 0.2%, and the All Ordinaries ended 0.1% higher.

Globally, markets are reacting to different interest rate expectations. The US stock market is near all-time highs, with traders pricing in a 90% chance of a rate cut next week. In contrast, Japan is expecting a rate hike in December, leading to weakness in Japanese stock markets and soaring bond yields to an 18-year high.

The partnership between NextDC and OpenAI has boosted NextDC's share price, highlighting the significant impact of AI on the technology sector.

Conversely, the retail sector shows signs of weakness, with Premier Investments' shares falling around 7% after its first-half earnings fell short of expectations. The company's underlying earnings are projected to be $120 million, below the market's expectation of $140 million. The Smiggle brand has been a particular drag on performance, while Peter Alexander experienced record revenue during promotional periods.

The US dollar has weakened to a five-week low, a trend observed throughout 2025, down around 9% against a basket of currencies. This weakening dollar generally leads to stronger commodity prices, which benefits Australia as a commodity-based economy. For Australian investors, a weaker US dollar can reduce returns on overseas investments, but it strengthens the Australian dollar for foreign investors.

The possibility of a Santa Claus rally between Christmas and New Year's is being watched, with interest rate movements in the US seen as a key factor in potentially driving this positive market sentiment.

Small Business Challenges: Online Theft and Chargebacks

Small businesses are increasingly facing a rising trend in online theft known as chargebacks. This involves customers making fraudulent claims for refunds after receiving products.

Fashion store owner Sam Kemp shared her experience of losing $1,000 worth of stock due to a chargeback, despite having confirmation of order legitimacy and proof of delivery from Australia Post. Her story went viral, revealing that many other small businesses are facing similar issues with significant financial losses and stress.

Another small business owner, Aninnsley, described the anxiety of wondering if posted items will be safe. She recounted a situation where a customer who had spoken to her about sizing later initiated a chargeback.

The fraudulent chargeback process typically involves a customer ordering a product, receiving it, and then contacting their bank to claim they never made the purchase. The funds are then reversed from the business to the customer's account. This is facilitated by the "zero liability" feature for Visa and Mastercard, which protects consumers if they genuinely did not make a transaction.

Brad Kelly, representing a large number of small businesses, stated that due to the volume of chargeback requests, businesses often find it easier to dismiss disputes. He noted that chargebacks are becoming more expensive for acquirers to process, leading them to sometimes overlook merchant disputes.

The Australian Banking Association acknowledged awareness of fraudulent chargeback concerns and stated that banks will work with businesses to resolve disputes within card network timeframes. Visa has introduced rules allowing businesses to use historical purchasing data to combat "friendly fraud" and protect against repeat abuse.

However, Kelly warned that businesses with too many chargebacks can face "red flags" on their accounts, potentially leading to their exit from payment facilities, making it difficult to secure new ones.

Sam Kemp is advocating for better protection for small businesses by taking her case to parliament. She met with Victoria's shadow minister for small business, emphasizing the need for banks to take more responsibility and for the customer not to always be right in these situations.