Key Takeaways
- Q4 headline CPI 3.8% YoY, slightly stronger than expected.
- Trimmed Mean +0.9% Q, 3.4% Y — exceeds forecasts; reinforces a likely February rate hike.
- Encouraging signs: rent growth moderating, new dwelling costs at slowest pace in seven months.
- Private sector credit up 0.8% in December (fastest since mid-2022); annual 7.7% — strongest in five years.
- AUD near three-year highs around US$0.701; markets pricing ~70% probability of 25bp hike to 3.85%.
Market UpdateInflation isn’t done yet
Inflation outcomes for the December quarter were firmer than expected, particularly at the core level. Headline CPI rose 3.8% over the year to December, slightly stronger than expected, reinforcing that inflation pressures remain elevated even as some categories show signs of cooling.
The Trimmed Mean rose 0.9% over the quarter and 3.4% over the year, exceeding Westpac’s forecasts and reinforcing expectations that the RBA will raise the cash rate at its February meeting.
Housing-related inflation was more encouraging. Rent growth moderated, and new dwelling construction costs rose at their slowest pace in seven months — building-cost inflation may be nearing a peak and rental pressures are beginning to ease.
Price pressures were uneven across categories. Holiday travel and recreation recorded stronger-than-expected increases, while electricity, fuel, clothing and footwear were weaker than forecast.
Monthly inflation data showed tentative signs of improvement, with the monthly Trimmed Mean easing to 3.3% annually. However, core inflation remains above the RBA’s target band, meaning the Bank is likely to maintain a cautious and restrictive policy stance.
Consumer ConfidenceConfidence rises 4.7pts
CreditPrivate sector credit: momentum builds despite rate headwinds
- Private sector credit up 0.8% MoM in December, fastest pace since mid-2022. Annual growth lifted to 7.7%, strongest in five years.
- Housing credit (over 60% of total) accelerated to 0.7% MoM — one of the strongest readings of the cycle.
- Investor credit jumped 1.0% MoM, the sharpest rise in over 18 years, reflecting stronger risk appetite and fewer affordability constraints.
- Owner-occupier lending continued steady growth at 0.5% MoM.
- Credit growth likely to stay elevated near term, but a potential February RBA hike could quickly shift housing and business credit risks, particularly for investors.
Foreign ExchangeAUD supported by policy divergence
- The AUD trading around US$0.701, near its highest in three years, supported by a weaker USD and growing RBA hike expectations.
- Markets pricing ~70% chance of a 25bp increase at next week’s RBA meeting; ~50bp of tightening expected over the year.
- All four major Australian banks expect the RBA to lift the cash rate to 3.85%.
- If the RBA hikes, Australia would join Japan as one of the few developed economies still raising rates, while the Fed is expected to begin cutting later in the year.
- Many view the move as a one-off adjustment rather than the start of an extended tightening cycle.
Sources: Westpac Weekly (30 January), ABS, Macrobond, Westpac Economics, ANZ-Roy Morgan, Trading Economics, RBA. This summary is for informational purposes only and should not be considered financial advice.