The Fed looks like it’s going to hike – implications for investors & Australia

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By Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP | 14 September 2026

Key points

  • The Fed is likely to start raising interest rates to combat sticky inflation and affirm its credibility.
  • First Fed rate hikes in a tightening cycle don’t normally signal the end of the bull market in shares but are consistent with volatility and the risk of a correction.
  • A Fed hike is unlikely to impact the RBA which started hiking before the Fed & was already likely to hike again this month.

Introduction

After much debate and anticipation, the US Federal Reserve looks likely to raise interest rates at its meeting this week by 0.25% taking the Fed Funds rate to a range of 3.75-4%. This will be its first hike since 2023.

Dashed lines from now show money market expectations. Source: Bloomberg, AMP

In moving to hike the Fed will join numerous central banks in doing so including the ECB and those in Norway, Japan, Korea, Indonesia, and the Philippines, the RBNZ and of course the RBA which has hiked three times.

Why is a Fed hike likely?

As in other countries, the hike is likely because inflation is above the Fed’s 2% target with upside risks. Some Fed officials have been arguing for a hike for a while. The Fed’s June meeting saw half of the officials on the Federal Reserve’s Open Market Committee that sets interest rates flag an expectation for a rate hike this year and the Fed’s easing bias was dropped. Recent commentary from Fed officials indicated a need to see a downtrend in inflation to leave rates on hold with new Fed Chair Warsh turning hawkish and effectively backing this in a speech last month. Then underlying US consumer price inflation data for August surprised on the upside pointing to a 0.25% monthly rise in core private final consumption (PCE) inflation for August, which is not consistent with Fed officials’ requirement for a falling trend in inflation. At the same time, US economic data has generally been solid and the renewed surge in the oil price has added to upside risks. So, the US money market sees an 86% chance of a 0.25% hike this week, and has factored in 3.5 hikes by June next year.

Source: Bloomberg, AMP

Trump’s illogical intervention a week ago trying to get the Fed to “LOWER THE RATE” will have only made it more likely that more Fed officials will support a hike in order to reinforce Fed credibility. Were it not for Trump’s tariffs and War with Iran the Fed may have cut again by now! Like the RBA, after nearly six years of inflation running above target Fed credibility is now on the line and Trump’s interventions are not helping.

How far will the Fed hike?

It’s often said that central bank rate hikes are like cockroaches “if there’s one there’s probably more”. Fed communication following the meeting is likely to remain hawkish warning of further tightening to come and this is likely to include the so-called “dot plot” of Fed officials’ interest rate expectations signalling another hike by year end. And while I am not a great fan of historical overlay charts like the next one for US inflation – the US and the global economy have become more inflation prone thanks to deglobalisation, rising defence spending, bigger government, Trump’s erratic pro inflation policy making, etc.

Horizontal axis shows years, starting in 2014/1966. Source: Bloomberg, AMP

And this provides a warning to the Fed to be cautious. After the surge in inflation in the early 1970s the Fed relaxed and then inflation came back with a vengeance, ultimately necessitating a far more aggressive monetary tightening to get it under control. The same could occur again. Things probably aren’t that bad now though given the Fed and other central banks now have firm inflation targets – albeit the risk is there. But to head of this risk the Fed will likely hike again. However, at present it looks more like fine tuning. US inflation is not yet showing a renewed surge and nor is it in most countries. Rather, the concern in the US is that at 2.4%yoy for core CPI and around 3.2%yoy estimated for core PCE inflation, it is just above target rather than necessarily taking off again.

Source: Bloomberg, AMP

So, our base case is for one more Fed hike in this cycle, probably in December – as it’s October meeting is just before the midterm elections.

What does it mean for share markets?

The experience of the last 35 years suggests that while first Fed rate hikes in a tightening cycle can cause a dip in shares, the bull market usually resumes until rates become onerously tight, which weighs on profits. This can be seen in the next chart. US shares had wobbles when rates first started to move up in February 1994 (US shares had a 9% correction), in June 2004 (US shares had an 8% correction) and in December 2015 (US shares had a 13% correction) but thereafter they resumed their rising trend and a bear market did not set in till 2000, 2007 and 2020 after multiple hikes. Of course, the 2020 bear market was ostensibly due to the pandemic. Recession did not come for seven years after the February 1994 first hike, for three and a half years after the June 2004 first hike and for four years after the December 2015 first hike. This is because the first rate hike only takes monetary policy to less easy, and it’s only when monetary policy becomes tight that the economy gets hit. The start of Fed tightening in the last cycle in March 2022 was different as shares were already in a falling trend and this continued until October 2022 culminating in a 25% fall. But inflation was much higher then – with US core CPI inflation of 6.5%yoy when the Fed started to hike necessitating a more aggressive increase in interest rates whereas now it’s much lower.

Source: Bloomberg, AMP

One guide to whether monetary policy is tight or not is the shape of the yield curve (long-term bond yields less short-term rates) – with a period of long-term bond rates falling below short-term rates often preceding recession. Of course, this doesn’t always work and it gave a false signal from late 2022 through 2024. At present, different versions of the yield curve are both in positive territory and not signalling recession.

Source: Bloomberg, AMP

Correction risks

While past experience suggests little reason to be too concerned by the first US rate hike, there are two main risks:

  • Correction risk is already high for shares – a Fed rate hike combined with worries about the rebound in oil prices, Trump’s latest tariff announcements, rising bond yields, AI bubble worries and concerns about the US midterm elections could combine to further push shares down in the near term in what is a seasonally weak period.
  • There is a high risk that Trump turns up both the tariff war (with maybe more countries retaliating) and the Iran War post the midterm elections once political constraints from the midterm elections recede. This would add to inflation.

Impact on Australian interest rates and the $A

The RBA sets rates for Australian conditions and does not just follow the Fed. As the first chart shows the link between US and Australian rates has been tenuous in recent times with the RBA hiking in 2009-10 when the Fed did nothing and the RBA cutting or on hold when the Fed raised rates over 2015 to 2018. They only move together if there is cyclical alignment. However, the RBA led the Fed in hiking starting back in February and is on track to hike probably later this month and maybe once more this year, and the Fed’s likely hike this week won’t alter that either way. A Fed rate hiking cycle is not necessarily bad news for the $A because it depends on how much the RBA raises interest rates. Current money market expectations suggest some slight narrowing in the rate differential between Australia and the US which would be negative for the $A. However, our view is that $A is yet to catchup to the widening in the rate differential this year, expectations for 3.5 Fed hikes look too hawkish and solid commodity prices should support the $A. So, unless there is a global recession, we continue to see the $A rising a bit over the next year.

Source: Bloomberg, AMP

Why have Australian living standards “fallen” and how do we fix it?

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By Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP | 14 July 2026

Key points

  • Falling real wages and a surge in tax and interest payments over the last five years have led to a slump in Australians’ living standards.
  • But a broader driver of the malaise in living standards has been a slump in productivity growth from over 2% pa in the 1990s to near zero since 2016.
  • Amongst other things this has led to a worse growth/inflation trade-off than was the case prior to the pandemic and higher than otherwise RBA interest rates.
  • Key policies to boost productivity growth include: tax reform; reducing the size of the public sector; deregulation; greater incentives to invest; and competition reforms.

Introduction

For the last few years there has been much talk of a “cost-of-living” crisis in Australia and of “falling living standards”. This has flared up again lately with the pickup in inflation resulting in a renewed fall in real wages. And in the last week the OECD noted that: a 5% fall in real wages over the last five years was amongst the worst in OECD countries; Deloitte Access Economics noted that on its growth forecasts for the next two years Australia was heading for its worst stretch of growth below 2% since the early 1990s; and the media reported that Australia’s underlying rate of inflation was around the highest in developed countries.

This of course is a far cry from what we were used to in the decades prior to the pandemic. In the 1980s a collapse in national income following years of stagflation, i.e., poor growth and high inflation, galvanised the Hawke/Keating Labor Government to undertake supply side productivity enhancing economic reforms to get the economy back on track. These were continued in the Howard/Costello years and Australians saw rapidly rising material living standards. This in part contributed to the IMF referring to “Australian Exceptionalism” given its strong performance compared to other developed countries and was highlighted in a 2018 cover story in The Economist magazine titled “Aussie Rules…what Australia can teach the world” and referred to “the wonder down under”. Unfortunately, this turned out to be another example of the tendency for magazine covers to jump on to something just when it’s about to reverse!

In fact, to borrow from journalist Paul Kelly’s new book, Australian Exceptionalism had by then already entered the “twilight zone” as since the late 2000s the wheels fell off the reform agenda and productivity started to suffer but it had been masked by strong export earnings so no one really worried. Since the pandemic, though, the malaise has become clearly apparent. So, what went wrong and how do we fix it?

Weaker living standards

The deterioration in living standards can be seen in various indicators. Often referred to in the last few years has been the slump in real household disposable income per capita which shows the value of incomes after allowing for tax, mortgage debt payments and inflation. It’s a far broader measure of household income than just wages. See the red line in the next chart.

Source: ABS, AMP

Since its high point in 2021, it fell more than 9% into 2023-24. It’s still 5.6% below its high, and is now showing signs of slowing again. Of course, the slump was exaggerated because it came off the back of a surge through the pandemic due to payments like Job Keeper. But even allowing for that, real disposable income per person is up only 0.6% pa over the last decade, compared to 2.3% pa growth over the prior 20 years. This in turn has resulted in even slower growth in real consumer spending per person. And real disposable income has been much weaker here than across OECD countries, where on average its risen above the highs reached in the pandemic.

Source: ABS, OECD, AMP

So, what’s gone wrong?

The poor performance in real household income reflects a combination of factors. First, wages have not kept up with inflation since 2021. Since the end of 2020 average consumer prices are up 25%, but average wages have only gone up 19%. So real wages have fallen 6%.

Source: ABS, AMP

Before the pandemic real wages rose of the time. They did start to rise again in 2024 and into 2025, but are now reversing again due to the rebound in inflation.

Source: ABS, AMP

Second, the rise in interest rates since early 2022 saw a big rise in mortgage interest payments relative to income. There was a brief decline last year, but this is now reversing again.

Thirdly, bracket creep has driven income tax payments to a near record high as a share of income further reducing disposable income. The July 2024 income tax cuts provided some relieve but the rising trend has resumed.

Source: ABS, AMP

However, a more fundamental driver of the malaise is poor productivity growth. Productivity is often thought of in terms of labour productivity, i.e. GDP per hour worked. It rises when we boost our skills, use more capital like machines or AI or arrange our efforts more efficiently all of which enables us to work smarter and so produce more, which can then be rewarded with rising real incomes. While productivity growth was strong in the 1990s and into the 2000s it slowed from the mid-2000s and has slowed to a crawl since 2016.

 

Source: ABS, AMP

Productivity growth is the main driver of material living standards over long periods. As can be seen in the next two charts, the slowdown in productivity points to ongoing softness in per capita GDP growth…

Source: ABS, AMP

…and slower growth in household incomes and by implication consumer spending.

Source: ABS, AMP

We can make up for this by faster population growth, but this doesn’t help living standards per person. Likewise, it can be masked by strong commodity prices and hence national income but medium-term threats to Chinese growth mean we cannot rely on that. Lower productivity growth makes it harder to boost the supply side of the economy to keep inflation down and results in lower real wages growth, slower growth in profits and a reduced ability for the government to provide services.

So, why has productivity growth stalled?

As noted in the introduction, after the malaise of the 1970s and a collapse in export earnings, there was a focus in the 1980s under Hawke and Keating, and then continued under Howard and Costello, on supply side economic reforms designed to improve productivity growth by making the economy more flexible and competitive, improving incentives and improving skills. This saw productivity growth surge through the 1990s into the 2000s and expanded the capacity of the economy to grow without causing inflation. But since then, a range of factors have contributed to slower productivity growth, including: no big new reforms since the GST in 2000 and some backsliding, e.g. with reregulation in industrial relations; very strong population growth has led to urban congestion and poor housing affordability; growth in business investment stalled in the 2010s; market concentration has increased, reducing competition; confusion regarding climate policies contributed to underinvestment in power supply and higher energy costs; and a huge expansion in public spending has taken resources from the more efficient private sector. A good example of the latter has been out of control growth in the NDIS which saw public sector employment rise dramatically over the last few years and health employment as a share of the labour force rise nearly 2 percentage points above its long-term trend.

Source: ABS, AMP

The surge in public final demand – which is now running around 28% of GDP compared to an average of around 22.6% over the previous 40 years – is particularly significant as the required shift in resources from the private sector to the public sector has been bad news for productivity. That is because public (or non-market) sector productivity is invariably lower than that in the private (or market) sector and because public spending has been squeezing out private business investment, which has weakened private sector productivity.

This has meant a worse growth inflation trade-off

The deterioration in productivity growth has effectively led to a worse growth/inflation trade off. In other words, because the economy is no longer as efficient as it uses to be in boosting the supply of goods and services to meet any pick up in demand (or spending) in the economy – as we saw last year when private sector demand picked up – an acceleration in growth is more likely to result in a higher rate of inflation than used to be the case for any given level of GDP growth. This can be seen in the next chart where the five-year average rate of GDP growth has been trending down (abstracting from pandemic distortions) but the five-year average inflation rate (the red line) has been trending up so far this decade. Of course, this is nowhere near as bad as the 1970s. However, it’s still necessitating higher RBA interest rates and ultimately lower economic growth to tame inflation than would have been the case prior to the pandemic. Hence the observation by Deloitte Access Economics referred to earlier & it’s also evident in the RBA’s own growth & inflation forecasts.

Source: ABS, AMP

In other words, households with a mortgage are paying for higher levels of public spending via higher mortgage rates. All Australians our paying for the slump in productivity growth with weaker than otherwise living standards.

How to sustainably boost growth in living standards?

If we want to boost living standards and enable sustained real wage growth consistent with the 2-3% inflation target there are no quick fixes. At the risk of sounding like a broken record, the only sustainable way to do it is to boost productivity so we can expand the supply side of the economy and take pressure off inflation. Fortunately, this has been debated for a long time so there are plenty of good ideas out there, including these seven key measures:

  1. Tax reform to rebalance from direct tax to a broader GST, compensate those adversely affected, index the income tax thresholds to inflation and remove nuisance taxes like stamp duty to incentivise work effort and investment and better allocate resources. The Government did move to curtail property tax concessions in the last Federal Budget but with no real cuts to income tax this was more of a tax hike than tax reform and the capital gains tax changes threaten startups and hence productivity.
  2. Put a limit on the size of government spending below 25% of GDP. If we want more government services, we need to find other government spending to cut. Unfortunately, the Budget saw no significant cut to government spending.
  3. Deregulate product and labour markets to remove red tape and boost labour market flexibility, for instance, to make it easier to build new homes. There was a bit of this in the last Budget but much rests with the states and the Government has ruled out industrial relations deregulation.
  4. Provide more incentives to boost investment and adopt new technology. There was a bit of this in the Budget but it was modest and the capital gains tax changes are likely to be a disincentive for some.
  5. Undertake competition reforms to reduce market concentration.
  6. Match population growth to the ability to supply new homes and make it easier for people to live away from congested cities.
  7. Reduce climate policy uncertainty and rely more on market signals as to how best to transition to net zero.

While the Economic Reform Roundtable last August and the lead up to the Federal Budget this year offered the hope of the more sustained focus on boosting productivity, this has yet to be really delivered upon. For a deeper look at the productivity malaise and solutions see here.

What’s stopping us?

The problem is that since the GFC, and reinforced by the pandemic, the political pendulum has been swinging in favour of bigger more interventionist government. There is now an expectation that government is the solution to most problems. The economic rationalist policies of Reagan, Thatcher, Hawke/Keating and Howard/Costello are out of fashion. Populist policies are in. Even in the US under Trump.

In the absence of a crisis, it’s hard to see Australian governments undertaking the sort of hardnosed economic rationalist reforms required. Hopefully the “cost-of-living” crisis and the living standard malaise will start to put more pressure on for sensible reforms. We may have a way to go yet though.

Investment outlook Q&A – oil, bond yields, the Budget and the RBA

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By Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP | 19 May 2026

Key points

  • The oil supply shock remains a significant threat to economic growth and shares – particularly with the Strait of Hormuz remaining closed and oil reserves running down.
  • It’s contributing to rising bond yields and putting pressure on share market valuations.
  • The tax changes in the Budget will make shares and super relatively more attractive investments and favour high yielding over growth investments (ie, less risk taking).
  • The Budget contains good moves to deregulate, but little real tax reform with public spending remaining too high.

Introduction

This note takes a look at some of the main questions investors have in a simple Q&A format, particularly around the oil supply shock, global bonds, China, the Australian Federal Budget and the RBA.

What happened to the oil supply shock?

While there was much angst when the US/Israel War with Iran led to the closure of the Strait of Hormuz at the start of March with a surge in oil prices, falls in shares and talk of a stagflation/risk of global recession, the fallout so far has been modest. In Australia, petrol prices are only just above where they were before the War began. What gives?

Source: Bloomberg, AMP

The global economy so far has been protected by the drawdown of oil stockpiles, the diversion of some fuel via other routes, fuel tax cuts, just in case buying, expectations that it will be temporary aided by Trump’s regular soothing comments to the effect it will soon be over and the AI boom in the US. However, the Strait is still closed, hopes for an imminent deal are fading and Trump is renewing his threats against Iran. Trump clearly wants to TACO but his threats have started to lose credibility. That’s always a risk when playing the “madman” in negotiations – and Iran looks happy to string it out. The trouble is that the world can’t keep running down oil stockpiles and sooner or later oil demand will have to adjust to a 10-15% reduction in global supply – with the International Energy Agency estimating global oil supply is down 13%. Rough estimates suggest this would require oil prices to rise to around $US150/barrel. Past experience tells us that oil crises impact oil prices, shares and economies with a long lag. For example, the full impact on oil prices unfolded over four months in the first oil shock in 1973 and over a year in the second oil shock in 1979. Hopefully, we are right and a deal is soon reached. If not, the risks of a much bigger boost to inflation/hit to growth will rise with a flow on to shares. The chart above shows that having overshot on the upside in March, Australian petrol prices have now overshot on the downside (even with the 32 cents fuel tax cut) & are at risk of rebounding.

Why are bond yields rising?

Rising bond yields reflect worries that rising oil prices will boost inflation, central banks will have to raise rates, the US budget deficit is blowing out and US capex remains strong with data centre spending. This is boosting borrowing costs for corporates and US home buyers and to a lesser extent for Australian home buyers by rising fixed mortgage rates.

Source: Bloomberg, AMP

Are shares expensive or cheap?

The rising trend in bond yields at a time of relatively high price to earnings ratios, particularly for US shares, leaves share valuations stretched with both US and Australian shares offering little risk premium over bonds. This has been the case for the last two years now so it’s no guide to timing, but indicates shares remain vulnerable if the news flow turns more negative.

What happened to the threat from US tariffs?

US tariffs have taken a back seat lately but are still bubbling away. The Trump Administration is now starting to pay out refunds for the reciprocal and Fentanyl tariffs the US Supreme Court declared illegal which could amount to $US166bn. This will lead to a temporary fiscal stimulus and budget deficit blow out. Those tariffs were then replaced with a temporary 10% tariff (under section 122) from late February that will expire on 24th July, but these have also been ruled illegal by the US Trade Court which will likely lead to another round of appeals. In any case they will likely be replaced by more permanent section 301 tariffs taking them back to where they were before the Supreme Court decision. Meanwhile from a peak of nearly 12% the average effective US tariff rate has fallen back to below 10% thanks to import substitution. It’s still way up on where it was at the start of last year…so still adding to US costs and distorting trade. Though, worst case scenarios have been avoided because other countries decided last year to take the “high road” and avoid a trade war with the US. And the trade truce between the US and China – extended by the recent Trump/XI summit – has avoided a trade war between the world’s two biggest economies (although the underlying structural tensions remain).

What about China?

China continues to face big challenges: a falling population; trying to get consumer spending to take over as a key growth driver; and political tensions with the West. The return of Trump last year saw a renewed flare up in tensions, but they have been defused with the trade truce. In the meantime, China simply diverted its exports to other countries. Chinese economic activity data was weaker than expected in April, but this looks like payback from stronger than expected March quarter growth. However, Chinese growth is likely to continue to muddle along with growth this year expected to be around 4.5%.

What does the Australian Budget mean for investors?

Because of the removal of existing property purchases from negative gearing, the shift to taxing real capital gains for all assets with a 30% minimum rate and the new minimum tax rate of 30% on distributions from discretionary trusts the Budget is the most consequential for investors in years. At a high level for investors this will:

  • Reduce the after-tax return from investing in existing property.
  • Favour new home builds over existing property (which means a narrower and potentially more problematic choice set).
  • Boost the relative attractiveness of shares and commercial property relative to residential property as they can still be negatively geared.
  • Favour high rental yielding residential properties over lower rental yielding properties as these are less dependent on capital growth.
  • Favour high yielding assets over lower yielding growth investments.
  • Make fixed interest and bank deposits relatively more attractive
  • Make crypto and gold relatively less attractive as they are dependent on capital growth which will potentially now be taxed at a higher rate.
  • Boost the relative attractiveness of super – because it retains its concessional tax treatment.
  • Boost the attractiveness of the family home as it remains CGT free and could also be converted into a negatively geared investment property at some point. It could lead to more renovations.
  • Make high turnover investment trading strategies less attractive because of potentially higher capital gains tax bills.

In short, the tax changes are likely to drive an increased focus on high yielding investments at the expense of those more focussed on capital growth which could mean a decline in risk capital in Australia.

How does the Budget stack up against my wish list?

Prior to the Budget, I produced a “wishlist” of the top five things needed in the coming Budget. These were to limit any “cost of living” relief, cut spending, undertake serious tax reform, less red tape and more incentives to invest, and to reform the Charter of Budget Honesty. On each of these:

  • There wasn’t a lot of extra “cost-of-living” relief beyond the temporary fuel tax cut, with the $250 tax offsets more than two years away. This gets a tick.
  • However, there was nowhere near the Keating like reduction in public spending that is necessary – $100bn or 2% of GDP over four years – to free up spare capacity in the economy and take pressure off inflation. Sure, there were spending savings later this decade – but these are dependent on the savings to the NDIS occurring as promised, no boost to spending ahead of the next election and still leave Federal spending well above pre-COVID average levels. And there is actually increased spending in the near term, so this gets a cross.
  • There was a tilt at some tax reform, but this was more about tax hikes than tax reform. The Australian tax system should be moving from a very high reliance on taxing income to a greater reliance on taxing consumer spending in order to boost incentive and improve intergenerational equity. The Australian income tax system is also very progressive compared to other countries with a high top marginal tax rate kicking in at a low multiple of average earnings leading to the top 20% of taxpayers accounting for 60% of income tax paid, even with various tax concessions. See the next chart.

    This in turn has motivated a high use of the tax concessions but, with their curtailment, the already very progressive nature of the tax system will become even more so. That will lead to further disincentive and work against the aim of boosting productivity. This may be compounded if the CGT changes lead to less capital being available for startups, private capital and growth stocks. Ideally the curtailment of the tax concessions should have been matched by lower income tax rates. So, it’s hard to tick the tax reform box so far.

2022-23 tax year data. Source: ATO, AMP

  • In terms of regulation and investment there were some good moves – with less red tape and moves to encourage investment mainly for small business. There was no move to unwind labour market re-regulation though. Overall, this gets a tentative tick.
  • Finally, the Budget with its further boost to “off budget” spending – with actual budget deficit being $64.1bn more than double the $31.5bn underlying deficit that gets the focus – and an ongoing lack of fiscal rules continues to lack the discipline seen in times past.

Where does this leave the RBA?

The RBA is well aware that raising rates won’t make high oil prices go away but is rather responding to a pre-existing inflation problem in Australia – with underlying inflation around 3.3%yoy running well above target before the War – and seeking to make sure that the War does not make it a lot worse. The extra near-term stimulus in the Budget does not make the RBA’s job any easier but it’s not enough to change our prior expectations for the RBA to hike rates once more, probably in August. Through next year though, the RBA will probably be back to cutting rates.

2026 Federal Budget Summary

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This year’s Federal Budget includes a mix of measures that impact tax, housing, investments and everyday costs. While some changes may create opportunities, others may mean it’s worth reviewing existing plans and strategies.

This overview is designed to help highlight some of the key measures that may be relevant across different stages of life. Your financial adviser can help you understand what these changes may mean for you, which measures are most relevant to your circumstances, and whether any action is worth considering.

Read the 2026 Federal Budget Summary


Things to consider before 30 June 2026

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1. It’s all about timing

If you are making contributions and have a retail or industry super fund, please check the fund website for cut off dates or call our office.

If you have a Self-Managed Super Fund, ensure pension payments leave the bank account by close of business on 30 June.

Action: Aim to process payments by 22 June or earlier to reduce end-of-year timing risk.

2. Review your Concessional Contributions (CC) options

The 2025–26 concessional cap is $30,000, including employer contributions, salary sacrifice and personal deductible contributions.

Action: to determine if you have any capacity, check your year-to-date total in ATO online services.

This strategy may also suit retirees or those with a large capital gains, provided they meet the contribution rules and stay within available limits, including any carried-forward concessional amounts.

3. Consider using the ‘Unused Carry Forward Concessional Contribution’ limits

If your total super balance was under $500,000 at the previous 1 July, you may be able to use unused concessional cap amounts from up to five earlier years to make extra concessional contributions.

Action: Review your unused carried-forward amounts now, especially if you still have 2020–21 amounts available before they expire after 30 June 2026.

4. Review plans for Non-Concessional Contributions (NCC) options

The 2025–26 non-concessional cap is $120,000 a year, or up to $360,000 under the bring-forward rule.

Action: consider whether contributing to the lower-balance spouse could improve tax efficiency and increase pension-phase assets.

5. Recontribution strategies

Recontribution strategies can help increase the tax-free component of super and may reduce tax on death benefits paid to non-tax dependants.

Action: Consider whether a withdrawal and recontribution before 30 June fits your cap and balance position.

6. Downsizer contributions

If you are over 55 and selling your home, you may be eligible to make a downsizer contribution of up to $300,000 per person from the sale proceeds.

Action: make the contribution within 90 days of settlement.

Used with the bring-forward non-concessional cap, this can allow a large one-year contribution, subject to eligibility and contribution limits.

7. Calculate co-contributions

If eligible, a co-contribution can be a simple way to boost your super. If your total income is equal to or less than the lower threshold and you make a non-concessional contribution of $1,000 to your super account, you will receive the maximum co-contribution of $500.

Action: Check the thresholds and eligibility criteria here: Government contributions | Australian Taxation Office

8. Examine spouse contributions and spouse contribution splitting

If your spouse’s income is below the relevant threshold, a spouse contribution may deliver a tax offset.

Action: check eligibility before contributing.

Spouse contributions can generally be used up to age 75 and count toward the receiving spouse’s non-concessional cap.

Contribution splitting may also help if one spouse has a much higher balance, if there is an age gap, or if it improves access to concessions or Age Pension outcomes.

9. Give notice of intent to claim a deduction for contributions.

If you plan to claim a tax deduction for personal concessional contributions, you must lodge a valid notice of intent to claim or vary a deduction.

Action: Submit the notice before starting a pension or taking a lump sum from the fund.

10. Review options on pension payments

Make sure the minimum pension for the year has been paid.

Age at 1 JulyStandard Minimum % withdrawal
Under 654%
65-745%
75-796%
80-847%
85-899%
90-9411%
95 or older14%

Warning

Before taking any action, you should seek advice to confirm if any of the above applies to your circumstance – failure to do so may have unintended consequences.

Nine key longer term consequences of the US/Israeli war with Iran

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP | 13 Apr 2026

Key points

  • Uncertainty remains high over the US/Iran War with a ceasefire declared but no agreement in talks so far. Tensions continue to remain high and oil flows remain restricted, with Trump announcing his own blockade on the Strait of Hormuz. But pressure on Trump to back down on the War is very high.
  • A stagflationary hit of higher inflation and weaker growth is now baked in with the uncertainty being how long it’s sustained. The flow of ships through the Strait of Hormuz remains the key – as it has been since day one of the War.
  • Beyond the near term uncertainty, there are likely to be nine key longer term consequences of the War: higher prices and inflation; escalated geopolitical risk; a renewed global terrorist threat; increased defence spending; increased spending on oil and gas infrastructure; increased focus on renewables and nuclear energy; more pressure to onshore supply chains; yet another reminder that the world is now more crisis prone; and bigger government and more public debt.
  • This is all flowing from and reinforcing the rise of populism. Over the long term this risks weaker growth, more inflation prone economies and more volatility which should mean higher risk premiums and risks lower investment returns.

Introduction

The past week provided welcome relief in the Iran War, with Trump delaying for two weeks his threat of the “complete demolition” of Iran’s power plants and bridges. So far its all very shaky, but whether the “ceasefire” holds or not and the War de-escalates or escalates from here, there will be significant long-term implications, beyond the near term stagflationary impact that already looks likely this year. The long-term implications will mostly serve to reinforce existing trends towards deglobalisation, increased geopolitical risk, even bigger government and higher inflation pressures.

TACO time – the current state of the War

Trump’s decision to backdown and announce a ceasefire was consistent with his pattern of making exorbitant demands then backing down as pressure grows intense. This time around his poll support was collapsing, markets were threatening to riot, and he was in a no-win situation with Iran. It clearly has plenty more missiles and drones and, if he escalates, it would use them, worsening the global impact. While Trump has military superiority, Iran has weaponised the Strait of Hormuz to control global oil supplies. So, it is a sort of MAD – mutually assured destruction – stand off from which Trump ideally has to back down. Renewed US/Iran talks have failed to reach agreement, with Trump declaring “whether we make a deal or not makes no difference to me. And the reason is because we’ve won”. But then he announced a new contradiction – the US will itself block shipping in the Strait, but at the same time its Navy will begin demining it! Of course he may soon say something completely different. Overall, we lean to the view Trump will find a way to keep the ceasefire going given the political pressure he is under, but uncertainty is high.

For now, the Strait remains the key, because the last ships that made it through at the end of February are now reaching their destinations meaning refineries in Asia will soon start to run low on oil to refine. So the resultant 10-15% hit to global oil supply (after allowing for diversions, eg, via the Saudi East-West tunnel) will start to bite this month. All of which risks a renewed surge in oil prices – to maybe around $US150/barrel in order to curtail consumption – and plunging share markets.

Source: Bloomberg, AMP

The nascent pick up in the flow of shipping could resume. But if this comes with Iran and/or the US controlling the flow (with fees and vetos) it will be an unstable solution – as the rest of the world won’t accept such an outcome indefinitely, given the precedent it will set. This would point to a resumption of the conflict. Maybe after the midterms are over, when Trump is less politically constrained, or if his and Republican polling gets so bad that he has nothing to lose by escalating again.

Even if there is a quick end to the War it will take months for global oil flows to return to normal given the time it will take to resume energy extraction in the Gulf (weeks & months for oil, years for some gas plants), to then load this on to ships and for those ships to arrive at refineries in Asia. And then for the refined products to reach Australia.

So, a near term stagflationary impact of higher inflation and weaker growth is now baked in. In Australia, we see inflation peaking around 5-5.5% in the current quarter and GDP growth slowing to around 1.5% this year. With oil supplies coming to crunch time this month the risk of recession in Australia is now high. For central banks wary of letting inflation expectations rise, the focus is likely to be initially on the boost to inflation rather than the hit to growth. This is the case in Australia where inflation was already well above target and signs of rising wage demands will worry the RBA. So, we are allowing for more RBA rate hikes this year.

The longer-term consequences

Beyond the uncertain short term stagflationary impact the War will leave a longer-term impact on economies and markets in nine key ways.

  1. Higher prices, inflation and inflation expectations – having another hit to supply and boost to inflation so soon after the last one in 2022 and on top of the tariff impact in the US will lead to another leg up in prices. This runs the risk of a further boost to inflation expectations and loss of faith in central banks’ ability to get inflation back to target.
  2. Increased geopolitical risk – this has been on the rise ever since the 2010s due to a loss of faith in liberal democracy reflecting rising inequality, increasing nationalism and populism and a shift away from a unipolar world (dominated by the US) to a multipolar world. The US has gone from chief defender of liberal democracies to a force propelling this shift under Trump with his focus on doing what he wants for America, trashing the global rules-based system, attacking allies (and treating them as scapegoats for his mistakes on Iran) and acting like a “madman” which is leading to a loss of credibility for the US. This has been particularly evident this year with the US intervention in Venezuela, attempt to take Greenland (which he is still on about) and now Iran. It’s hard to see this not being interpreted by other powerful countries as a green light to do whatever they want in their region and beyond. I would rather Ray Dalio’s assessment that the world is heading down a path that risks broader conflict be wrong, but it can’t be ignored. What’s going on now with Iran is the sort of thing that world wars start over.
  3. A new generation of terrorists – the Israel/Gaza war and now the Iran War risk driving a renewed rise in terrorism. Economies and markets can look through terror attacks that are limited in impact – as we saw in the 2000s – but this would change if the damage was more general.
  4. Increased defence spending – this is an inevitable result of increased geopolitical risk. It will also be fuelled by Trump’s renewed contradictory attacks on NATO countries and other allies including Japan and Australia – for not joining in on the attack on Iran. Particularly so if the US decides to leave NATO as it’s been alluding to.
  5. Increased spending on oil and gas infrastructure – while Trump appears to have been surprised and frustrated by Iran’s move to control the Strait of Hormuz (through which 20% of global oil and gas flows) as evident in his “Open the F…… Strait, you crazy bastards” comment, it’s entirely logical and had long been predicted if Iran found itself threatened. It was why Saudi Arabia built its East-West oil pipeline in the 1980s. Now that it’s happened, it provides yet another reminder of the global energy dependency on a highly volatile part of the world. This was on display in the 1970s but was forgotten about from the 1980s as oil shocks were brief. It’s likely to mean increased efforts by Gulf countries to bypass the Strait and medium term moves by other countries to boost their own oil and gas reserves.
  6. Increased focus on renewables and nuclear energy – over the longer term the crisis will further boost demand for renewables and nuclear on the simple logic that the sun, the wind and nuclear energy do not depend on volatile politics in the Middle East. This is already evident with motorists reportedly scrambling to buy electric cars (which are now around 15% of new car sales in Australia).
  7. Yet more pressure to onshore supply chains – this is on top of the pressure flowing from the pandemic for medical equipment but will now focus on oil refining, aluminium, fertiliser etc which are all being impacted by the War. Future Made in Australia will likely see another leg up. Which all means more protectionism and deglobalisation.
  8. Yet another reminder that it’s now a more crisis-prone world – the Iran War is now the fifth major global shock in the last 20 years with the others being the GFC, the Eurozone debt crises, the pandemic & the 2022 inflation shock. While there were crises before that – the tech wreck, the Asian crisis, the early 1990s recession – they now seem more frequent & less related to traditional economic cycles.
  9. Bigger government and more public debt – more defence spending and government involvement in economies, eg in onshoring, mean more public spending, bigger budget deficits and ever higher public debt – at a time when its already high. The latter is particularly evident in the US with Trump pushing for a $500bn (or 42%) defence budget boost when the US budget deficit is running around 6.5% of GDP despite low unemployment suggesting it should be in surplus.

It could also be evident in the upcoming Federal Budget in Australia, which is likely to see more “cost of living” help for households and business at the expense of commitments just a few months ago for the Budget to focus on savings in the level of spending and on productivity enhancing reforms. Another year of stronger spending growth will add to concerns that it will never be brought back to more sustainable levels, as in 2027 the focus will return to the next election.

Ever higher public debt and rising bond yields also run the risk of a public debt crisis at some point.

Source: IMF, AMP

Implications for investors

There are three key implications for investors.

First, a somewhat less favourable economic outlook – if governments play an increasing role in the economies (via more defence spending, onshoring and protectionism), it’s likely to mean lower productivity resulting in slower economic growth and higher inflation. In short, lower living standards. In the US at present, it’s being fortuitously masked by the AI boom – but this could be a double-edged sword in the near term.

Second, the boost to geopolitical risk and reinforcement of populism and nationalism (notwithstanding the counter trend election outcome in Hungary) means increased uncertainty, including for businesses.

Finally, all of which runs the risk of more constrained and volatile investment returns. Which should mean that shares should be offering a higher risk premium over bonds. But at present the risk premium offered by US and Australian shares – as measured by the forward earnings yield less 10-year bond yields – remains very low.

Source: Bloomberg, AMP

Gulf War 3 – the threat to economies and markets from the US/Iran war

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 2 Mar 2026

Key points

  • The start of a war between the US and Israel and Iran poses the risk of a significant disruption to global economic growth given the likelihood of significant disruption to the supply of oil, particularly through the Strait of Hormuz.
  • This in turn could contribute to a correction in share prices.
  • A $US40 a barrel spike in oil prices could add 40 cents a litre to petrol prices with a threat to growth & inflation. As a “tax on spending” the RBA should look through it.
  • For investors: share market falls are normal, timing markets is hard and the key is to stick to a long-term strategy.

Introduction

Geopolitical shocks have been a rising feature this year with US “interventions” in various countries – Nigeria, Venezuela, Greenland and now Iran. It now looks like Venezuela was a planned precursor to Iran with the US and Israel launching broad based attacks on Iran on the weekend following its failure to give up its nuclear program. To be sure conflict regularly flares up in the Middle East leading to concerns of a blow to the global economy via a surge in oil prices like in the 1970s and early 1980s, but most of time oil supply is not affected as key producers are not involved. The risks escalated last year with Israel and the US getting involved in conflict with Iran (which supplies around 4.5% of global oil and gas production and exports 1.5 percentage points of that). But last year’s fears settled down after US strikes in June failed to lead to an escalation and oil supplies were unaffected. This time might be different though resulting in a sharper and longer spike in oil prices. So, what are the implications for the global economy and investment markets.

Oil prices on the rise

But first some context regarding oil prices as that is likely where the main shock will come from. The next chart shows world oil prices since 1970 in nominal terms (blue line) and after adjusting for inflation (red line).

Source: Bloomberg, AMP

From their highs over $US120 a barrel back in 2022 on the invasion of Ukraine oil prices had fallen sharply and were around a low of $US56 in January after the US intervention in Venezuela. Up till Thursday they had risen to around $US67 as the risk of a strike on Iran increased and have spiked to $US72 today after the start of the war with Iran. This leaves them well below the Ukraine War high and in real terms they remain well below the highs seen on the back of the second oil crisis in 1979 and the commodity boom in 2008. But its early days yet.

The risks point to a further spike in oil prices

What we know so far from the conflict that started Saturday is that:

  • US & Israeli targets in Iran are broad based (surgical strikes last year).
  • President Trump is calling for regime change in Iran urging Iranians to “take over your government”. The shift from surgical strikes in June last year to broad based strikes and regime change implies a potential longer involvement and hence disruption to oil production.
  • The Iranian government sensing a threat to its survival is retaliating with a broad range of targets in neighbouring oil producing countries and effectively shutting the Strait of Hormuz through which 20% of global oil production and 25% of LNG flows daily.
  • While OPEC countries have about 3.5 million barrels per day of spare capacity able to offset a disruption to Iranian exports of 1.5 million barrels per day, this is academic if the Strait of Hormuz is blocked.
  • At the same time Iranian backed Houthis are moving to disrupt shipping again through the Red Sea which will add to transport costs.

This poses the risk of a more significant spike in oil prices, possibly to above $US100/barrel, as oil supplies are severely disrupted, potentially taking them above the highs seen at the start of the Ukraine War. At this stage it’s not clear what the death of Iran’s Supreme leader Ayatollah Ali Khamenei means – it could accelerate the demise of the regime, or it could further motivate his followers.

Constraints on the US

However, the constraints on the US cannot be ignored. Trump is likely to want to minimise the impact on oil prices given the US midterm elections this year and his desire to retain control of Congress. And in particular, most of his MAGA base was motivated by a desire to avoid more “forever wars” so a lengthy entanglement would weaken support from his base.

There are essentially two scenarios

Base case – limited war (60% probability) – given these considerations our base case is that the war is limited with Trump likely finding a way to declare victory in the next week or so, presumably on the basis that he has (again) obliterated the threat from Iran and that he will leave it to the Iranian people to sort out. It may take a few days/weeks before this is clearly apparent so oil prices could still go higher (threatening shares) before they go lower (shares higher) but this would be a selling opportunity in oil and a buying opportunity in shares.

High risk case – oil supplies significantly disrupted (40% probability) – however, Trump may lose the gamble with Iran fighting on for longer forcing the US to say involved longer. Iran could descend into chaos as occurred in Iraq and Afghanistan necessitating US troops on the ground. There are few examples of successful regime change from US interventions in recent decades. This could mean a bigger and much longer disruption to oil supplies, conceivably resulting in a doubling in oil prices to around $US150/barrel, which could drive a sharp fall in shares.

Impact of higher oil prices

Higher oil prices will add to inflation resulting in higher than otherwise interest rates. But it’s not that simple. Central banks will focus on underlying inflation and higher oil prices threaten economic growth. Past oil price surges have played a role in US & global downturns – in the mid-1970s, the early 1980s, the early 1990s, early 2000s and even the GFC. See the next chart. They weren’t necessarily the driver of these recessions, but a rise in energy prices is a tax on consumer spending.

Note: the relationship between oil prices & GDP looks messy over 2020/2021 as oil prices crashed with the pandemic & then rebounded into 2021 but were still low. Source: Bloomberg, AMP

Trouble often ensues if the oil price doubles over 12 months. However, while it will ultimately depend on how high oil prices go there are some positives suggesting it may not be quite as negative as feared:

  • First, the oil intensity of economic activity has been falling with energy efficiencies and the growth of the services sector. So, the impact of an oil price surge today is less than it used to be.

Source: Energy Institute, Bloomberg, AMP

  • Secondly, we have not yet seen a doubling over 12 months in oil prices suggesting they are not yet up enough for a big hit to global growth.

Impact on Australia

The main way Australians will feel the impact of the war is via higher petrol prices. Australian petrol prices track the Asian Tapis oil price closely & Tapis tracks US oil prices. This is because our prices are set globally – to which is then added tax, transport costs & margins. Roughly speaking each $US1 a barrel rise in oil prices adds around a cent a litre to petrol prices. So, a $US40 a barrel rise in world oil prices taking them above $US100 a barrel would add around 40 cents a litre with a 7-10 day lag if sustained.

Source: Bloomberg, AMP

A 40 cents a litre rise in petrol prices would add about 0.8% to CPI inflation, but it would also impart a dampening impact on growth. This is because it would add around $14 a week to the household petrol bill leading to a cut back in spending elsewhere in the economy. In other words, it will act as a tax on households.

Source: Bloomberg, AMP

So, for the RBA the implications are ambiguous – a boost to inflation but a hit to growth. We are not changing our view which sees rates on hold with a high risk of another hike. While higher oil prices flowing from the war could drag on Australian growth via weaker global growth, Australia is relatively well placed as we are a net energy exporter & may benefit from higher prices for gas and coal. And our economy is less dependent on oil.

Implications for investment markets

Overall, we see the outbreak of war with Iran as negative for shares (with the risk to growth at a time when the key direction setting US share market was looking a bit vulnerable), but positive for oil and energy prices, gold (as a safe haven) and government bonds (as a safe haven).

Key things for investors to bear in mind

In times of uncertainty like these with a threat to share markets, it’s important to focus on basic investment principles. In particular:

  1. Share market pullbacks are healthy and normal – their volatility is the price we pay for the higher returns they provide over the long term.
  2. It’s very hard to time market moves so the key is to stick to an appropriate long-term investment strategy.
  3. Selling shares after a fall just locks in a loss.
  4. Share falls provide opportunities for investors to buy them cheaply.
  5. Shares invariably bottom with maximum bearishness.
  6. Australian shares offer an attractive income relative to bank deposits.
  7. To avoid getting thrown off a long-term strategy – it’s best to turn down the noise around all the negative news flow.

Nine key charts for investors to keep an eye on

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 17 Feb 2026

Key points

  • This year has started off rather messy with geopolitical threats and worries around AI disruption and valuations.
  • We are mildly upbeat on shares for the year but see a 15% or so correction as likely along the way.
  • Nine key charts worth watching are: business conditions PMIs; US tariffs; inflation; inflation expectations; profit growth; share market valuations; the rotation trade from tech to non-tech shares; the $US; and geopolitical risk. At present they are sending mixed signals.

Introduction

Share markets have had a bit of a wobbly start to the year, particularly in the US. This note looks at nine key charts worth watching.

Chart 1: Global business conditions PMIs – positive

As always, a key driver of how shares perform over the next 6-12 months will be whether major economies including Australia avoid recession and continue to grow. The historical experience indicates that provided recession is avoided any fall in shares will be relatively short term in nature. Business conditions PMIs – surveys of business conditions globally – will provide a key early warning. So far, they are running around okay levels.

Source: Bloomberg, AMP

Chart 2: US tariffs as a proxy for Trump policies – better

Last year saw a US tariff roller-coaster as Trump announced huge tariffs and then backed down a bit. They are still subject to much chopping and changing and while longer-term damage is yet to felt, it’s likely we have seen “peak tariff” as Trump pivots to more voter friendly policies ahead of the midterm elections. This may get a push along with a good chance the Supreme Court will reject the reciprocal and fentanyl tariffs. Call it TACO or TUNA, the pivot on tariffs is consistent with other recent moves like nominating a more conventional Fed Chair and a softer approach from ICE. If this continues it’s likely to be positive for share markets.

Source: US FTC, Evercore ISI, AMP

Chart 3: Inflation (and hence interest rates) – neutral

Last year progress in lowering inflation reversed in some countries. This included Australia which has raised rates. A resumption of the downswing will be needed for further cuts or to leave rates on hold (in Australia).

Source: Bloomberg, AMP

Chart 4: Inflation expectations – slight negative

The 2022 inflation shock and last year’s US tariff surge posed a risk that inflation expectations will move higher making it harder to get inflation down. Fortunately, inflation expectations remain reasonably low. But they are high compared to the pre-pandemic period, including in Australia. If the trend stays up it will mean higher interest rates than otherwise.

Source: Macrobond, AMP

Chart 5: Company profits – positive

Consensus 12-month ahead earnings growth expectations are around 15% in the US and around 10% in Australia, with upwards revisions lately.

Source: Bloomberg, AMP

While the Australian December half reporting season is only about 25% done, so far there has been more beats and less misses than normal with around 60% of companies reporting earnings & dividends up on a year ago. This needs to continue to support further gains in the local share market.

Source: Bloomberg, AMP

Chart 6: Share valuations – negative

Since 2020, rising bond yields and high PE multiples have seen a deterioration in share valuations such that the gap between earnings yields & bond yields is near zero in the US & Australia. This leaves them vulnerable to bad news. Ideally lower bond yields and higher earnings are required.

Source: Bloomberg, AMP

Chart 7: Share market rotation – positive

While concerns about the disruptive impact of AI, related capex and tech valuations have weighed on tech stocks this year leaving Nasdaq down 3% and the Magnificent Seven down 7.2%, an investor rotation into non-tech shares has pushed the equal weighted S&P 500 up 5.8% and limited the fall in the market cap weighted S&P 500 to 0.1%. The rotation has also seen other global share markets rise. A continuing rotation should mean that overall shares can still see gains this year, unless tech falls so much it drags the whole market down (as ultimately occurred in the tech wreck).

Source: Macrobond, AMP

Chart 8: The US dollar – messy

Normally in times of uncertainty the $US rises as the US economy has a relatively low exposure to cyclical sectors. Over the last year this has been upended as Trump’s erratic policymaking put downwards pressure on the $US. If the $US continues its downtrend it could raise the risk of a US public debt crisis which runs the risk of higher bond yields impacting share markets. For Australia, the falling $US and rising interest rates versus the US means a higher $A. This is a de facto monetary tightening – and could take pressure off inflation enabling the RBA to avoid further rate hikes.

Source: Bloomberg, AMP

Chart 9: Geopolitical risk – slight negative

Since the GFC, geopolitical risk has been on the rise in response to rising populism and nationalism, great power rivalry between the US and China and as the US enters relative military decline. It’s hard to see this reversing any time soon. Key to watch in the near term is the high risk of conflict between the US and Iran which could threaten global oil supplies. But as we saw last year with the US strike on Iran, trying to forecast this is fraught.

Reflects a tally of news articles covering geopolitical tensions. Source: matteoiacoviello.com, AMP

Inflation, rate hikes and public spending – Q&A

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 10 Feb 2026

Key points

  • Keeping inflation low and around target is important in terms of maximising living standards in Australia.
  • We are optimistic that much of the recent rise in inflation will prove temporary.
  • But some may reflect the economy hitting capacity constraints as a pickup in household and business spending combines with historically high levels of public spending.
  • The best things governments can do to help lower inflation is reduce the level of spending in the near term and help boost the supply side of the economy in the long term.

Introduction

Much in economics is shades of grey and so subject to some debate. This has certainly been the case around the rebound in inflation in Australia, the RBA’s response and what’s driving it. This note looks at the key issues.

Why did the RBA raise rates?

In hiking interest rates by 0.25% to 3.85% the RBA noted that “inflation picked up materially in the second half of 2025” with annual inflation running above the 2-3% target on all key measures. And it said that “while part of the pickup in inflation is assessed to reflect temporary factors…capacity pressures are greater than previously assessed.”

Source: ABS, AMP

But inflation’s only 3.8%yoy which is not that bad?

True, it’s not the double-digit inflation of the 1970s or even the 8% of 2022. But the RBA is charged with keeping it at 2-3%, and specifically 2.5%. By leaving it running above that level for too long without a response, the RBA worries it will lose credibility in terms of its commitment to the target. And if that happens, community expectations for inflation will rise, making it harder for the RBA to get inflation back down. We are already seeing a bit of that with reports of unions going after wages rises in excess of current inflation and headlines referring to 6% wage claims.

Why the obsession with keeping inflation low?

The problem with high inflation is that it reduces the real value of wages and savings and distorts economic decisions as people try and find ways to protect their real purchasing power rather than focussing on investing productively which leads to lower productivity growth & living standards. This is at the core of the “cost of living crisis” which has seen average prices rise 23% since 2020 but wages rise around 18% resulting in a real fall of 5%. And for mortgage holders, permanently higher inflation will mean a sustained higher level of mortgage rates. The 1970s shows that, once the inflation genie is out of the bottle it’s very hard to get it back in without recession and high unemployment.

Why is the inflation target 2-3%?

Most developed countries concluded they should target low inflation. It was generally concluded that zero inflation would be too extreme – as consumer price indexes tend to overstate inflation because they under allow for quality improvements and as zero inflation would allow little room for real interest rates to go negative if needed – so 2% was agreed as the target, but Australia opted for 2-3%, with the focus now on 2.5%.

Why is it up to the RBA?

Ideally, the Government should be responsible for keeping inflation low, but experience shows that elected politicians are biased to easy money or low rates in order to get re-elected and so have a natural bias to high inflation. As a result after the experience of the 1970s it was concluded that best practice would be for the central bank, i.e. the RBA in Australia, to be charged with meeting the low inflation target and that it do this independent of government, albeit it’s ultimately answerable to government (or Congress in the US) in achieving its low inflation objective. Several central banks have a dual mandate that also includes full employment. This does not mean that government should not help out with fiscal policies and other measures to keep inflation low – see below.

But what if the rise in inflation is just temporary?

Of course, the rise in inflation could owe to temporary factors, e.g. if the pickup in consumer spending, home building and business investment proves temporary. In fact, underlying inflation has been trending down since a spike in July last year and was running below 3% annualised in December and business surveys have not shown a spike in inflation. It was for these reasons we thought the RBA could have waited a bit longer and why we think it may be able to avoid further hikes.

What does the RBA mean by capacity constraints?

That said the RBA is aware of this risk. And its concerns about capacity constraints in the economy are valid. Through last year, economic growth picked up with an acceleration in consumer spending, housing investment and business investment. This combined with high levels of public spending may have taken overall demand in the economy to a point that it bumped up against supply constraints as spare capacity was used up. This would also be consistent with above average levels of capacity utilisation evident in business surveys and ongoing evidence that the jobs market might be tight. When demand is above supply, companies and workers are in a stronger position to raise their prices and wages.

Won’t raising rates just add to the cost of living?

Unfortunately, this is true for those with a mortgage. A few decades ago, mortgage interest costs were included in the Consumer Price Index but were removed as they cause a circularity problem with the RBA hiking rates which then boosts inflation potentially necessitating more rate hikes which can then lead to the RBA going too far. But all the evidence suggests rate hikes – by taking spending power away from a key income sensitive group in the economy – do work in pushing inflation back down, albeit with a lag. We saw this in response to the 2022-23 rate hikes.

But aren’t rate hikes unfair for some groups?

This is also true as mortgage holders are hit hard whereas those who have paid off their mortgage aren’t and may benefit from higher rates on their bank deposits. But again, we know that rate hikes work in slowing inflation as mortgage holders cut spending because the value of household debt is nearly double that of bank deposits and those with a mortgage are far more sensitive to changes in their disposable income than retirees. Issues of equity should be addressed by government.

How can government take pressure off inflation?

Governments can do three things to help reduce inflationary pressure:

  • First, slow the pace of growth in administered prices as they are up 6% yoy versus private sector prices which are up 2.9% yoy.
  • Second, reduce the level of public spending to free up space for the private spending – consumer spending, home building and business investment – to grow more rapidly without pushing the economy up against capacity constraints and causing higher inflation. Some of the debate around this has focussed on the slowdown in public spending growth to 1.3%yoy up to the September quarter as measured in the national accounts at a time when private spending growth picked up more than expected to around 3%yoy, with the conclusion that its private spending causing the problem. But this ignores the fact that public spending is part of demand in the economy and that its level is also very important. And on this front, after many years since late last decade with real growth in excess of 4% pa, public demand in the economy is still around a record 28% of GDP, whereas in the forty years prior to the pandemic it averaged around 22.6%.

Source: ABS, AMP

At the Federal level, there is no slowdown in spending growth. The next chart shows Federal Government spending (which includes transfers to the states and households) as a share of GDP. It shows that after big swings around the pandemic, spending as a share of GDP has risen from 24.3% in 2022-23 to a forecast 26.9% this financial year as a result of nominal spending growth of 7.2% in 2023-24, 8% in 2024-25 and 8.2% this financial year. In fact, December budget data shows Federal government spending now growing around 15%yoy. Again, this is seeing public spending settle at a much higher share of the economy than pre-covid which in turn is resulting in capacity pressures as the private sector has sought to spend more.

Source: Federal Treasury December MYEFO (page 57 and pages 316-317), AMP

So, the best thing governments can do to in the near term to help bring down inflation would be to cut the level of government spending which would free up space for private sector demand growth without higher inflation. Failure to do so risks higher for longer inflation and interest rates which leaves all the pressure on consumers to cut spending and on businesses to cut investment.

  • Finally, implement productivity enhancing reforms like deregulation and tax reform to boost the supply side of the economy to better enable it to meet expanded demand without capacity constraints.

Is the world more inflation prone now?

A productivity boost from AI may rescue us, but there is reason to believe Australia and the world may be more inflation prone now: the ratio of workers to consumers is falling; the rise of populism is leading to protectionism, deglobalisation & irrational government intervention in economies; defence spending rising. So central banks need to be careful.

What’s the relevance of all this for investors?

For investors high inflation is bad as it means: higher interest rates (which makes cash more attractive and other assets like shares relatively less attractive); higher economic volatility and uncertainty; and a reduced quality of earnings as firms tend to understate depreciation when inflation is high. The first two mean rising bond yields which means capital losses for investors in bonds. All three mean shares tend to trade on lower price to earnings multiples when inflation is high, and real growth assets (like property) generally tend to trade on higher income yields. This was seen in the high inflation 1970s when shares struggled. It means that the boost to earnings (or say rents in the case of property) from inflation tends to be offset by a negative valuation effect as investors demand lower PEs/higher yields. So, a sustained period of high and rising inflation can be a problem for bonds, shares and other growth assets. That’s why it’s in investors’ interest that inflation is kept low and stable.

RBA starts the year off with a rate hike

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 3 Feb 2026

Key points

  • The RBA hiked its cash rate by 0.25% to 3.85% as widely expected in response to inflation running above target.
  • Its commentary was cautious and hawkish with inflation now expected to stay above target for longer even with assumptions for two more rate hikes and the stronger $A.
  • We thought it was a close call and leaned to a hold. But having hiked we expect the RBA to hold for the remainder of the year as we see underlying inflation as having peaked in the September quarter and falling back to target.
  • Valid concerns about capacity constraints though are likely to keep the risk of a further rate hike high.
  • The best thing government can do to help alleviate this is to lower the level of public spending.

Introduction

The RBA’s decision to hike rates to 3.85% was no surprise with it being about 70% factored in by the money market and 22 of the 28 economists surveyed by Bloomberg expecting a hike. We thought that the RBA should and (wrongly as it turned) thought it would hold but we also saw it as a very close call. The decision means that the RBA has already reversed one of the only three rate cuts we saw last year, which of course followed 13 rate hikes seen in 2022 and 2023. Once passed on to mortgage holders it will leave mortgage rates around levels prevailing 13 years ago. Of course, it should also mean a slight rise in bank deposit rates.

Source: Bloomberg, AMP

The decision to hike largely reflected the increase in annual inflation through the second half last year with quarterly trimmed mean (or underlying) inflation rising to 3.4%yoy and monthly trimmed mean inflation at 3.3%yoy, which is well above the 2-3% inflation target and was above the RBA’s forecast for 3.2%yoy. This has led the RBA to conclude that the economy has less spare capacity than it previously thought.

Governor Bullock’s press conference comments basically reinforced these concerns and indicated caution regarding the outlook leaving the door wide open for further interest rate hikes if needed.

Consistent with its decision to hike the RBA now sees inflation staying above target for longer, despite assuming a higher $A and two more rate hikes the RBA now sees underlying inflation staying higher for longer and not really getting back to the midpoint of the inflation target until June 2028. This reflects its revised assessment that the economy has more capacity pressures than previously assessed – compared to say back in August last year when it saw inflation around target even with two or three more cuts! Of course, as the lagged impact of the forecast growth slowdown flows through inflation could conceivably fall below target in 2028-29 but that’s a long way off.

Source: RBA, AMP

We expect the RBA to leave rates on hold

There is an old saying that rate hikes are like cockroaches – if you see one there is likely to be another! However, we lean a bit more optimistic and expect this to be a case of one and done:

  • Monthly trimmed mean inflation has progressively trended lower from 0.47%mom in July to 0.23%mom in December and slowed from 1%qoq in the September quarter to 0.9%qoq in the December quarter.

Source: Macrobond, AMP

  • We still expect underlying inflation to fall back to target this year.
  • Business surveys show output price indicators around levels consistent with the inflation target – see the pink & purple lines in the next chart.

Source: NAB, Bloomberg, AMP

  • Consumer spending is likely to take a hit as we have swung quickly from rate cuts to hikes as mortgage stress likely remains high. For mortgage holders – who are far more responsive in their spending decisions to changes in their disposable income than outright homeowners – the RBA’s 0.25% hike will mean that their interest payments will start going back up again. For someone with a $660,000 average new mortgage this will mean roughly an extra $110 in interest payments a month or an extra $1300 a year. This will likely dent spending, particularly as expectations will now be for more hikes. Sure those relying on bank deposits will be better off but household debt in Australia is almost double the value of household bank deposits.
  • The rise in the Australian dollar is a defacto monetary tightening that will help lower imported inflation.

That said, the risks are still skewed on the upside for the cash rate if domestic demand growth continues to strengthen adding to concerns about the economy bumping into capacity constraints and if inflation does not fall as we expect. On balance we expect to see the cash rate remain at 3.85% for the remainder of the year, and we see money market expectations for two more rate hikes as being a bit too much.

The key to watch for what happens next year will be the monthly inflation data. Another move in March seems unlikely given that the RBA has just moved but March quarter CPI data to be released in late April, ahead of the RBA’s May meeting will likely be key. If it shows a further cooling in trimmed mean inflation as we expect then the RBA will likely hold.

How can government take pressure off inflation?

Whether it was a hold or a hike, inflation has proven more sticky than expected a year ago. Pressure to deal with this has largely fallen on the RBA but Australian governments could make life a lot easier for it. Government is contributing to the strength in inflation in Australia in two ways. First, prices for items administered by government or indexed are rising around 6%yoy, well above the 2.9%yoy price rises for items in the market sector of the economy. So governments should be looking for ways to lower this.

Second, and more fundamentally while public spending growth slowed to around 1.4%yoy in the September quarter, that followed many years of 4% plus growth which left public spending around a record 28% of GDP. As Governor Bullock noted, aggregate demand includes public and private spending. So high levels of public spending as a share of the economy are constraining the recovery in private spending that can occur without seeing the economy bump up against capacity constraints, which flows through to higher prices. So, the best thing that Australian governments can do to help bring down inflation would be to cut government spending back to more normal levels which would free up space for private sector growth without higher inflation. Lower public spending will also help boost productivity by freeing up resources for the more productive private sector which should help lower inflation longer term.

Source: ABS, AMP

The bottom line on rates

While the return to rate hikes on the back of inflation running above target is disappointing, I can understand the RBA’s desire to get back on top of it and avoid perceptions that its tolerant of high inflation. As they say “a stitch in time saves nine.” Looking forward we are confident that underlying inflation will continue to fall back to target and so see the RBA remaining on hold for the remainder of the year, even though the risks are on the upside. The best thing Federal and state governments can do is to quickly reduce the level of public spending to free up more space for private sector spending.

Implications for the economy and financial markets

For the economy the implications from the RBA’s rate hike with talk of more to come are as follows:

  • Somewhat weaker economic growth from later this year.
  • A bigger slowdown in home price growth – we were assuming home price growth this year of 5-7% but with rate hikes its possible we now see falls. Sure home prices rose in 2023 despite rate hikes but that was because immigration surged. Roughly speaking each 0.25% rise in mortgage rates knocks about $10,000 off how much a person on average earnings can borrow to buy (and hence pay for) a home.
  • The $A is likely to continue to rise as the gap between Australian and US interest rates widens further.

Source: Bloomberg, AMP

  • All up this could have a dampening impact on the Australian share market’s relative performance this year although I still expect it to have a reasonable year as profits rise after three years of falls.