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.

From the age of the economist to the age of the populist – key insights from economics, why many are ignored & what it means for investors

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 27 Jan 2026

Key points

  • Economics provides a range of insights including that: there is no free lunch; prices in free markets are usually best at allocating scarce resources; government policy comes with benefits and costs; productivity underpins living standards; and inflation is mostly a monetary phenomenon.
  • Unfortunately, these are increasingly being ignored with the rise of populist politicians with simplistic short term policies.
  • Over the long term this risks a less favourable economic environment – less growth, more inflation and more volatility which could weigh on investment markets.

Introduction

While a casual observation of economists would suggest they are invariably at logger heads this partly reflects the tendency of the media to juxtapose economists with contrasting views on issues like where interest rates, inflation or unemployment are heading. On top of this economists are trained to see all sides of an issue & so are more likely to see things as shades of grey rather than black and white – which is good but many love black and white! As Winston Churchill is said to have said “if you put two economists in a room, you get two opinions…” Or “if you laid all the economists in the world end to end, they’d never reach a conclusion” as often attributed to George Bernard Shaw. But at a fundamental level the economics profession tends to agree on a lot. This note looks at key insights from economics, their relevance today & why they are increasingly ignored.

Ten key economic insights

Note I used AI, and specifically ChatGPT, to help compile this list!

1. There is no free lunch – the basic economic problem is that human wants are unlimited, but resources are scarce. So we have to learn how to best allocate scarce resources. This means recognising that getting more of something may mean getting less of something else.
2. Prices guide decisions – prices signal peoples’ preferences and resource scarcity. So if prices are free to move up and down they guide demand and supply decisions without the need for centralised direction. Its often said that “the best solution to high prices is high prices” – because they encourage more producers to supply the item in short supply and potential users to switch to an alternative.
3. Free markets usually work well in allocating scarce resources, but not all the time – competitive markets tend to allocate resources efficiently to their best uses. But failures occur, eg, where it’s hard to charge for the provision of a good like a lighthouse, where prices may not cover the full cost of supplying a good like the cost of pollution, where a market dominated by a few suppliers or buyers or where key groups do not have access to key information. An example is the failure of markets to capture the potential damage to the atmosphere from carbon emissions – which is the justification for government intervention to put a price or tax on carbon emissions.
4. Government policy comes with both benefits and costs – for example public spending must be financed and takes resources away from private enterprise which can be more productive, taxes distort economic behaviour and some (like income tax) do so more than others (like a goods and services tax on all spending) and regulation can slow economic activity. For example, public spending in Australia is now around record levels as a share of economic activity & regulations have increased both of which are likely slowing productivity.
5. Free trade leaves both sides better off – trade between individuals and countries benefits both by allowing specialisation and comparative advantage. For example, Australia exports raw materials to China and imports manufactured goods. Australia has a comparative advantage in mining whereas China has a comparative advantage in manufacturing, allowing Australian consumers to get cheaper manufacturing goods and also freeing up resources for the provision of services where Australia also has a comparative advantage.
6. Opportunity cost is what really matters – the true cost of any decision is what you give up doing it, ie, the value of the next best alternative — not just the money spent. For example, the true cost of government decision to build a new railway link is not the money it will cost but what that money could have been spent on, eg, a new hospital.
7. Productivity growth underpins rising living standards – over the long run improvements in real incomes depend on rising productivity or output per hour worked — driven by technology, skills and capital.

Source: ABS, AMP

8. Inflation is ultimately a monetary phenomenon – while short term inflation can be impacted by supply and demand shocks, sustained inflation requires money supply growth to exceed real output growth.
9. Short run and long run are different – policies that boost demand can raise employment in the short run, but long-run growth depends on supply-side factors like productivity, incentives, and institutions.
10. Expectations matter – what people think affects current decisions and hence outcomes. For example, if workers and businesses expect inflation to stay low then they will be more likely to set wage and price increases at low levels. This is why central banks want to keep inflation expectations at low levels. Likewise, if businesses expect to be whiplashed by erratic announcements from government about tariffs and how to run their business then they will invest and employ less.

Economic rationalism is out of favour

Starting in the 1980s and rolling into the 2000s these lessons were front and centre of economic policy making as the malaise of the 1970s was fresh and led to a focus on sensible economic policy making drawing on many of these insights – free markets, measures to boost competition, smaller government, free trade, monetary policy focussed on keeping inflation down and attempts to anchor expectations at desired levels. But support for economic rationalism is in retreat. There are several reasons for this:

  • The GFC reduced confidence in free markets. This has been clearly evident in the u turn back towards more state direction in the Chinese economy under President Xi. But also in the increasing intervention in the US economy since President Obama but particularly under Trump.
  • The marginal voter now favours more government intervention in the economy – this likely reflects a combination of rising inequality (notably in the US), perceived cost of living pressures, expectations running ahead of reality (with more going to university and coming out with expectations that they will run things), social media driving and aggravating grievance, the experience in some countries through the pandemic where government backstopped jobs and spending and a dimming of memories of the malaise of the 1970s.

The Gini coefficient measures income inequality & shows variation between the actual income distribution and the perfectly equal distribution and ranges between zero or perfect equality and one or perfect inequality. Source: OECD, Standardised World Income Inequality Database, AMP

  • A backlash against high immigration levels has led to a rise in “far-right” nationalist political parties, eg, the National Rally in France, AFD in Germany, the Reform Party in the UK and even Trump in the US.
  • Economic insights are often counterintuitive – surely government is better at directing the use of scarce resources than free markets? Or they are not what people want to hear – eg, that there is no free lunch.
  • Policy makers are less inclined to communicate the need for hard choices reflecting the rise of focus groups driving policy and in the face of social media which amplifies grievance and simplistic solutions.
  • A decline in the study of economics in school and university (in favour of trades like business and finance) may be contributing to increased ignorance of the insights from economics. In Australia economics enrolments in Year 12 are down around 70% on early 1990s levels. The resultant loss of economic literacy may make it harder for people to engage in economic policy debate or resist simplistic populist solutions.

With a loss of faith in the economic system has also come an increasing disregard for the global rules-based order that governed global relations in the post war period for the West and globally since the end of the Cold War. Canadian PM Mark Carney refers to this as a “rupture”. It’s evident in the increasing threat faced by the UN, WTO, the International Court, global efforts to combat climate change, etc. This rules-based order while far from perfect helped reinforce economic rationalist approaches globally, eg in free trade and in the IMF’s assistance to debt ridden countries.

From the age of the economist to the age of the populist

The end result has been a rise in populism. While the far right tends to be dominated by a desire for no or selective immigration, the common features of populists whether left or right are a scepticism of free markets and support for more state direction of and participation in the economy along with protectionism. It’s evident in the US with President Trump where the term “Socialism with American characteristics” is becoming more apt with increasing links between the public and private sectors. It’s evident in the power of the far left and far right in France which is leading to political grid lock. Populism has always been around, but for many years it was on the fringes – but its increasingly taking centre stage. While its impact has been less in Australia it is evident in “Future Made in Australia” policies and the rising tendency for government to prop up struggling steel works and aluminium smelters. Politically, populism has been held at bay in Australia by compulsory voting contributing to a dominance by the centre left ALP and centre right L-NP but this may be coming under threat with the implosion in the Coalition and One Nation now polling ahead of the combined Liberal and National Parties in primary voting intentions.

But populist economic policies tend to fail

The problem is that populist policies offer no sustainable solution to the frustrations people feel and will ultimately make things worse. This is because: by promising more spending and less taxes they ignore budget constraints; by advocating price controls which gives short term relief they worsen things long term by reducing supply (eg, rent controls); they often advocate easy money which invariably leads to high inflation, eg Turkey; they wrongly blame scapegoats like immigrants or institutions like central banks for problems leading to policies that discourage innovation & investment; they go for short term gains (like artificially boosting wages) which leads to long term pain (like unemployment); and their erratic intervention in the economy (eg, raising then cutting tariffs and overriding the rule of law) leads to less investment and employment. And many of Trump’s policies will worsen inequality rather than combat it.

Implications for investors

There are three key implications for investors. First, a less favourable economic outlook – if governments play an increasing role in the economy overriding many of the insights from economics referred to above it’s likely to mean lower productivity over time resulting in slower economic growth and higher inflation than otherwise. In short, lower living standards. Of course, this will take time to show up. In the US at present its being fortuitously masked by the AI boom. Second, the shift to populism and nationalism is leading to increased geopolitical risk which means increased uncertainty. Finally, all of which runs the risk of more constrained and volatile investment returns.

Of course, as an economist I would say the key is to promote the study of economics but of course it’s more complicated! And these things go in cycles with the shift away from economic rationalism to populism likely to have further to go before it’s realised that populism is a dead end.

The investment Outlook for 2026 – expect a rough but, ultimately, ok ride

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

Key points

  • 2025 was another strong year for investors with shares up strongly on the back of better than feared growth and profits and global central banks cutting rates. Balanced super funds returned around 9%. Volatility rose though mainly on the back of worries about Trump’s tariffs.
  • 2026 is likely to see good returns but after the strong gains of the last three years, it’s likely to be more constrained. And another 15% plus correction is likely along the way again.
  • We expect the RBA to leave rates on hold, the ASX to return around 8% and balanced growth super funds to return around 7%. Australian home price gains are likely to slow to around 5-7%.
  • The key things to watch are interest rates; the AI boom; US midterms; China; geopolitics; and the Australian consumer.

Introduction

Despite uncertainty around US President Trump’s policies, geopolitics and interest rates, 2025 saw strong investment returns on the back of falling interest rates, solid economic and profit growth globally and expectations for stronger profit growth in Australia. AI enthusiasm boosted US shares although they were relative underperformers globally. This saw average superannuation funds return around 9%. This is the third year in a row of returns around 10% and over the last five years, they returned 7.7% pa.

Source: Mercer Investment Consulting, Morningstar, Chant West, AMP

Here is a simple dot point summary of key insights & views on the outlook.

Five key themes from 2025

  • US tariff turmoil – Trump’s Liberation Day tariffs caused volatility, but fortunately he backed down, retaliation was limited, deals were cut, and a trade war was averted.
  • AI enthusiasm – It surged along with related investment.
  • Global resilience – Despite Trump’s shock and awe global growth remained just above 3% and Australian growth picked up.
  • Lower interest rates – Despite sticky inflation around 3%, central banks continued to cut rates. In Australia rates were cut three times.
  • Gold a “safe haven” – There was lots of geopolitical noise, but it failed to dent investment markets significantly, but it did help gold prices!

Five lessons for investors from 2025

  1. Government intervention in markets is still rising. It was evident under Biden with increasing subsidies, and it’s ramped up dramatically under Trump with tariffs a key example along with the US Government buying shares in companies like Intel and charging Nvidia a fee for selling chips to China. “Socialism with American characteristics” is becoming more apt. In Australia it’s also evident in government moves to prop up failing steel works and aluminium smelters. Ultimately, it will mean a high cost to taxpayers and consumers.
  2. Trump’s bite is often worse than his bark. Variations are “take Trump seriously but not literally” or “Trump always chickens out” (TACO). Trump often puts something out there (like Liberation Day tariffs around 30%) then backs down as markets rebel or deals are cut.
  3. Timing markets is hard. It was tempting to switch out of shares in response to the plunge around Trump’s silly Liberation Day tariffs and on the back of concerns around stretched valuations or an AI bubble. But the trend remained up. As Keynes once said, “markets can remain irrational for longer than you can remain solvent.”
  4. Geopolitical risk remains high in an age of populists and nationalism, and this can create periodic setbacks in markets.
  5. By the same token, geopolitical events are hard to predict & then can be less impactful than feared. There was much fear that a US strike on Iran would lead to a flare up and surge in oil prices, but it was all a bit of a non-event from a market perspective and quickly forgotten about.

Some of these are covered in detail by my colleague Diana Mousina here.

Seven big worries for 2026

  • Share valuations – these remain stretched relative to history with US shares offering little risk premium over bonds and Australian shares not much better. Fortunately, Eurozone and Asian shares are cheaper.
  • The surge in AI shares shows some signs of being a bubble – including surging data centre capex increasingly being funded by debt.
  • Some central banks are at or close to the bottom on rates – this includes the ECB, Bank of Canada and the RBA. In Australia, higher inflation since 2025 could see the RBA hike prematurely.
  • Trump’s policies – there is much uncertainty about the impact of his policies in relation to tariffs, immigration, university research, the rule of law and his attacks on Fed independence which are hotting up ahead of Chair Powell’s term expiring in May. And now his crazy grab for Greenland to get its minerals and threat of tariffs on Europe if they don’t let him have it. All of which threaten “US exceptionalism.”
  • Risks for China’s economy remain – as its property slump continues.
  • High public debt in the US, France the UK and Japan is a problem – it runs the risk that governments will try and inflate their way out of it.
  • Geopolitical risk remains high – the Ukraine war is yet to be resolved, problems with Iran could flare up again with a possible US military strike, US tensions with China could escalate again, political uncertainty will likely be high in Europe with the rise of the far right, the US intervention in Venezuela could turn bad for the US (and may be interpreted as a “green light” for China and Russia to act in their own spheres of influence). Trump’s grab for Greenland threatens the NATO appliance. And the midterm elections in the US are often associated with share market volatility with an average 17% drawdown in US shares in midterm election years since 1950. This is arguably evident in Trump’s increasingly erratic and populist policies.

Source: Bloomberg, AMP

These considerations point to another year of high volatility.

Five reasons for optimism

  1. First, while AI may be in the process of becoming a bubble it could still be early days. Compared to the late 1990s tech bubble: valuations are cheaper; Nasdaq is up less; tech sector profits are very strong; bond yields are lower; and its early days in the associated capex build up around data centres.
  2. Second, while central banks are likely close to the bottom on interest rates, rate hikes are likely a way off (probably a 2027 story). For the Fed, another rate cut is likely in 2026, and a Trump appointee will likely be given some leeway before Fed independence worries really kick in. In Australia we expect some fall back in underlying inflation to allow the RBA to avoid rate hikes, but it’s a close call.
  3. Third, despite lots of noise Trump is pivoting to more consumer-friendly policies ahead of the midterms which will boost demand, and ultimately, he wants shares to rise ahead of the midterms and not fall. There is a chance he could now pivot further towards the populist left. But mostly his shift will likely be more market friendly and given the elections he has an interest in keeping geopolitical flareups low. Pressure to reduce the cost of living suggest the threatened tariffs on Europe over Greenland are a bluff & won’t stick.
  4. Fourth, global growth is likely to stay just above 3% as the lagged impact of rate cuts feed through along with some policy stimulus in the US and China. Australian growth is likely to edge up to 2.2%.
  5. Finally, okay economic growth likely means solid profit growth globally & about 10% profit growth in Australia (after 3 years of falls).

Key views on markets for 2026

  • After three years of strong returns, global and Australian share returns are expected to slow in the year ahead to around 8%. Stretched valuations in the key direction setting US share market, political uncertainty associated with the midterm elections and AI bubble worries are the main drags, but returns should still be positive thanks to Fed rate cuts, Trump’s consumer friendly pivot and solid profit growth. A return to profit growth should also support gains in Australian shares. Another 15% or so correction in share markets is likely along the way though.
  • Bonds are likely to provide returns around running yield.
  • Unlisted commercial property returns are likely to stay solid helped by strong demand for industrial property for data centres.
  • Australian home price growth is likely to slow to around 5-7% in 2026 after 8.5% in 2025 due to poor affordability, rates on hold with talk of rate hikes & APRA’s ramping up of macro prudential controls.
  • Cash & bank deposits are expected to provide returns around 3.6%.
  • The $A is likely to rise as the rate gap in favour of Australia widens as the Fed cuts & the RBA holds or hikes. Fair value is about $US0.73.
  • Precious metals like gold are likely to remain strong as a hedge against Trump related inflation risks and geopolitics.
  • Balanced super fund returns are likely to be around 7%.

Six things to watch

  1. Interest rates – if underlying inflation fails to fall, central banks including the RBA could start hiking rates.
  2. The US midterms – historically these drive more volatility in markets & uncertainty is high this time around given Trump’s erratic approach.
  3. The AI boom – watch for signs that it may be becoming more bubble like with investor euphoria and excessive debt driven capex.
  4. The Chinese economy – China’s property sector is continuing to struggle, and more measures are needed to support consumers.
  5. Geopolitics – risks remain high on several fronts including the US/China détente, Iran, Ukraine and now Greenland.
  6. The Australian consumer – consumer spending has seen a decent pick up but may be vulnerable if rates start to rise.

Nine things investors should always remember (yeah, I know I say this every year, but they are important!)

  1. Make the most of compound interest to grow wealth. Saving in growth assets can grow wealth significantly over long periods. Using the “rule of 72”, it will take 16 years to double an asset’s value if it returns 4.5% pa (ie, 72/4.5) but only 9 yrs if the asset returns 8% pa.
  2. Don’t get thrown off by the cycle. Falls in asset markets can throw investors off a well-considered strategy, destroying potential wealth.
  3. Invest for the long-term. Given the difficulty in timing market moves, for most it’s best to get a long-term plan that suits your wealth, age and risk tolerance and stick to it.
  4. Diversify. Don’t put all your eggs in one basket.
  5. Turn down the noise. We are increasingly hit by irrelevant, low quality & conflicting information which boosts uncertainty. The key is to avoid the click bait, turn down the noise and stick to a long-term strategy.
  6. Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
  7. Avoid the crowd at extremes. Don’t get sucked into euphoria or doom and gloom around an asset.
  8. There is no free lunch! If an investment looks dodgy, hard to understand or has to be justified by odd valuations, then stay away.
  9. Seek advice. Investing can get complicated.

The RBA holds rates at 3.6% and warns of rate hikes next year

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 10 Dec 2025

Key points

  • The RBA left its cash rate on hold at 3.6% as widely expected at is December meeting.
  • Its commentary also became more hawkish (ie leaning towards a rate hike) on the back of the further rise in inflation in October. Governor Bullock reiterated that the Board will be data dependent and effectively warned it may have to raise rates if inflation does not fall back.
  • We now expect the RBA to leave rates on hold next year with a fall back in inflation and still fragile consumer spending avoiding a rate hike but concerns about capacity constraints as the economy recovers likely preventing a rate cut and keeping the risk of a rate hike high.

RBA holds at 3.6% with a far more hawkish tone

2025 initially saw turmoil as US President Trump announced tariffs that were much higher than expected along with a bunch of other moves to upend US institutions and the global economic order. But the global economy held up okay. Key big picture themes for investors were:

The RBA’s decision to leave rates on hold at 3.6% was no surprise with it being the consensus amongst all 29 economists surveyed by Bloomberg and the money market factoring in zero chance of a change. The decision leaves the RBA having only reversed three of the 13 rate hikes seen in 2022 and 2023 (not that a cut back to a 0.1% cash rate was expected) and mortgage rates around levels prevailing 13 years ago.

Source: Bloomberg, AMP

The RBAs on hold decision follows the further increase in inflation seen in the new October monthly CPI which occurred in both headline and trimmed mean (or underlying) inflation and has taken Australian inflation back above many comparable countries. See the next chart.

Source: Bloomberg, AMP

Given the recent run of hotter inflation and demand data it was also not surprising to see the RBA further ramp up its hawkish commentary, but it’s now explicit after Governor Bullock’s press conference that the RBA now has a tightening bias. To be sure, the RBA expressed caution about reading too much into the new monthly CPI showing a further rise in inflation and reiterated that it expects some of the rise in underlying inflation to be temporary.

But its commentary was progressively more hawkish compared to last month with the post meeting Statement noting that the rise in inflation may be becoming more broad based, growth is picking up including for private demand, the housing market is continuing to pick up, the labour market remains a little tight, surveys show capacity utilisation above its long-run average, growth in unit labour costs remains high and if the pickup in the private sector continues it will add to capacity pressures. All up the RBA concludes that “the risks to inflation have tilted to the upside”, whereas the language previously noted “uncertainty…in both directions”. And at the same time the RBA notes that the impact from global uncertainties has been minimal.

Governor Bullock’s press conference comments came across as even more hawkish than the post meeting Statement. In particular she noted that the RBA did not consider a cut but did consider circumstances that may drive a hike, it did not see cuts in the “foreseeable future” so its about a hold or hikes and she reiterated a recent warning that “if inflation pressures look to be more persistent then it..might have to consider whether we need to raise rates.” And further that “if it looks like inflation is not coming back to the band then the Board will have to take action and it will.”

This effectively leaves the door wide open for higher interest rates next year if needed.

The RBA also indicated it will remain data dependent and, on this front, December quarter CPI data to be released in late January ahead of the RBA’s next meeting in February will be key as to whether we see a rate hike early next year.

We expect the RBA to leave rates on hold in 2026, but the risks are now a bit more on the upside

We are now forecasting rates on hold through next year, amidst conflicting economic indicators.

  • On the one hand, the rising trend in unemployment, falling job openings, the tendency for economic data to run hot and cold, uncertainty around the new monthly CPI and business surveys suggesting its pick up could be partly temporary (with final product price rises in the NAB survey remaining benign – see the next chart) and the fragile consumer recovery (with, eg, the NAB business survey reporting easing consumer sector orders) suggest that it’s too early to be considering rate hikes. And it’s arguable that potential economic growth at present is really now above 2%yoy given productivity growth of 0.8%yoy and labour force growth of 1.9%yoy, rather than at 2%yoy which is around the economy’s current growth rate.

Source: Bloomberg, AMP

  • But on the other hand, the strengthening trend in domestic demand growth and consumer spending, rising capacity utilisation in the NAB survey along with the renewed rise in inflation runs the risk that the economy is bumping into capacity constraints and possibly suggests that monetary policy is no longer restrictive. This would suggest that the risks are skewed to a rate hike next year.

So, on balance we expect to see the cash rate remain at 3.6% in 2026, with the swing back to rate hikes more a story for 2027. But we concede that the risks look like they are now a bit more to the upside on rates in 2026. However, our assessment is that the swing in the money market from expecting 2 or 3 more cuts after the August RBA meeting to now expecting nearly two hikes next year is premature and a bit too extreme.

Source: Bloomberg, AMP

That said as noted above the key to what happens early next year will be the December quarter CPI to be released in late January, with the November CPI on 7th January providing some early indication. Our assessment is that underlying inflation will drop back a notch to 0.8%qoq or slightly less from 1%qoq in the September quarter – partly supported by the weaker trend in final product prices from business surveys – allowing the RBA to remain on hold at its February meeting. Of course, if trimmed mean inflation in the December quarter does not fall back as we expect (and comes in around 0.9%qoq or more) than a hike as early as February is possible. Note that the RBA’s implied forecast in its November Statement on Monetary Policy is 0.8%qoq.

The bottom line

While the RBA is rightly more hawkish in order to send a signal that it’s committed to getting inflation back to target and therefore to help keep inflation expectations “well anchored”, our base case is that rates will be left on hold next year at 3.6% as inflation falls back, albeit the risks are now skewing a bit to the upside. December quarter CPI inflation is the key to what happens early next year on rates.

It’s also worth noting that while rates bottoming at 3.6% is not good news for those with a mortgage it may not be such a bad thing to the extent that it reflects a more positive economic outlook as this will underpin a return to profit growth in Australia after three years of falling profits. Of course, it won’t be so good if inflation stays above 3%yoy.

And for those wondering – Governor Bullock noted that the RBA will look through the impact of the ending of the electricity rebates on inflation next year, just as they looked through their impact when they were applied.

Australian home prices up solidly – expect some slowing in 2026

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 1 Dec 2025

Key points

  • Cotality data shows national average home prices rose strongly again in November, but with the pace of growth slowing slightly to 1%mom.
  • Near record low vacancy rates is contributing to a pickup in annual rental growth to 5%yoy.
  • The lagged impact of rate cuts, the expansion of the 5% low deposit scheme and the startup of the Help to Buy scheme along with the ongoing housing shortage are expected to drive further gains in home prices next year.
  • However, the gains are likely to slow in 2026 as a result of poor affordability, the less favourable outlook for interest rates with the risk of a rate hike and APRA moving to ramp up macro prudential controls and likely to do more.
  • After around 8.5% growth this year we now expect property price growth to slow to around 5-7% in 2026.

Introduction

National average property prices rose solidly again in November with this year’s rate cuts boosting demand along with the expanded 5% first home buyer deposit scheme. All capital cities saw prices rise.

Australian dwelling price growth

Source: Cotality

However, the national pace of gains slowed slightly from 1.1%mom in October to 1% in November. And a divergence has opened up again with the boom time cities of Perth, Brisbane and Adelaide accelerating in recent months and Sydney and Melbourne slowing a bit. Poor affordability is likely biting in Sydney along with less negative listings and stronger supply and the malaise around Victoria is likely impacting Melbourne.

Source: Cotality, AMP

The run of strong monthly price gains has taken annual growth to 7.5%yoy which is back above its decade average of 5.4%pa.

What drove strong home price growth this year?

The surge in property prices this year has been stronger than the 3% rise we expected at the start of the year and reflects a combination of three RBA rate cuts, the expanded first home buyer 5% deposit scheme which was only announced prior to the Federal election, improved consumer confidence and the ongoing shortage of housing. This has also been helped by below average levels of listings as vendors hold back for higher prices and as lower interest rates are relieving the pressure to sell for some distressed mortgage holders. These considerations have clearly more than offset the impact of poor affordability.

  • Historically rate cuts have been associated with an upswing in property prices unless there has been a recession and sharply rising unemployment. And this year has been no exception with prices starting to rise from February when the RBA started cutting rates. Rate cuts boost how much buyers can borrow and hence pay for a property. Roughly speaking, each 0.25% cut in variable mortgage rates adds around $11,000 to how much a buyer on average earnings can borrow. And of course this has been more than swamped by a rise in median home prices of around $90,000 since January.
  • The Federal Government promised prior to the May election that it would expand access to the low deposit guarantee allowing most FHBs to get in with a 5% deposit from 1st October, which had been brought forward from 1st January 2026. And the Government’s Help to Buy Scheme will start this week with 10,000 places a year which will see the Government take a 30% to 40% equity stake in the purchase price of a property for an owner occupier. Both of these demand side policies add to demand by bringing forward purchases and adding to how much a buyer can pay.
  • While some slowing in population growth and improving housing completions are bringing the property market into better balance on annual basis, there is still an accumulated housing shortfall that has built up over the last few years of under building. We estimate this to be around 200,000 to 300,000 dwellings.

The upswing in property prices in Sydney and Melbourne this year is consistent with an upswing in auction clearance rates in both cities this year. These have since cooled from their August high which mainly looks seasonal but could be a sign of things to come as affordability bites.

Expect prices to continue rising but at a slower pace

Which brings us to the outlook for 2026. The combination of the lagged effect of this year’s rate cuts, the expanded first home buyer 5% deposit scheme and now the Help to Buy scheme, improved consumer confidence and the ongoing shortage of housing are likely to keep the upswing in property prices going in 2026. However, the pace of gains is likely to slow from that seen this year as the RBA now looks to be at or very close the bottom of the interest rate cycle with talk that the next move in rates will be up, APRA is starting to ramp up controls to slow risky or speculative lending and affordability is now worse than ever.

  • On the interest rate outlook we think another RBA rate cut next year is still possible, but it will require a run of softer inflation numbers back below target and higher unemployment. And given the early stage of the economic recovery it’s arguably too early to expect the RBA to raise rates next year. That’s more likely a 2027 story. However, given the recent run of data showing rising inflation, still low unemployment and possibly strengthening private sector economic growth, we are not particularly confident and chatter that rates may have bottomed with a possible rate hike later next year may act as a dampener on buyer demand. Either way this will leave mortgage rates at their cycle low well above their record lows seen in 2021 of around 2 to 3%. As such, the buying capacity of home buyers is expected to remain below the levels seen in 2021-22. This will limit the upside in property prices.
  • APRA is now starting to ramp up regulatory controls to cool riskier forms of property lending. The initial move to cap the proportion of each bank’s housing lending that goes to borrowers with a debt-to-income ratio of six times or more at 20% from 1st February is likely to impact investors (who tend to have higher DTI ratios) more than owner occupiers but could impact some first home buyers seeking to take advantage of the 5% deposit scheme. It won’t have much impact initially (except maybe for small lenders) as the aggregate ratio is well below the 20% cap at present, but it’s clearly a pre-emptive move designed to cool investor activity before it gets too hot.
  • If it doesn’t work (and some borrowers may try to get in ahead of the cap becoming binding, so it could boost investor lending in the near term) APRA is likely to do more like putting a cap on investor credit growth like the 10%yoy cap it applied in late 2014. On this front, note investor lending is already running at a pace in excess of 10% which suggests a high risk that APRA will do more to slow down riskier forms of home lending that it fears may create financial stability risks.

Source: RBA, AMP

  • And housing affordability is deteriorating from already very poor levels. This is evident in the ratio of home prices to wages and incomes being at record levels. This could limit the upside in property prices – although we and many others have been saying that for years and home borrowers appear to be able to devote an ever-rising proportion of their income to debt servicing – albeit with the help of BOMAD (the bank of mum and dad) and governments.

Source: Cotality, ABS, AMP

  • Finally, slower population growth, reflecting a crackdown on student visas and a return to the normal pattern of students leaving after they complete their degrees, may also take some pressure off the home buyer market. Population growth has already slowed from a peak of 662,000 over the year to September 2023 to 423,000 over the year to March with the Government’s immigration forecasts implying a fall to around 365,000 in 2025-26.

Overall, Australian home prices are likely to remain in an upswing in 2026 on the back of the lagged impact of lower interest rates, more support for first home buyers and the housing shortage. However, it’s likely to be constrained by less rate cuts than previously expected with the risk of a rate hike, APRA’s move to ramp up macro prudential controls with more likely to come and poor affordability. After 8.5% or so growth this year we anticipate some slowing in national average home price growth to around 5-7%yoy next year.

With FOMO running hot in the boom time cities of Brisbane, Perth and Adelaide they are likely to remain the strongest over the next six months. But as their relative affordability continues to deteriorate with home price to income ratios in each city now being well above that in Melbourne some sort of rotation back to the laggards including Melbourne and possibly Sydney is likely at some point later next year. The other laggards of Hobart, Darwin and Canberra already appear to be picking up pace.

What to watch?

The key things to watch will be interest rates, unemployment and population growth. For example, a return to rate hikes, a sharply rising trend in unemployment and a sharp slowing in net migration could result in a resumption of property price falls. On the flipside a faster fall in rates and faster than expected population growth could drive a stronger upswing in property prices.

Housing affordability at a record low – here’s four key ways to fix it

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 25 Nov 2025

Key points

  • With the latest surge in home prices relative to incomes housing affordability is at a new record low. This is adding to a slide in home ownership and rising inequality.
  • The key to sustainably improving housing affordability is to better align immigration to housing supply, boost housing supply, encourage decentralisation and some tax reform.
  • There are no quick fixes, and we have a long way to go.

Introduction

For as long as I have been an economist, housing affordability has been an issue. But while it was once mainly a cyclical concern associated with bouts of high interest rates, from the 2000s it’s become a chronic problem. With national home prices at new record highs housing affordability has reached a new record low. This is a terrible situation for a country with so much land and a small population that used to pride itself on the “Aussie dream”. This note looks at what can be done to fix the problem and why at the same time we need to make sure – in the face of calls to slash immigration and densify our cities – we don’t throw the baby out with the bathwater and create bigger problems.

Housing affordability keeps getting worse

But first a quick recap – how did we get here? After strong gains in home prices over many years, Australian housing is expensive relative to income, rents & its long-term trend and by global standards. Poor affordability is apparent in a surge in the ratio of average dwelling prices to average wages(red line in the next chart) & household income (green line) – both of which have more than doubled since 2000 and with the recent rebound in prices are now at record highs.

Note home ownership data is only available from 5 yearly census. Source ABS, Cotality, AMP

The time taken to save a deposit has also doubled over the last 30 years and is now at a record 11 years. Sure, a first home buyer can now get in with a 5% deposit, but this is with 95% debt! And the deterioration in affordability has contributed to a falling trend in home ownership, along with a range of other factors(see the blue line in the previous chart).

Source: ABS, Cotality, AMP

Key drivers of poor housing affordability

The drivers of poor housing affordability are hotly debated. Many zoom in on things like tax concessions for investors, SMSF buying and foreign demand. But investor and foreign demand were not big drivers of the 20- 30% surge in prices over 2020-22. And property tax concessions are common in other countries, without such poor affordability. Rather the key drivers have been a combination of three things:

  • The downtrend from high interest rates at the start of the 1990s to low rates before and in the pandemic along with the increased availability of debt boosted borrowing ability and hence buyers’ capacity to pay for homes. But this is not the full story as lots of comparable countries have had low interest rates without such expensive housing. And interest rates are well up from their pandemic lows and yet affordability is even worse.
  • Housing supply (for reasons ranging from too much red tape to capacity constraints) has failed to keep up with a surge in demand for housing that started in the mid-2000s with rapid population growth.
  • The concentration of people in just a few coastal cities hasn’t helped.

Of these, the fundamental demand/supply mismatch is the critical factor behind poor affordability. This can be demonstrated in the next chart.

Source: ABS, AMP

Starting in the mid-2000s annual population growth jumped by around 150,000 people largely due to a surge in net immigration – see the blue line in the prior chart. This should have been matched by an increase in dwelling completions of around 60,000 homes per annum but there was no such rise until the unit building boom of 2015-20 leading to a chronic undersupply of homes – see the red line. The unit building boom and the slump in population growth through the pandemic helped relieve the imbalance but the unit building boom was brief and a decline in household size from 2021 resulted in demand for an extra 120,000 dwellings on the RBA’s estimates. The rebound in population growth post the pandemic then took property market back into undersupply again.

The next chart translates this into an estimate of the cumulative undersupply of dwellings in Australia. Up until 2005 the housing market was in rough balance. It then went into a massive shortfall of about 250,000 dwellings by 2014 as underlying demand surged with booming immigration. This shortfall was then cut into by the 2015-20 unit building boom and the pandemic induced hit to immigration. But it’s since rebounded again to around 220,000 dwellings, or possibly as high as 300,000 if the pandemic induced fall in household size is allowed for. The shortfall is confirmed by low rental vacancy rates.

Source: ABS, AMP

Four key things to improve housing affordability

Very high house prices and associated debt levels relative to wages pose two key problems. First, they pose the risk of financial instability should something make it harder to service loans. Second, the deterioration in affordability is resulting in rising wealth inequality, a deterioration in intergenerational equity, confining more to renting which will exacerbate wealth inequality (renters tend to be less wealthy over their lifetime than homeowners) and it is likely contributing to rising homelessness.

Some might see a house price crash as the solution. Yes, this would improve affordability – but it would likely also come with a deep recession and high unemployment which will make it hard for many to buy a house.

Other policies that won’t work, include: grants & concessions for first home buyers (as they just add to higher prices); abolishing negative gearing (which would just inject another distortion into the tax system and would adversely affect supply), although there is a case to cap excessive use of negative gearing tax benefits; banning foreign purchases altogether (as they are a small part of total demand and may make it even harder to get new unit construction off the ground); and a large scale return to public housing (as a major constraint to more units is excessive costs and delays, and just switching to public housing won’t fix this).

There are no quick fixes, but here are the four key things that need to be done to fix affordability:

  • First, match the level of immigration to the ability of the property market to supply housing and reduce the accumulated housing shortfall of around 200,000-300,000 dwellings. – we have clearly failed to do this since the mid-2000s and particularly following the reopening from the pandemic, and this is evident in the ongoing supply shortfalls. Our rough estimate is that immigration needs to be cut back to around 200,000 a year (see here where we looked at the issue in detail) from 316,000 over the year to the March quarter.
  • Second, build more homes – the commitment by Australian governments to build 1.2 million homes over five years was a welcome move down the path to boost supply. One year into it though and we have only completed 174,000 homes and approvals are only running around 190,000 homes annually, so we are well below the implied 240,000 annual target. To meet the target will require relaxing land use rules, less red and green tape, shifting to faster ways to build including with modular and pre-fab homes, encouraging build to rent affordable housing, training and importing far more tradies and refocussing more on units. In terms of the latter the only time we consistently built more than 200,000 homes per annum was in the unit building boom of the 2015-19 period.
  • Third, decentralisation to regional Australia – this needs appropriate infrastructure and measures to boost regional housing supply.
  • Fourth, some tax reform – including replacing stamp duty with land tax (to make it easier for empty nesters to downsize) and reducing the capital gains tax discount (to remove a pro-speculation distortion).

But don’t throw the baby out with the bathwater

But in seeking to address the problem we need to act in a balanced way. In particular, immigration has been a huge benefit to Australia by boosting labour supply and addressing labour shortages, supporting state and federal budgets, slowing the aging of the population, boosting innovation and enhancing cultural diversity and vibrancy. In particular, via international students who count as immigrants, it helps drive more than $50bn in education export earnings each year, which is our fourth biggest export earner behind iron ore, coal and gas. Ideally, universities should be able to have as many foreign students as they like providing they house them on campus as this would take pressure off existing housing.

Secondly, observing that Australian cities are very low density compared to cities in Europe, Asia and parts of the US (see the next chart) has led some to suggest that the solution to poor affordability lies in densifying our cities. For example, a plan from the Grattan Institute proposed allowing three story units to be built anywhere in Australia’s capital cities. This extreme form of YIMBYism would be a monumental mistake – not only would it push city land values further into the stratosphere exacerbating inequality but it will put the nail in the coffin of the quarter acre block at the centre of the “Aussie dream” epitomised in films like “They’re a Weird Mob” and “The Castle” and the TV show “Neighbours”, which is one of the things that has made Australia great and why people want to come here. Going down the path of even bigger, congested cities seen internationally is not a solution. Which is why allowing more units in Australian cities should be seen as a short-term measure with decentralisation to regional centres being the long-term solution.

Source: Grattan Institute

Share market wobbles – what are the negatives and positives?

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 18 Nov 2025

Key points

  • Rich valuations, AI bubble worries and uncertainty about central bank rate cuts are the main negatives for shares at present and could see recent falls extend further.
  • Against this though, global profit growth remains strong and there is no sign of recession suggesting that the broad trend in shares may remain up.
  • For investors and super fund members, the danger in trying to time corrections and bear markets is that you miss out on longer-term gains. The key is to adopt an appropriate long-term investment strategy and stick to it.

Introduction

November so far has seen a pretty wobbly ride for shares. From their October highs, US shares are down 3.2% and Australian shares are down 5%. More significantly perhaps concerns about a bubble in equity markets focused around AI have escalated since we had a look at the issue early last month (see here) with more high profile commentators and investment experts expressing concern. And share markets have not been helped by a scaling back in expectations for near term rate cuts in the US and uncertainty about whether there will be further rate cuts at all in Australia. This note looks at the key negatives and positives for shares.

The negatives for shares

Several negatives hang over shares.

  • First, shares are expensive. This is nothing new but is clearly evident in relatively high price to earnings multiples. The forward price to earnings ratio on US shares is at 23.5 times, not far below the 1999-2000 tech boom high. The PE on Australian shares is well above its tech boom high despite a recent fall. Related to this, the risk premium offered by shares over bonds – the gap between the forward earnings yield and the 10-year bond yield – is very low in the US and Australia versus the post-GFC period.

Source: Bloomberg, AMP

It should be noted that thanks to lower bond yields the equity risk premium now is more attractive than it was prior to the 1987 crash or the tech wreck. And valuations are a poor guide to timing market movements. That said, high PEs and the low equity risk premium compared to much of the last twenty years warn of a slower return potential ahead and provide less of a buffer should things go wrong.

  • Second, shares have had several years of strong gains, with the last bear market in global shares being in 2022. Shares did have sharp falls into April this year on Trump’s tariffs, but the falls were less than 20% and were quickly reversed. Over the last 3 years US shares have returned 23%pa, global shares 21%pa and Australian shares 13%pa. History warns that after a run of strong above average years a weaker year and often a bear market can come along.
  • Third, there are signs of a bubble forming in AI shares with investor enthusiasm for AI related exposure. We covered this in the note last month referred to earlier. Specifically, the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) have risen more than 30-fold over the last decade dwarfing various other bubbles and they have disproportionately driven the US share market accounting for 50% or more of its gains since 2023.

Source: Bloomberg, AMP

  • Fourth, there has been increasing uncertainty around how much central banks will cut interest rates – notably in the US and Australia – and this has been a key driver of weakness in shares since their October highs. The US money market now sees only around a 45% chance of a December rate cut. This is raising concern on several fronts as US jobs data has shown signs of weakening lately and less rate cuts may mean higher bond yields which in turn pressures share market valuations. In Australia, higher than expected September quarter inflation and associated worries about capacity constraints have seen the RBA adopt a more cautious data dependent approach with the money market seeing just a 40% chance of another rate cut.
  • Fifth, there remains immense uncertainty around the lagged economic impact on US economic growth of Trump’s tariffs.
  • Finally, there remain concerns about excessive public debt levels in several countries including the US and ongoing geopolitical risks.

The positives

Against this backdrop, a number of positives provide some offset.

  • First, profit growth in the key direction setting US share market remains strong. The September quarter earnings reporting season has seen 82% of results beat expectations which is above the norm of 76% and profit growth is on track for around 15.5%yoy. Tech profits are running around 28%yoy, which contrasts with the “dot.com” stocks in the late 1990s tech boom which were making little in the way of profits. September quarter profits have generally surprised on the upside globally as well.

Source: Bloomberg, UBS, AMP

  • Related to this, business conditions PMIs – derived from business surveys – are at levels consistent with reasonable economic growth. And Australian economic growth is gradually improving which should lead to stronger ASX listed company profits next year. So, there is no sign of recession which is important because major bear markets in shares tend to be associated with recession – although this is no guarantee as shares often lead the way.

Source: Bloomberg, AMP

  • Third, Trump is now cutting tariffs as next year’s mid-term elections come into focus. Trump won the 2024 election largely on the back of dissatisfaction with “cost of living” increases, but recent Democrat election victories confirm that swing voters are now deserting him because he has added to the cost of living. To avoid a disaster in next year’s mid-terms he is swinging back to measures to reduce the cost of living. This was already evident in his acceptance of the latest trade truce with China which saw both sides removing imposts and threats on each other with no resolution to the key issues. But it signalled that we are well passed “peak Trump tariffs” with Trump having little choice but to back down with China as he couldn’t afford another escalation in his politically unpopular tariffs. His pivot was also evident in his talk of tariff rebates and floating the silly idea of a 50-year mortgage. But after the Democrat victories early this month the pivot is in full swing with tariff exemptions on imports of food items – like beef, tomatoes, bananas, oranges, fruit juices, nuts and coffee. This means removing tariffs that were only imposed earlier this year. So much for his argument that foreigners pay tariffs and there is no impact on prices for Americans! And his chopping and changing won’t do anything for businesses trying to work out where best to locate production – but that’s a separate issue. The key is that Trump is pivoting to more market and consumer friendly policies.
  • Fourth, measures of investor sentiment are still not showing the euphoria often associated with major market tops and bubbles don’t normally burst when there is so much talk about them.
  • Fifth, while there is much uncertainty about how much further interest rates will fall our view remains that both the Fed and RBA will cut rates further. We are allowing for three more US rate cuts and one more RBA rate cut, albeit not till around May next year.
  • Finally, we are now entering a positive period of the year for shares from a seasonal perspective. Shares typically rally from November into the new year as part of the Santa rally.

Source: Bloomberg, AMP

So, while the risk of a further near-term pullback in shares is high, a more severe fall may not come till next year. And in the meantime, still strong global profit growth, little indication of a recession and the likelihood that central banks will still cut rates further suggest the broad trend in shares may still remain up. However, 2026 could be a rougher year as it’s another mid-term election year in the US. Since 1950 US shares have had an average top to bottom drawdown of 17% in mid-term election years.

Implications for investors

The bottom line is that stretched share market valuations are warning of the risk of a further fall in share markets and it’s possible that AI enthusiasm has run ahead of itself. But stretched valuations are a poor timing tool for market movements. As we saw in the 1990s any bubble could inflate further, well beyond when commentators and experts start to worry about it. Either way, rough periods are an inevitable part of share market investing but trying to time them is hard, so the key is to adopt an appropriate long term investment strategy and stick to it.

Bubble trouble – is AI enthusiasm driving a bubble in shares?

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 8 Oct 2025

Key points

  • Rich share market valuations are warning of the risk of a pullback in shares amidst fears of a bubble and it’s possible that enthusiasm for AI has run ahead of itself. But the fundamentals behind this are arguably far stronger than they were at the time of the late 1990s tech boom.
  • For investors and super fund members, the danger in trying to time corrections and bear markets is that you miss out on longer-term gains. The key is to adopt an appropriate long-term investment strategy and stick to it.

Introduction

Lately, some commentators and investment experts have been expressing concern about a bubble in equity markets with some referring to excessive optimism about AI and drawing comparisons to the late 1990s tech boom. Some have been advocating holding a higher proportion of funds in cash in response. This note looks at the key issues and what it means for investors. As the concerns centre on the direction-setting US share market, we will focus mainly on that, as any fall there will impact Australian shares.

Why the bubble worries?

The concerns about a bubble reflect a combination of factors:

  • First, shares have been enjoying very strong gains led by the US with most at or around record levels. The US share market is up 35% from its April US tariffs driven low & has returned 25%pa over the last 3 years with global shares returning 23%pa and Australian shares 15%.
  • Second, valuations are stretched with the forward price to earnings ratio on US shares at 23.6 times, not far below the 1999-2000 tech boom high of 26 times. The PE on Australian shares is well above its tech boom high. Note PEs were above current levels in late 2020/early 2021 due to distortions caused by the pandemic.

Source: Bloomberg, AMP

Related to this, the risk premium offered by shares over bonds – the gap between the forward earnings yield (inverse of the forward PE) and the 10-year bond yield – is very low in the US and Australia.

  • Third, the US share market has been disproportionately driven by a group of tech stocks. For example, the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) have been accounting for 50% or more of the gains in the S&P 500 since 2023 despite being about one third of market capitalisation. This arguably leaves US shares very vulnerable to the performance of this narrow group of tech/AI focussed companies.
  • Fourth, this narrow group of stocks have surged in value over the last decade initially reflecting FAANG (Facebook, Apple, Amazon, Netflix & Google) enthusiasm that has morphed into AI enthusiasm since Chat GPT was released in 2022. As can be seen in the next chart the Magnificent Seven group of stocks have risen more than 30-fold since 2015 dwarfing various other “bubbles” over the last decade including the tenfold rise in the tech heavy Nasdaq into 2000.

Source: Bloomberg, AMP

  • Fifth, while there is a high level of corporate interest and investment in AI, evidence that they are reaping a benefit is mixed with many projects at the pilot stage with issues around data, culture, leadership and skills. In other words, AI hype may have run ahead of the reality.
  • Sixth, speculative assets like gold and bitcoin have also been strong, suggesting speculative attitudes may be starting to take hold.
  • Finally, share markets appear to be disconnecting from a long worry list that includes: uncertainty around US tariffs and their impact; the slowing US jobs market; messy US economic policies and the latest shutdown; uncertainty as to whether the Fed will cut rates as much as the 4-5 cuts the US market is expecting; concern about public debt sustainability in the US, France, UK and Japan; & elevated geopolitical risks particularly with escalating tensions between Russia and NATO and the risk of secondary tariffs on countries importing Russian oil.

But could this time be different?

Over the years I have seen numerous bubble calls only for the market to keep going up or see nothing more than a brief correction. There are several arguments against the bubble call making it all a shade of grey:

  • First, while the risk premium offered by shares is low, bond yields today are much lower than when the tech boom peaked in early 2000 when they were over 6%, so the equity risk premium is at least better than it was back then particularly in the US.

Source: Bloomberg, AMP

  • Second, while the chart above showing a comparison of “bubbles” highlights the extreme gains in the Magnificent Seven it probably exaggerates the case for a bubble. It shows gains much bigger than the tech heavy Nasdaq going into 2000, but this time around Nasdaq has not gone up anywhere near as quickly. There is a danger in focussing on a select group of stocks – just as there was last decade when the FAANG stocks were said to be in a bubble. Perhaps the comparison should be the “dot com” stocks of the late 1990s.
  • But here there is a notable difference. Dot com stocks were making little in the way of profits, but Magnificent Seven stocks are making huge profits as a group with very strong profit growth, running around 30%yoy. Profit growth for US tech companies generally is around 17%yoy. More broadly US company profit growth has continued to surprise on the upside and is likely to have been around 11.5%yoy in the September quarter.
  • Fourth, while initial results on the benefits of corporate investment in AI are mixed, it was inevitable that this will take time, but anyone who has used AI tools can see the huge benefit they offer in doing things faster (like doing the research for these notes!) and boosting productivity. Related to this AI systems, or specifically large language models, are very data and computationally intensive and will require a significant build out of data centres which in turn will mean high levels of business investment and demand for raw materials like copper.
  • Fifth, while global business conditions PMIs – i.e. surveys of how businesses are faring – have slowed they are still at levels consistent with reasonable economic growth. In other words, there is no sign of recession which is important because major bear markets in shares tend to be associated with recession – although this is no guarantee as share markets often lead the way.

Source: Bloomberg, AMP

  • Sixth, measures of US investor sentiment show optimism, but they are arguably not yet indicative of euphoria towards shares that may be associated with a major share market top. See the next chart.

The Investor Sentiment index is based on a composite of surveys of investors and investment advisers and options positioning. Source: Bloomberg, AMP

Related to this, bubbles don’t normally see lots of people doing bubble searches online so the surge in Google searches for an “AI bubble” since June may be a positive sign from a contrarian perspective, i.e. that we are not in a bubble yet.

Source: Source: Google, AMP

  • Finally, while there is no doubt a speculative element in investor demand for gold and bitcoin pushing their prices up, their surge partly owes to demand for a hedge against feared unsustainable public debt levels, worries that this might be monetised (i.e. where governments allow higher inflation to reduce the real value of debt) and geopolitical threats. So, record high levels of both are not necessarily a sign of a broader speculative mania.

Implications for investors

What are investors to make of all of this? There are four key points.

  • Rough periods – corrections and sharp bear markets – are normal in share markets and are the price we pay for the higher returns compared to defensive assets they provide over the long term.
  • Rich share market valuations are warning of the risk of a pull back in shares and it’s possible that enthusiasm for AI has run ahead of itself. But the fundamentals behind this are arguably far stronger than they were at the time of the late 1990s tech boom.
  • Either way it’s very hard to time share market moves. There were warnings of “irrational exuberance” in US shares in 1995, and it went on for another five years. The danger in trying to time corrections and bear markets is that you miss out on the longer-term gains.
  • The key is to adopt a long-term investment strategy appropriate for your risk tolerance, financial situation and age and stick to it.

Why I still love dividends and you should love them too

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 4 Mar 2019

Key points

  • Dividends are great for investors. They augur well for earnings growth, provide a degree of security in uncertain times, are likely to comprise a relatively high proportion of returns going forward and provide a relatively stable source of income.
  • Including reinvested dividends, the Australian share market has surpassed its 2007 record high.
  • It’s important that dividend imputation is not weakened in Australia to ensure dividends are not taxed twice.

Introduction

Prior to the 1960s most share investors were long-term investors who bought stocks for their dividend income. Investors then started to focus more on capital growth as bond yields rose relative to dividend yields on the back of rising inflation. However, thanks to an increased focus on investment income as baby boomers retire, interest in dividends has returned. This is a good thing because dividends are good for investors in more ways than just the income they provide.

Australian companies pay out a high proportion of earnings as dividends. This is currently around 65% compared to around 45% for global shares. However, some argue that dividends don’t matter – as investors should be indifferent as to whether a company pays a dividend or retains earnings that are reinvested to drive growth. Or worse still, some argue that high dividend pay outs are a sign of poor long-term growth prospects, that they are distraction from business investment or that they are often not sustainable. And of course, some just see dividends as boring relative to speculating on moves in share values. My assessment is far more favourable.

Seven reasons why dividends are cool

First, dividends do matter in terms of returns from shares. For the US share market, it has been found that higher dividend payouts lead to higher earnings growth1. This is illustrated in the next chart, which shows that for the period since 1946 when US companies paid out a high proportion of earnings as dividends (the horizontal axis) this has tended to be associated with higher growth in profits (after inflation) over the subsequent 10 years (vertical axis). And higher profit growth drives higher returns from shares. So dividends do matter and the higher the better (within reason). There are several reasons why this is the case: when companies retain a high proportion of earnings there is a tendency for poor hubris driven investments; high dividend payouts are indicative of corporate confidence about future earnings; and high payouts indicate earnings are real.

Source: Global Financial Data, Thomson Reuters, AMP Capital

Second, dividends provide a stable contribution to the total return from shares, compared to the year-to-year volatility in capital gains. Of the 11.7% pa total return from Australian shares since 1900, just over half has been from dividends.

Source: Global Financial Data, AMP Capital Investors

Third, the flow of dividend income from a well-diversified pool of companies is relatively smooth. As can be seen below, dividends move in line with earnings but are smoother.

Source: Thomson Reuters, RBA, AMP Capital

Companies like to manage dividend expectations smoothly. They rarely raise the level of dividends if they think it will be unsustainable. Sure, some companies do cut their dividends at times, but the key is to have a well-diversified portfolio of sustainable and decent dividend paying shares.

Fourth, investor demand for stocks paying decent dividends will be supported as the ranks of retirees swell.

Fifth, with the scope for capital growth from shares diminished thanks to relatively high price to earnings ratios compared to say 40 years ago, dividends will comprise a much higher proportion of total equity returns. More than half of the total medium-term return from Australian shares is likely to come from dividends, once allowance is made for franking credits.

Sixth, dividends provide good income. Grossed up for franking credits the annual income flow from dividends on Australian shares is around 5.7%. That’s $5700 a year on a $100,000 investment in shares compared to $2150 a year in term deposits (assuming a term deposit rate of 2.15%).

Source: Bloomberg, RBA, AMP Capital

Finally, while Australian shares are still 10% below their 2007 high, once reinvested dividends are allowed for (ie looking at the ASX 200 accumulation index) the market is well above it.

Source: Bloomberg, AMP Capital

Another way to look at dividend income

How powerful investing for dividend income can be relative to investing for income from interest is illustrated in the next chart. It compares initial $100,000 investments in Australian shares and one-year term deposits in December 1979.

Source: RBA, Bloomberg, AMP Capital

The term deposit would still be worth $100,000 (red line) and last year would have paid $2,200 in interest (red bars). By contrast the $100,000 invested in shares would have grown to $1,111,435 as at December last year (blue line) and would have paid $47,792 in dividends last year (blue bars). Or around $62,240 if franking credits are allowed for. Over time an investment in shares can rise but a term deposit is fixed.

But don’t dividends crimp capex?

This issue has been wheeled out repeatedly since the GFC. But it’s ridiculous. First the rise in dividends this decade has mainly come from cashed up miners and it’s hard to argue they should invest more after the mining investment boom. Second the dividend payout ratio is not high historically. Third the reasons for poor business investment lie in: business sector caution after the GFC & the rise in the $A above parity, which squeezed competitiveness; the fall back to more normal levels in mining investment; and the shift to a capital lite economy based around IT and services. Don’t blame dividends for poor capex.

Source: Thomson Reuters, RBA, AMP Capital

Why dividend imputation is so important

Dividend imputation was introduced in the 1980s and allows Australians to claim a credit against their tax liability for tax already paid on their dividends in the hands of companies as profits and boosts the effective dividend yield on Australian shares by around 1.3 percentage points. However, over the years it has been subject to claims that it creates a bias to invest in domestic equities, that it biases companies to pay dividends and not invest and that it benefits the rich. This is all nonsensical as dividend imputation simply corrects a bias by removing the double taxation of company earnings – once in the hands of companies and again in the hands of investors. The removal of dividend imputation would not only reintroduce a bias against equities but would also substantially cut into the retirement savings and income of Australians, discourage savings and lead to lower returns from Australian shares.

Labor’s proposal to make franking credits in excess of a taxpayer’s tax liability non-refundable could be argued to remove an anomaly in the tax system as dividend imputation was designed to prevent the double taxation of dividends, not to stop them being taxed at all. But a problem is that many Australians have planned their retirement around receiving such refunds. This is a subject for another note. But it is worth noting that Labor’s proposal does not affect at least 92% of taxpayers who will continue receiving franking credits as they have a sufficient income tax liability (as will pensioners who will be exempted). If it sets off a broader wind back of franking credits, then it would be a bigger concern.

Concluding comments

Dividends provide a great contribution to returns, a degree of protection during bear markets and a great income flow. For investors needing income the trick is to have a well-diversified portfolio of companies paying high sustainable dividends.

The Aussie economy in 2019; it’s not boom but it’s not doom either

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By Dr Shane Oliver

Head of Investment Strategy and Economics and Chief Economist, AMP Capital

Investors might be confused about the mixed news coming out late last year for the Australian economy and what it means for returns and rates.

Economic growth has been okay, and unemployment has fallen to five per cent which is quite low by Australian standards. But we’re also seeing ongoing weakness in house prices. Some say house price falls could be worse that those seen during the global financial crisis, and, ultimately, I think they will be.

So what’s going on here?

How we avoided recession

Basically, we’re seeing ‘desynchronisation’ across key sectors in the Australian economy – that is, when one part of the economy weakens, another picks up.

Desynchronisation partly explains why the Australian economy has dodged recession for almost 28 years.

We enjoyed a mining boom. When that came to an end, the mining-exposed parts of the economy, notably Western Australia, suffered. But that enabled lower interest rates and a lower Australian dollar which helped stimulate the economy. The housing market also strengthened and we had a housing boom in Sydney and Melbourne.

A new rotation

The economy is now rotating again, creating another two-speed economy.

On the positive side, we’re getting close to the end of the mining investment slump, which is taking pressure off Western Australia, the Northern Territory and parts of Queensland. We’re also seeing good signs in terms of non-mining investment and export values are doing ok.

But on the negative side, the housing boom is coming to an end and the key drivers for weaker housing returns remain in place:

  • Credit tightening
  • Rising supply in the unit market
  • Reduced foreign buyer demand
  • A lot of investors having to switch from interest-only loans to principle and interest loans.
  • Uncertainty about changes to taxation concessions around negative gearing and capital gains tax should Labor win the upcoming federal election

Also evident is a psychological change in attitudes to the housing market from ‘I’ve got to get in now otherwise I’ll miss out’ – (fear or missing out or FOMO); to ‘if I don’t get out now, I’ll be in trouble’ – (Fear of not getting out or FONGO).

So we’re likely to see more weakness in house prices as we go through 2019, particularly in Sydney and Melbourne where prices could come off another 10 per cent or so, probably more in Melbourne which has lagged a little bit going into this downturn.

That would take top to bottom falls in Sydney and Melbourne to around 20 per cent (10 per cent in 2019). Other parts of Australia will hold up a bit better, with the national average prices having top to bottom fall of around 10 per cent.

That’s going to cause a degree of weakness in terms of consumer spending in Australia because we will get a negative wealth effect flowing through. (When house prices fall, Australians are likely to feel less wealthy and trim consumption). That will also be a bit of a constraint for the banks.

Rate cut risk

When we put all this together, it’s going to mean an ongoing environment where wages growth remains low and inflation remains low, and so we’re unlikely to see the Reserve Bank raise interest rates in 2019.

In fact, the likelihood is that the Reserve Bank ends up cutting interest rates in 2019. If they do that as we expect, it could well be a second half 2019 story because it will take them a while to come around to the view rates need to be cut.

It’s a close call, but we think rates will be cut in 2019 and that there will be no rise.

Avoiding recession

Despite the negatives, when I look at the Australian economy, I don’t see a recession.
There are areas of the economy which are quite strong, and which will keep growth going to counter the other areas which will constrain it.

This year we’re probably looking at overall economic growth of around 2.5 to 3 per cent; we’re looking at unemployment going sideways – it may come down a little bit, but nothing to get excited about; and we’re looking at ongoing weak wages growth and low inflation.

What this means for investors

This outlook above has a number of implications for investors, including:

  • Returns from bank deposits will remain poor,
  • With a rate cut likely in Australia and further rate rises likely in the US, albeit at a slower rate, the Australian dollar is likely to fall into the high $US0.60s,
  • Australian bonds are likely to outperform global bonds,
  • Australian shares will remain great for income, but global shares will deliver better capital growth, and
  • The housing downturn will hit retailers, retail property, banks and building material stocks.

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