Australia's economic growth unexpectedly slowed last quarter, casting doubt on the economy's underlying strength and suggesting markets may have prematurely priced in rate hikes. Data released Wednesday showed the country's GDP expanded by 0.4% in the September quarter, missing the 0.7% forecast and falling below the upwardly revised 0.7% growth in the previous quarter. Annual growth stood at 2.1%, also below the expected 2.2%.
Following the data release, the Australian dollar weakened and yields on policy-sensitive three-year government bonds declined.
Money markets now assign over 50% probability that the Reserve Bank of Australia (RBA) will keep rates unchanged through 2026. Prior to the GDP report, markets had anticipated one rate hike by the end of next year. The release comes less than a week before the RBA's final policy decision of the year, with consensus expecting rates to remain at 3.6% following three cuts this year.
The RBA projects Australia's economic growth will approach its 2% "potential" rate in 2026, supported by lower borrowing costs, stable household income, and strong population growth. However, with inflation remaining uncomfortably high and the labor market still relatively tight, the rate-setting committee faces delicate policy balancing challenges.
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