Interest rate outlook shifts again as contradictory signals build

The interest rate outlook has shifted yet again, but this time the change is being driven by a more complex mix of data. A resilient labour market is pushing expectations of rate cuts further out, even as emerging pockets of weakness suggest inflationary pressures may ease sooner than many forecasters anticipated.

October’s unemployment rate fell back to 4.3 per cent, reversing the bump seen in September and confirming that the jobs market remains tighter than expected. For workers, this is welcome news. For the Reserve Bank, it complicates the case for near-term rate relief. A labour market that refuses to soften meaningfully makes it harder to argue that inflation risks are fully under control.

Yet other sectors of the economy are now clearly losing momentum. Retail spending remains subdued, business surveys point to deteriorating conditions, and credit data show ongoing strain for small businesses and segments of the housing market. These weaknesses alone might not be enough to shift monetary policy, but they add weight to the view that underlying economic momentum is slowing, just not uniformly.

The construction sector provides perhaps the clearest signal of where things may be heading. Fresh analysis shows activity is cooling rapidly, with new project starts, wage pressures and materials cost growth all easing. The pipeline of new development has shrunk dramatically, with the value of major projects entering the system falling by more than half over the past year. This marks one of the steepest adjustments in a domestic inflation driver that has been running hot for two years.

While some capacity is simply rolling off completed infrastructure and commercial projects, much less work is entering the pipeline to replace it. This points to a softer construction outlook through 2026 and, importantly for the RBA, a meaningful reduction in the cost and wage pressures that contributed significantly to inflation. In effect, one of the biggest inflation engines is powering down at the same time households and parts of the business sector are already feeling the pinch from higher rates.

The unevenness across the economy is also visible in consumer sentiment, with different measures painting different pictures. The ANZ–Roy Morgan index remains firmly in pessimistic territory, suggesting households are still grappling with higher borrowing costs and ongoing cost-of-living pressures. Westpac’s sentiment index, however, now back in positive territory for the first time in nearly four years, points to improving optimism among some groups, particularly those with rising incomes or lower mortgage exposure. Confidence is recovering, but only tentatively.

All of this leaves the RBA with a more complicated landscape than earlier in the year. Some analysts now see the first rate cut being pushed back into late 2026. Others argue the slowdown in construction and patchier consumer conditions strengthen the case for easing sooner once the central bank is confident inflation is on a clear downward path.

The path to lower rates remains open, but as always, data-dependent. The stronger labour market may be delaying the timing, but the cooling construction sector suggests the broader economy is quietly doing some of the work for the RBA.