Australian shares rallied on Wednesday, posting their strongest session in about two months, after a cooler-than-expected inflation report dampened expectations that the Reserve Bank of Australia (RBA) would raise interest rates again in November.
The S&P/ASX 200 index climbed 0.9% to close at 8,789.30, with rate-sensitive sectors leading the advance. The trigger was August's trimmed-mean inflation, a core measure that strips out volatile items like food and energy. That gauge rose just 0.2% for the month, below the 0.3% that economists had forecast. On an annual basis, core inflation held steady at 3.6%.
For everyday investors, the immediate takeaway is that the RBA's tightening cycle may be closer to its end than many feared. The market's implied probability of a November rate hike tumbled to 20% from 36% after the data, according to interest-rate futures. That shift in expectations is why stocks jumped: lower odds of a hike mean borrowing costs are less likely to stay elevated for an extended period, which tends to support corporate earnings and share valuations.
Why core inflation matters
Central banks, including the RBA, pay close attention to core inflation because it gives a clearer picture of underlying price pressures, filtering out one-off swings in items like petrol or fresh produce. A lower-than-expected core reading suggests that the broader inflation trend is cooling, even if the headline number occasionally spikes.
Australia's inflation story has been a mixed bag recently. While the trimmed-mean measure has been gradually easing, other data points have shown stubborn price pressures. For instance, a separate report earlier in the month showed headline inflation ticking up to 4% as fuel and housing costs bit. That kind of divergence can keep the RBA on edge, as it tries to balance the need to tame prices against the risk of choking off economic growth.
The RBA has held its cash rate steady at 4.35% since late 2023, after a rapid series of hikes that took the rate from near zero to its current level. The central bank has repeatedly said it will not hesitate to raise rates again if inflation proves more persistent than expected. But today's data gives policymakers more room to stay on hold, and markets are now pricing a higher chance that the next move could be a cut, possibly sometime in 2025.
What it means for investors
For Australian investors, the reaction in the stock market is a reminder of how sensitive equities are to interest-rate expectations. When rates are expected to stay higher for longer, borrowing costs for companies rise, consumer spending can slow, and the discount rate applied to future earnings increases—all of which can weigh on share prices. Conversely, when rate-hike odds fall, those pressures ease, and stocks often rally.
The sectors that led Tuesday's gains were the ones most exposed to interest rates: real estate, utilities, and technology. These groups tend to have higher debt loads or longer-duration earnings, making them more responsive to changes in rate expectations. Banks also benefited, as lower odds of a hike reduce the risk of a sharp slowdown in lending activity.
Looking ahead, investors will be watching the RBA's next policy meeting in November, as well as upcoming economic data that could influence the central bank's decision. The market's implied odds are not a guarantee—they can shift quickly with new information. A stronger-than-expected jobs report or a surprise uptick in inflation could easily push the probability of a hike back up.
For those with a diversified portfolio, today's move is a useful illustration of why it's important to stay invested across different asset classes rather than trying to time the market based on a single data point. While a softer inflation print is good news for stocks in the short term, the broader picture remains uncertain, and central banks around the world are still grappling with how to bring inflation down to target without causing a recession.
In the meantime, Australian investors can take some comfort in the fact that the RBA appears less likely to tighten further, at least for now. But as always, the path of interest rates—and the stock market's reaction to it—will depend on the data that comes in over the coming weeks.
