Outlook Q4 2025 & Quarterly review

Monetary Policy and Key Economic Data: The Reserve Bank of Australia (RBA) continued its gentle easing cycle. After cutting the cash rate by 25 basis points to 3.85% in May, the RBA held steady in July, then delivered another 0.25% cut in August to 3.60%. These moves were supported by increasing confidence that inflation was tracking back into the 2–3% target range balanced with concerns about softer economic growth.

Indeed, core trimmed-mean inflation eased further to 2.7% in Q2, after Q1 saw trimmed mean back in the target range for the first time since December 2021¹. By August, headline CPI was around 3.0% (top of the band) and core inflation ~2.6% in the monthly print. Despite this temporary pick up in August (boosted by the expiry of electricity rebates) the underlying trend is one of moderation. The RBA remains data dependent, monitoring closely the return to the mid point of the target band which they expect by December 2025 and will likely look through short term impacts such as state electricity subsidies rolling off.

Australia’s economy showed resilience into mid-2025. GDP growth picked up with real GDP expanding +0.6% QoQ in Q2 2025 (vs +0.3% in Q1), and ~1.8% YoY. Stronger household spending underpinned the rebound. The labour market remained tight with unemployment hovering just above 4% (4.2% seasonally adjusted in August). Wage growth has been solid, ~3.4% YoY to June 25, aligning with RBA expectations. Overall, by late September domestic data was “broadly in line” with the RBA’s outlook, or slightly stronger. The economy had momentum, and inflation was at the upper end of target but contained.

Official surveys indicate that sentiment improved markedly in August to a 3.5 year high (buoyed by interest rate cuts and easing inflation) before paring back a little in September. Pessimists still outnumber optimists, but the reading is getting closer to 100 where these views intersect and are “cautiously pessimistic”. Australia’s housing market also rebounded in 2025 likely lifting sentiment (national prices rose ~5% YTD), though balances a little with those with mortgages still feeling the relative effects of rising rates since COVID levels and affordability remaining an issue. Overall, a less negative household and consumer stance will likely support a shallower cash rate cycle from here.

Policy Implications: With its dual mandate achieved (stable prices and full employment), the RBA will likely adopt a patient stance. The cash rate ended Q3 at 3.60%, and consensus expects no further cuts until November. Looking ahead, markets and analysts anticipate perhaps one more 0.25% cut in late 2025, then a gradual easing path into 2026. The central bank is balancing support for growth against the risk that inflation’s “higher than pre-pandemic” price level proves persistent in some areas (e.g. services, housing).

Bond Yields: Australian 30-year rates ended the quarter near multi-year highs (just below 5%) – a reflection of continued global risk aversion and term-premium demands, as investors worldwide remained cautious about long-term inflation and debt dynamics. Front end Australian bond yields also sold off over the quarter as a less aggressive easing path for the RBA was factored in, with the 3-year yield increasing by ~30 basis points to ~3.6%. The Australian 10-year yield increased by ~16 basis points to be ~4.3% at the end of quarter as global factors kept long-term rates elevated². 

Credit Markets: Credit spreads have rallied strongly post COVID-era widening, however Australian credit spreads remain wider than other major markets. Encouragingly for both issuers and investors, supply dynamics are healthy with issuers now able to reliably access funding in longer dated tenors (7-10 years) and larger volumes (~$500mn), compared to previously (3-5 years and ~$250mn respectively). Coupled with negative USD swap spreads, Australian issuers have tended to issue domestically rather than via other markets in recent times (USPP for example). Asset quality and capital metrics have remained strong. Financial sector bonds (major bank senior and Tier 2) are reasonably valued. Banks are well-capitalized and benefitting from improving net interest margins, and supply has been robust but digestible. In the corporate sector, fundamentals have remained sound, supported by consumer spending, cost management measures, and a focus on maintaining leverage and coverage levels above required thresholds.

Currency: The AUD traded within a range of 64 – 67², notably. Early in the period, the AUD recovered from a sharp sell-off in April (“Liberation Day” trade tariff turmoil), as global sentiment briefly improved on hopes of geopolitical de-escalation and speculation about U.S. Federal Reserve leadership changes. However, those tailwinds faded by Q3. During August, risk aversion around global growth fears and geopolitical headlines saw the AUD fade and the USD strengthen due to safe haven status. By quarter-end, AUD/USD hovered in the mid-0.65s, roughly flat to slightly weaker over Q3.

Outlook and Fixed Income Portfolio Implications

Monetary Policy & Macro: Looking ahead, Australia’s macro backdrop appears relatively stable, but with growth likely below trend and inflation moderating into the target range. The RBA is expected to continue a cautious easing into 2026. Following the recent monthly higher than expected headline inflation print the market has pared back the magnitude of easing expectations, to be more in line with our base case. We expect a shallower cash rate path, potentially just one more 25bp cut by year-end, taking the cash rate to 3.35%, followed by a pause to assess conditions.

Currency: The anticipated Fed easing cycle (more pronounced if U.S. growth falters sharply) would push AUD a little higher, partly offset in a global risk-off scenario. The AUD is also supported by possible RBA rate cuts being less than market pricing, improved industrial metals prices, and increased FX hedging flows from superannuation funds as the Fed and RBA cash rates converge (thus reducing hedging costs).

Credit Positioning: Rate cut expectations in Australia and globally support asset valuations. We continue to favour higher-quality, defensive sectors such as Utilities and Infrastructure which offer reliable cash flows and often benefit from long-term investments in decarbonization and capacity. These sectors, typically rated in the A/BBB range, have seen consistent demand and should remain resilient even if growth slows. Carry remains attractive on corporate bonds – all in yields on high-grade AUD senior credit are in the 4-5% range, the highest in about a decade, noting the expectation that significant further tightening is limited. Add to credit selectively.

Overall – we are cautiously positive on the fixed income outlook in Australia. We anticipate total returns to be driven mainly by interest income and potentially some capital gains if yields drift lower. While risks (global shocks, inflation surprises) persist, current valuations provide a reasonable buffer. As of Q3 2025, Australian fixed income offers an appealing mix of income, quality, and defensive characteristics, making it a valuable component of a diversified portfolio.

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