Australian Services Activity Contracts to 48.5 in October Despite Beating Forecasts
Key Facts
Australian services activity contracted in October, with the Purchasing Managers’ Index falling to 48.5 points from 51.9 points in September, according to the economic calendar reading published on November 3. The index came in below the 50-point level that separates contraction from expansion, but exceeded market expectations of 47.8 points. The reading put the sector in contraction territory after the index was above the expansion threshold the previous month. This comes as the Reserve Bank of Australia faces elevated inflation, and it raised interest rates one day before the reading was released. The picture combines weakness in services activity with continued price pressures, both of which are present in monetary policy discussions.
On prices, the Consumer Price Index rose 4.3% in the 12 months through September, compared with an annual increase of 4.0% through August, according to the Australian Bureau of Statistics. On a monthly basis, the index rose 0.6% in September after seasonal adjustment. Core inflation, measured by the trimmed mean, also reached 3.6% year over year. The figures confirm that price pressures were reflected not only in a higher annual reading but also in a monthly increase in September. These are official data separate from the Purchasing Managers’ Index survey, but they provide the price backdrop policymakers faced when making their decision.
The Monetary Policy Board raised the cash rate target by 25 basis points to 4.85% on November 3. Six members voted for the increase, while three supported keeping the rate at 4.60%, in a split that reflects differences within the board over the next move. The Reserve Bank of Australia said that “inflation remains elevated, and recent data indicate that it is broad-based.” The board said it considered further tightening in financial conditions warranted to support the return of inflation to target. The rate increase therefore came as the services index showed contraction, with signs of slowing activity coinciding with tighter policy to combat inflation.
In its forecasts published in November, the bank raised its estimate for headline inflation in December 2026 to 4.5% from 3.6% in its previous forecast. It also said inflation was not expected to return to the midpoint of the 2–3% target range before mid-2028. This timeline places inflation’s return to target further out than the coming months. It coincides with September data showing annual inflation at 4.3% and core inflation at 3.6%. These estimates remain part of the backdrop to the rate decision, rather than an actual inflation reading for December.
September labor market data point to another aspect of the economic picture: the seasonally adjusted unemployment rate rose 0.1 percentage point to 4.7%. Employment fell by 39,300 people to 14,782,700 people, according to the Australian Bureau of Statistics. The decline in employment coincided with the contraction in the services index in October, although the two readings cover different periods and measures. This means activity and employment data showed signs of weakness, while price readings and official forecasts remained above the path for inflation’s return to target. These indicators alone do not determine the direction of the economy in the coming months.
After the rate decision on November 3, the Australian dollar fell 0.3% to US$0.6977, according to Reuters, while market bets on the bank keeping rates unchanged at its next meeting strengthened. The reaction shows that the rate increase did not dispel expectations of a pause in tightening at the next meeting. The Australian Bureau of Statistics is scheduled to publish September international merchandise trade data on November 5. The Monetary Policy Board’s next meeting is scheduled for December 7 and 8, 2026. The trade data will come first, about a month before the next monetary policy meeting.