Large cap investing through a rate hiking cycle is rarely about the decision itself. By the time a central bank moves, the market has usually priced most of it. The harder and more useful work is reading what comes next, and understanding which parts of a portfolio are genuinely exposed and which are simply caught in the noise.
This week delivered both halves of that puzzle within 24 hours. On Tuesday, the RBA rate hike everyone expected arrived, taking the cash rate to its highest level in 15 years. On Wednesday, the inflation numbers landed, and the headline figure jumped to 4.0%.
On the surface, that looks like a central bank chasing an inflation problem that is getting worse. Look one layer down and the picture is more balanced. Underlying inflation has not moved for three months, and the jump in the headline rate was driven largely by fuel.
For ASX investors, the distinction matters. It shapes whether the Reserve Bank is close to the end of this cycle, and which large cap sectors are most exposed if it is not.
The RBA rate hike: four hikes, one message
On 29 September the Reserve Bank’s Monetary Policy Board lifted the cash rate by 25 basis points to 4.60%. It was the fourth increase of 2026, following moves in February, March and May, and it takes rates to their highest level since late 2011. The decision was unanimous.
The move was well flagged. Markets were pricing roughly a 92% chance of a hike in the lead up, up from around 44% a month earlier, after a run of hawkish commentary from Governor Michele Bullock and senior RBA officials. The Governor’s remark that higher unemployment would be needed to bring inflation under control did a lot of the work.
The Board’s statement was firm. It said inflation is still too high, that a further tightening in financial conditions is warranted, and that it will raise the cash rate again if needed. It also acknowledged that the earlier hikes had tightened financial conditions and that the economy appeared to be slowing.
That last point is easy to skim past. It is a central bank telling you its medicine is working, while reserving the right to administer another dose.
For households, the effect is concrete. On an average mortgage of around A$731,000, this hike alone adds roughly A$110 a month in repayments, on top of three earlier increases this year.
What the inflation numbers actually said
The Australian Bureau of Statistics released the August CPI on 30 September. The key figures were these.
Headline CPI rose 4.0% in the 12 months to August, up from 3.5% in July. That was slightly below the 4.1% economists had expected. In the month itself, prices rose 0.4%, again a little under forecast.
Trimmed mean inflation, the RBA’s preferred measure of underlying price pressure, was 3.6%. That is unchanged from July, and it has held at that level for three consecutive months.
The headline jump had clear causes. Automotive fuel prices rose 14.8% in August alone, reflecting higher global oil prices and the expiry of the federal fuel excise relief that ran from April through August. New dwelling prices rose 5.4% over the year as builders passed on higher materials and labour costs.
Why the core matters more than the headline
The expiry of a temporary excise cut is a one off step in prices. It lifts the annual rate for 12 months and then drops out of the calculation. Central banks generally look through effects like this, provided they do not feed into wages and broader price setting.
The trimmed mean is designed to strip out exactly these kinds of large, idiosyncratic moves. A reading that has sat at 3.6% for three months suggests underlying inflation is sticky, but not accelerating on a 12 month view.
Markets took that message. Expectations of a further hike in November eased, and the Australian dollar fell after the release. That reaction makes sense. A central bank that has just raised rates, sees the economy slowing and watches core inflation stall has a reasonable case to pause and assess.
But the core number deserves a caveat, and investors should not skip it.
The uncomfortable number
EY senior economist Paula Gadsby pointed out that, on a six month annualised basis, trimmed mean inflation was running at 3.9% in August. That is above the 12 month figure of 3.6%.
In plain terms, the most recent six months have been hotter than the six months before them. The 12 month average is flattering the trend. If that momentum continues, the RBA’s patience may be shorter than the market now assumes.
The calendar adds to the tension. The September CPI is due on 28 October, and the next RBA decision is on 3 November. One more firm monthly print could put a November hike straight back on the table.
This is why it pays to be measured about calling the peak. The data says “possibly close”. It does not yet say “done”.
Not every large cap feels rates the same way
The ASX 200 reached a record of 9,296 points on 6 August and has spent much of September lower, falling to its weakest level since early July in mid September as rate expectations firmed. But the broad index hides very different sensitivities.
Banks are the most debated group. Higher rates can support net interest margins, particularly through returns on deposits and capital. But they also slow credit growth and, with a lag, lift arrears and bad debts. The RBA is openly seeking a softer labour market, and rising unemployment is the main driver of bank credit losses. Valuation sharpens the issue. Commonwealth Bank of Australia (CBA) has traded on a premium multiple for some time. A hike will not break a well capitalised bank, but it does test a share price that already assumes a great deal is going right.
Real estate investment trusts and long duration assets feel rates through two channels: higher funding costs and a higher discount rate applied to cash flows that arrive many years from now. Goodman Group (GMG), an industrial property and data centre developer, has been a visible example, with its shares falling roughly 10% over the calendar year to the end of August. Long term structural demand does not protect a valuation from a rising discount rate.
Consumer discretionary companies sit downstream of the mortgage belt. Four hikes in a year meaningfully reduce disposable income for indebted households, and small businesses are reporting softer sales.
Resources and healthcare are less directly exposed to domestic rates. Their earnings are driven far more by global commodity prices, currency and product cycles. They are not immune to a global slowdown, but they are not where the local rate risk is concentrated.
The practical point is that “the market” does not have a single interest rate exposure. Portfolios do, and they can differ a great deal depending on sector weights.
Peak cash rate is not the same as peak bond yields
There is a common playbook for the end of a hiking cycle. Investors wait for the central bank to signal a peak, then buy rate sensitive sectors such as property trusts, infrastructure and long duration growth names in anticipation of falling yields.
That playbook has worked in past cycles. The risk this time is that it assumes long term bond yields will follow the cash rate down.
The RBA controls the overnight rate. It does not control the global price of long term money, which is being pushed higher by large government deficits, the capital demands of the AI build out and the cost of energy security. As Darren Katz explores in this week’s companion piece, US 10 year Treasury yields reached around 5% in September, their highest since 2007. Australian two year government bond yields were already sitting at around 5.06% after the decision, above the cash rate.
If the RBA pauses but global long rates stay elevated, the valuation relief that rate sensitive sectors usually enjoy at the peak may be more muted than history suggests. Pausing is not the same as cutting, and cutting is not the same as cheap money.
Risks to this view
Several outcomes would change the analysis.
Inflation could prove stickier than the 12 month trimmed mean implies, as the six month annualised figure warns. A hike in November or beyond would weigh again on banks, property and consumer names.
Oil remains a wildcard. The conflict in the Middle East has already lifted fuel prices sharply, and a further escalation would feed back into headline inflation and expectations.
Conversely, the economy could slow faster than expected. A sharper rise in unemployment would bring rate cuts forward, which would help rate sensitive sectors but hurt bank earnings through higher credit losses.
Finally, sector rotations around policy turning points are notoriously hard to time. Investors who reposition aggressively ahead of a peak that does not arrive can pay for it.
What long term investors should consider
For long term investors, the practical question is not whether the RBA moves in November. It is whether the portfolio is built for a period in which rates stay high for longer than is comfortable.
That points to a few sensible disciplines. Understand where interest rate sensitivity actually sits across holdings, rather than treating the market as one block. Favour companies with conservative balance sheets and long dated debt maturities. Be cautious about paying premium multiples for businesses whose earnings are vulnerable to a softer labour market. And treat a central bank pause as information, not as a signal to rush back into everything rate sensitive.
Large cap investing in this environment is less about predicting the next decision and more about owning businesses that can keep compounding whatever the next decision turns out to be.
TAMIM Takeaway
The RBA lifted the cash rate to 4.60% this week, its fourth hike of 2026, and headline inflation jumped to 4.0% on the back of fuel prices. Underlying inflation, however, has held at 3.6% for three months, and markets have moved to price a pause.
What the market may be missing is the gap between a pause in the cash rate and a fall in long term borrowing costs. Global bond yields are being driven by forces the RBA cannot control, so the usual end of cycle rally in rate sensitive sectors may be less generous this time. The six month trend in core inflation is also hotter than the headline suggests.
For long term investors, the right mindset is patient and selective. Focus on balance sheet strength, be honest about valuation, and know where rate risk sits in the portfolio. The cycle may be close to its peak, but the cost of capital may stay higher for longer than many expect.
There is a habit investors pick up after a long run of easy money, and it makes rising interest rates far more unsettling than they need to be. They start to think of interest rates as a setting rather than a price. Something a central bank chooses, the way you might nudge the thermostat in the office when the room gets a little warm.
For the better part of 13 years after the global financial crisis, that habit was rewarded. Rates were low, then lower, then effectively zero. Every wobble in markets was met with a cut, a bond buying programme or a reassuring speech. It became natural to assume that if borrowing costs ever climbed too far, someone in authority would simply turn the dial back down.
September 2026 has been an uncomfortable lesson in why that assumption deserves a second look.
The Federal Reserve has delivered its first rate hike in three years. The Reserve Bank of Australia has lifted the cash rate to 4.60%, its fourth increase this year. The European Central Bank and the Reserve Bank of New Zealand have both tightened this month. And at the long end of the curve, where central banks have far less direct control, US government borrowing costs have pushed to levels not seen since before the global financial crisis.
The interesting question is not whether rising interest rates hurt investors in the short term. Of course they do. The more useful question is why they are rising, and whether anyone can genuinely make them stop.
The thermostat illusion
Central banks set short term rates. They do not set the price of 10 or 30 year money. That is determined in the market, by the willingness of investors to lend to governments and companies for long periods, and by the return they demand for doing so.
In mid August, the yield on the 30 year US Treasury bond closed above 5.3%, a 19 year high. By mid September, the 10 year yield had pushed to around 5%, its highest level since 2007.
Washington’s response is instructive. On 19 August the US Treasury announced it would at least double the maximum size of its long dated bond buybacks, from US$2 billion per operation to US$4 billion. The idea is simple enough: buy more long bonds, push their prices up, push their yields down. Long rates fell on the announcement and bounced back the following day. When the first enlarged operation was revealed in September, the maximum had been tripled to US$6 billion, and yields still moved higher.
The market, in other words, was not persuaded.
That is worth sitting with. When a government with the deepest bond market in the world steps in to lean on long term rates, and the market shrugs, it tells you something about the forces on the other side of the trade.
Rates are a price, and prices have a job to do
Strip away the jargon and an interest rate is simply the price of money. Like any price, it reflects supply and demand. When more people want to borrow and the pool of willing savers does not grow as quickly, the price goes up.
For most of the past two decades, the supply of capital looked almost unlimited. Global savings were abundant, inflation was low, and central banks were active buyers of government debt. The demand side was comparatively tame.
That balance has shifted. There are now three very large customers queueing at the same counter, and none of them looks likely to leave soon.
Three big borrowers at the same counter
The first is government. The United States is running a budget deficit of roughly 6% of GDP at a time when unemployment sits around 4%. Historically, deficits of that size have been a feature of recessions, not of reasonably healthy economies. US federal debt has now reached around US$40 trillion, and net interest costs are projected to exceed US$1 trillion this year, more than the country spends on defence. On top of rolling over its maturing debt, the Treasury needs to find buyers for roughly US$2 trillion of new net issuance.
Australia is far from that position, but it is worth remembering that very few developed governments are running surpluses. The queue of sovereign borrowers is long and international.
The second is artificial intelligence. McKinsey estimates that more than US$5 trillion will be spent worldwide on AI related data centres through 2030. Some of that will be funded with debt and some with equity, but every dollar draws on the same global pool of savings. Data centres, power stations, transmission lines and chip fabrication plants are capital hungry in a way that software never was. The digital revolution, it turns out, eventually needs concrete, copper and a very large cheque.
The third is energy and security. The conflict in the Middle East has pushed oil sharply higher, with Brent trading above US$107 a barrel in early September. Governments are rebuilding energy security, supply chains and defence capability at the same time. All of it requires capital, and much of it is inflationary in the short run.
Put those three together and you have a lot of demand for money chasing a supply that is not growing as fast. In that light, higher long term rates are not a malfunction. They are the price mechanism doing exactly what it is supposed to do.
Why the last era flattered almost everyone
It is worth being honest about what the period from 2009 to 2021 did for investment returns.
When the price of money falls for a decade, two things happen at once. Assets become more valuable, because future cash flows are discounted at a lower rate. And borrowing becomes cheaper, so anyone using leverage gets a second boost. Property, private equity, infrastructure, long duration growth stocks and highly geared business models all enjoyed this double tailwind.
Many of those returns were genuinely earned through skill. But some were simply the reward for owning long duration assets during a once in a generation fall in interest rates. When the tide of falling rates lifts every boat, it is very hard to tell good sailing from good weather.
The risk today is that investors are still navigating with charts drawn in that period. Valuation models, return targets and capital structures built for a world of 1% money do not automatically work in a world of 5% money.
Talking the price down rarely works for long
Markets have a long memory for governments that try to defend prices against fundamentals. Sometimes it works briefly. Rarely does it work durably.
Buying back long bonds may smooth market functioning and calm nerves for a day or two. But it does not reduce the deficit, it does not lower inflation, and it does not reduce the capital demands of the AI build out. Funding buybacks with more short term borrowing also shortens the maturity profile of the debt, which means refinancing more often at whatever rates prevail.
There is a broader lesson here for investors. When a policymaker treats the symptom rather than the cause, the symptom tends to return. The question to ask is not “will authorities step in?” but “does the step they are taking change the underlying supply and demand?”
That may prove an uncomfortable question for anyone counting on rescue.
What rising interest rates mean for portfolios
None of this is a call to panic. It is a call to recalibrate.
The hurdle rate has gone up. When a government bond offers around 5%, every other investment has to clear a higher bar. Shares, property and private assets need to justify their valuations against a risk free alternative that actually pays something. That favours businesses with real earnings today over those promising earnings a long way into the future.
Balance sheets matter again. Companies that borrowed cheaply on short tenors will have to refinance at higher rates. Those with modest debt, long maturities or net cash have a quiet advantage that does not show up in a single profit result but compounds over time.
Duration risk is everywhere, not just in bonds. Long dated growth stocks, highly geared property and infrastructure assets with floating rate debt all carry interest rate sensitivity. Investors who own a lot of these may be making a bigger interest rate bet than they realise.
Private market valuations deserve scrutiny. Assets that are valued periodically rather than priced daily can look stable while the discount rate underneath them is moving. Stability on a statement is not the same as stability in value.
Cash and fixed income are useful again. For the first time in a long time, defensive assets can do more than sit there. That gives investors patience, optionality and the ability to wait for better prices.
What it does not mean
It would be easy to take this analysis to a dramatic conclusion: sell everything American, buy gold, retreat to cash. That would almost certainly be the wrong lesson.
The problem described here is primarily a fiscal problem, not a corporate one. Many of the world’s best businesses are still listed in the United States, and the ingredients behind that, including deep capital markets, rule of law, innovation and a culture of reinvention, remain largely intact. The US dollar still accounted for around 57% of allocated official reserves in the first quarter of 2026. There is no obvious successor waiting in the wings.
Moving money elsewhere does not remove risk, it changes the type of risk. Other developed economies are running deficits too, many have weaker growth, and some carry more regulation and less scale. Selling quality assets to avoid a problem whose timing nobody knows can look like a mistake for a very long time.
Sensible global diversification is a good idea in any environment. Diversification as an act of fear rarely is.
The risks to this view
Forecasting interest rates is a humbling exercise, and there are several ways this thesis could prove wrong.
AI may turn out to be strongly disinflationary. If it lifts productivity materially, economies could grow faster with less inflation, which would ease pressure on both deficits and rates.
A recession would change the picture quickly. Weaker growth would reduce private demand for capital, central banks would cut, and long term yields could fall sharply, at least for a time.
Policymakers could return to large scale bond buying. Quantitative easing suppressed long term rates for years after 2008, and while today’s inflation backdrop makes that harder to justify, it is not impossible.
And it is worth remembering that confident calls for structurally higher rates were made repeatedly through the 2010s, and they were wrong for a decade. Humility is warranted.
The point is not that rates must keep rising. It is that investors should not build portfolios that only work if they fall.
What should long term investors actually do?
For long term investors, the practical question is not “where will the 10 year yield be at Christmas?” Nobody knows. The better question is “would my portfolio still make sense if money stayed expensive for several years?”
That means looking hard at valuation, preferring businesses that fund themselves, being honest about how much interest rate sensitivity sits across a portfolio, and treating defensive assets as a source of opportunity rather than dead weight.
It also means resisting two opposite temptations. The first is assuming that someone will always step in to make borrowing cheap again. The second is assuming that because the fiscal picture is worrying, disaster is imminent. Problems that are slow to build are usually slow to resolve.
Markets move in hours. Fiscal arithmetic moves in years.
TAMIM Takeaway
Interest rates are rising around the world, and attempts to lean against long term bond yields have so far failed to impress the market. That is because rates are a price, and the demand for capital from government deficits, the AI build out and energy security is enormous.
The market may be underestimating how long this can last, because a generation of investors learned to treat cheap money as the natural state of things. It was not. It was the exception.
For long term investors, the right response is neither panic nor denial. It is discipline: pay sensible prices, favour strong balance sheets, understand where interest rate risk is hiding, and stay globally diversified for the right reasons. Cheap money is unlikely to come back by decree. Portfolios should be built to cope if it does not come back at all.
This week’s reading list is about the gap between a shock and its consequence. Long bond yields are up sharply across six major markets, but the most careful reading available says this is less a verdict on American institutions than the price of clearing a global market in which more people want capital and fewer are willing to hold duration at any price. A war that should have been a windfall for oil producers appears instead to be dragging peak consumption forward, because demand turned out to be more elastic than the textbooks allow. A US$2 trillion repricing of enterprise software happened over a stretch in which enterprise software revenue growth actually accelerated. The most durable source of excess returns turns out to be not the moat everyone is trained to look for, but the absence of anyone looking at all. Humanoid robots are among the most watched technologies in the world, and the watching tells you very little, because the demo video is the least informative artefact the industry produces. Twenty five years on, the direct damage of the 11 September attacks is dwarfed, by more than twenty to one on a conservative accounting, by what the response to them cost. And a coffee shortage in East Germany in 1977 is a large part of why Vietnam is the world’s second largest coffee producer today. The useful lesson for investors is that first order reasoning gets the direction right about as often as a coin does. The best investors are not trying to predict the shock. They are trying to work out what it will actually set in motion, which is usually something other than the obvious thing.
📚 What is driving the global rise in long-term interest rates? Gene Frieda at Bruegel on the question sitting underneath every valuation model right now. Two loud explanations are on offer: that investors are losing faith in US fiscal policy and Federal Reserve independence, or that higher real rates simply signal stronger growth. Frieda finds neither convincing, partly because the move is not uniquely American, with US, German, French, Italian, UK and Japanese 30 year yields all up between 45 and 79 basis points in the six months to late August. His conclusion is less dramatic but more useful: long term capital has become more expensive because investment demand and the supply of long dated debt have both risen while the buyers who used to absorb duration regardless of price, central banks, reserve managers and Dutch pension funds among them, have stepped back. There is Australian data in here too, and it is striking. Real yields accounted for about 97 per cent of the rise in Australian long rates since September 2024, with almost none of it coming from inflation expectations. (Bruegel)
📚 Something is shifting in the inflation picture: Claudia Sahm explaining why she has moved from hold to hike ahead of the September Fed meeting, having moved from cut to hold only in June. Her framework is the genuinely useful part. A central bank should look through shocks that raise the price level temporarily, which is why tariffs and an energy spike were reasonable to ignore. Her argument is that three things have changed: a Middle East conflict now long enough that energy is bleeding into core prices, a Canadian trade war implying tariffs are not finished, and memory chip shortages from the AI buildout. The last is the sharp distinction. Chip scarcity is demand driven, not supply driven, so the logic for looking through it does not apply. Note she is explicit that better data could move her back to hold, which is a more honest way to hold a macro view than most people manage. (Stay-At-Home Macro)
📚 A long war will permanently damage oil demand: Tim McDonnell on the counterintuitive consequence of crude moving back above US$100. Supply really is constrained, and S&P Global has now concluded for the first time that Middle Eastern production will not return to prewar levels by the end of 2027. But the demand side is doing something the standard model does not expect. Oil demand is assumed to be highly inelastic, which is why prices swing so violently. JP Morgan’s Natasha Kaneva notes that demand has been running around five million barrels a day below last year and has absorbed the largest share of the price shock, with next year potentially the weakest since 2019. The implication for anyone holding energy exposure is uncomfortable: the price of alternatives has fallen far enough that the level required to destroy demand is lower than it used to be. (Semafor)
📚 The SaaSpocalypse was more like a RenaiSaaS: Ernie Tedeschi introduces a weekly index built from Stripe payment volumes across roughly 72,000 businesses, and uses it to ask what actually happened to software revenues during the early 2026 sell-off that erased somewhere between US$1 trillion and US$2 trillion of enterprise software value. The answer is that revenue growth accelerated straight through it, with the index now running above 30 per cent year on year and sitting 4 per cent above its pre-sell-off trend. Younger SaaS businesses grew fastest of all. Tedeschi is careful to say this does not make the market wrong, since valuations are prospective and the concern was about AI encroachment over years rather than quarters. Worth reading with the obvious caveat in mind, which is that Stripe has an interest in the health of the businesses it processes payments for, and that pay-in volume is not an income statement. (Stripe Economics)
📚 Invisible Companies: Jay Barney, Haiyang Zhang and Jerry Neumann on a source of durable excess returns that sits outside both of the standard explanations. Not barriers to entry, not hard to copy resources, but competitive neglect: profits persist because nobody thinks to look, and would-be competitors do not know that they do not know. The evidence is hard to argue with. Constellation Software has compounded at roughly 34 per cent a year since its 2006 listing, against about 11 per cent for Berkshire Hathaway over the same period, buying ski lift ticketing and funeral home record keeping software in deals often under US$5 million, and reckons there are still more than 38,000 such businesses available. Waste Management rolled up 133 haulers in two years because nobody else wanted to be in rubbish. This is the most directly useful piece on the list for anyone who fishes in Australian small and mid caps, and the closing question is a good one: if every screening tool is trained on the same data, does invisibility become harder to maintain, or quietly hardcoded? (Colossus)
📚 14 Reasons Robotics is Hard: Steve Newman with a careful catalogue of what stands between the current humanoid robot demos and an actual artificial worker, and a strong argument for discounting the demos entirely. You may be watching the one success in a hundred attempts, filmed in a scenario arranged to avoid everything the machine cannot do. The specifics are what make it: the human hand has around two dozen degrees of freedom and roughly 17,000 tactile sensors, and no robot hand matches the combination of dexterity, sensitivity, strength and durability. A human sized robot generates about twice the heat of a person with none of the cooling, so some models run fifteen minutes and then need ten to cool down. Waymo has driven over 220 million miles and still occasionally drives into floodwater. And scaling matters: Tesla took fourteen years to reach its first million car year, while ChatGPT reached 100 million users in two months. (Second Thoughts)
📚 The Staggering Financial Cost of 9/11: Robert VerBruggen, for the 25th anniversary, attempting to total the dollar cost of the attacks and everything that followed, in 2025 dollars, with each component estimated separately so readers can adjust or discard any part of it. The direct toll, lives, health, property and the short term economic hit, comes to somewhat over US$100 billion. The response comes to roughly US$1.4 trillion of additional homeland security spending, US$1.2 trillion for Afghanistan and another US$1.2 trillion for Iraq and Syria, with Brown University’s broader accounting reaching US$8 trillion. Against a US economy of about US$30 trillion, that is a very large multiple of the original damage. The piece is published by the Manhattan Institute and its closing paragraphs argue that the scale of the response was nonetheless justified, which readers can take or leave. The accounting itself is transparent and the sources are all linked. (City Journal)
For most Australian investors, owning the big four banks has barely felt like a decision. Australian bank shares sit in almost every super fund, every income portfolio and every index product, and for good reason. For the best part of two decades, rising house prices meant growing mortgage books, growing mortgage books meant rising profits, and rising profits funded some of the most generous fully franked dividends in the developed world.
That arrangement is now being tested more seriously than at any point since the 2022 and 2023 rate cycle.
House prices are falling across almost every capital city. Mortgage applications have slumped. The Reserve Bank of Australia has already lifted rates three times this year and meets again on 29 September, with markets leaning towards a fourth increase. And the S&P/ASX 200 Financials index has fallen more than 10% from its August peak.
The question for long term investors is not whether the backdrop has become harder. It clearly has. The more useful question is how much of that is already reflected in bank share prices, and how much may not be.
The setting for 29 September
The RBA held the cash rate at 4.35% in August. Since then, the data has pushed in one direction. Headline inflation eased to 3.5% in the year to July, but trimmed mean inflation, the measure the RBA watches most closely, stayed at 3.6%. The economy also grew faster than expected, expanding 0.4% in the June quarter and 2.1% over the year.
Market pricing for a September hike has been volatile, swinging between roughly 55% and 80% over the past fortnight. Economists are more divided. Among the major banks, NAB is forecasting a September move to 4.60%, while ANZ, CBA and Westpac expect the increase to come in November.
Two timing details matter. The next monthly inflation figures are released on 30 September, the day after the meeting, which gives the Board a reasonable argument for waiting. And the global backdrop has shifted. The US Federal Reserve raised rates on 16 September for the first time since 2023 and signalled more to come.
For the banks, though, the exact date is less important than the direction. A November hike appears to be broadly priced in either way. The real issue is what a higher cash rate does to a housing market that is already turning down.
The Australian bank shares story now runs through housing
The housing numbers have deteriorated quickly.
Cotality’s national home value index fell 0.9% in August, the fifth consecutive monthly decline, leaving values 3.6% below their March peak. July’s decline was revised to 1.2%, the largest monthly fall of this cycle. Through winter, 93% of capital city suburbs recorded a fall in values, and every capital except Darwin fell over the three months to August.
Activity has slowed too. Sales volumes are running around 15.5% below a year ago, and advertised listings in the capitals are 24% higher, not because more homes are being listed but because they are taking longer to sell. The ABS has since confirmed that the total value of Australia’s housing stock fell by A$34.1 billion in the June quarter to A$12.7 trillion, the first decline since September 2022.
Forecasts are now being revised lower. Macquarie recently doubled its expected peak to trough fall in national home prices, from around 5% to around 10%.
For the banks, the more immediate issue is volume. Every major bank reported a sharp drop in mortgage applications after the May Budget changed the tax treatment of investment property. Westpac’s post Budget run rate was down around 20% on the prior quarter, with investor applications down 26%. CBA and NAB both reported falls of around 15%.
Why higher rates do not simply mean higher bank profits
A common assumption is that rising interest rates are good for banks. There is some truth in that. Banks earn more on the deposits and capital that sit on their balance sheets when rates rise, and the early stages of a tightening cycle often help margins.
But that is only one part of the equation. The other parts are volume, competition and credit quality, and at present all three are moving the wrong way.
Start with volume. The banks’ own economists expect housing credit growth to slow materially. Westpac sees it easing from 6.8% this financial year to 4.7% in FY27. CBA is guiding to between 5% and 7%. NAB is the most cautious of the majors at just 2.5%. Macquarie and Morgan Stanley sit near the bottom of that range, at around 3.5% and 3% respectively.
Then consider competition. When fewer new loans are being written, banks compete harder for existing borrowers who are refinancing. That usually means sharper pricing and thinner margins. Deposit competition is intensifying as well, with CBA advertising a 12 month term deposit special of 5.15%.
This is where the brokers’ concerns are concentrated. Macquarie has FY27 net interest margins for the majors one to four basis points below consensus, with earnings one to four per cent lower. Morgan Stanley expects margins to fall by around six basis points between the second half of FY26 and the second half of FY27, and has cut its FY27 earnings forecasts for the majors by roughly 7% since May.
Finally, there is credit quality. Both brokers expect bad debts to rise from here. That is not a prediction of crisis, but it is a reminder that loan losses are currently running from very low levels and have more room to rise than to fall.
What the latest results tell us
CBA’s FY26 result, released on 12 August, is a useful reference point because it shows both the strength and the strain.
The headline numbers were solid. Cash net profit rose 7% to A$11.0 billion, pre provision profit rose 6% to A$16.5 billion, and return on equity improved to 14.0%. The bank grew at or above system across all five of its core domestic product categories, which it described as a first for any major Australian bank in 15 years. The full year dividend was A$5.05 per share, fully franked.
But the tone was more cautious beneath the surface. Management noted that growth is slowing and that higher rates and inflation are putting pressure on households. Loan impairment expense rose from low levels, arrears increased in some consumer portfolios, and the bank chose not to extend its on market buy back, which expired with only A$300 million of the A$1 billion program completed.
None of that suggests a bank in difficulty. It suggests a well run institution preparing for a tougher period.
Balance sheets are stronger than in past downturns
It is important to keep perspective. Australian banks enter this period with considerably more capital, tighter lending standards and larger borrower buffers than in previous cycles. CBA alone reported nearly A$95 billion in average mortgage offset balances during FY26, a sign that many households still have savings to draw on.
The key variable for bank losses is not house prices in isolation. It is unemployment. Falling prices become a genuine credit problem mainly when borrowers also lose income. The unemployment rate rose to 4.5% in July, which is higher than a year ago but still low by historical standards. That is the number to watch most closely over the coming months.
The more immediate risks may sit outside the major banks. Developer Bathla Group entered voluntary administration in late August with around A$3.2 billion of liabilities, largely funded by private credit. The majors have no direct exposure, and UBS has characterised it as a private credit event rather than a banking one. But the second order effects, including tighter non bank lending, weaker developer confidence and pressure on construction collateral, are worth monitoring.
Valuation: what is already priced in?
This is where the picture becomes more nuanced.
Based on CommSec forecasts, CBA trades on around 24 times FY27 earnings, while Westpac trades on around 16 times and NAB and ANZ on around 15 times. CBA’s premium reflects genuine quality, but it also leaves very little room for disappointment if margins or credit costs move against it.
Over the past 12 months, the banks have fallen around 4% while the materials sector rose more than 50%. The recent sell off has taken some of the heat out of valuations, but it is not yet clear that earnings expectations have fully adjusted to slower credit growth and thinner margins. That gap between what the brokers are forecasting and what consensus still assumes is the heart of the debate.
The income argument has also changed. For much of the past decade, bank dividends looked compelling next to cash. With term deposits offering more than 5%, the gross up from franking credits still matters, but the margin of advantage is much narrower than it was.
Broker positioning reflects this caution. Macquarie is underweight the sector, with ANZ and NAB its preferred exposures. Morgan Stanley is overweight ANZ, largely because its business mix is less tied to Australian conditions, and underweight CBA, NAB and Westpac. Wilson Asset Management has also said it remains underweight the major banks.
Risks and counterpoints
A balanced view needs to consider both sides.
The bear case is straightforward. If the RBA hikes and house prices fall by 10% or more, credit growth slows further, margins compress and bad debts rise at the same time. With banks making up roughly a fifth of the ASX 200, a sustained de rating would weigh heavily on the index and on the many portfolios that track it closely.
There are also risks specific to individual banks: CBA’s valuation premium, the pace of consumer arrears, execution on large technology programs, and competitive pressure in mortgages and deposits.
But there is a credible counterpoint. The banks are highly capitalised and profitable, and unemployment remains relatively low. Higher rates still provide some support to deposit margins. The current downturn has also been concentrated at the premium end of the market, with lower quartile values up 10.8% over the year to August, which may limit stress among more stretched borrowers. And the banks came through the 2022 and 2023 correction with earnings largely intact.
If the RBA holds in September and inflation continues to ease, the sector could find some breathing room sooner than the current mood suggests.
Investor implications
For long term investors, the practical question is not whether to own banks. It is how much, which ones, and at what price.
A few considerations seem sensible.
Be aware of concentration. Many Australians hold more bank exposure than they realise through super funds, index products and income portfolios. A period of slower earnings growth is a reasonable time to review whether that weighting still reflects an investor’s objectives.
Differentiate between the banks. The majors are not interchangeable. Business mix, offshore exposure, valuation and capital position all vary, and brokers are already expressing strong preferences within the sector.
Treat dividends as earnings dependent. Fully franked income remains valuable, but dividend growth ultimately depends on earnings growth. If credit growth slows and margins narrow, payout ratios and buy backs will come under closer scrutiny.
Watch the right indicators. Unemployment, arrears, net interest margin guidance and credit growth will matter more than the monthly swing in house prices. The November reporting and trading update period for the majors will be an important test.
Avoid overreacting to a single meeting. Whether the RBA moves in September or November, the direction of travel is broadly the same. Portfolio decisions are better anchored to earnings and valuation than to the timing of one decision.
TAMIM Takeaway
Australia’s major banks are entering a more demanding phase. House prices have fallen for five consecutive months, mortgage applications have slumped, and the RBA is likely to lift rates again, whether on 29 September or in November. Brokers increasingly believe that consensus earnings forecasts do not yet fully reflect slower credit growth, sharper competition and rising bad debts.
That does not make the banks poor businesses. They remain well capitalised, profitable and central to the economy. But the easy tailwind of rising house prices and strong lending growth has faded, and valuations, particularly at the premium end of the sector, still assume a smoother path than the data currently suggests.
For long term investors, the sensible approach is to own banks deliberately rather than by default: understand the exposure, differentiate between the majors, and let valuation rather than habit guide position sizes. The dividend cheques may keep arriving, but the growth that once came with them can no longer be taken for granted.
Disclaimer: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB), Westpac Banking Corporation (ASX: WBC), and Australia and New Zealand Banking Group Limited (ASX: ANZ) are held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.
Markets are surprisingly good at handling one worry at a time. Give investors a single villain, an oil spike, a hawkish central banker or a wobble in technology stocks, and they will argue about it, price it and move on. What markets handle far less gracefully is a pile up.
That is what the past week delivered. Three separate market shocks arrived almost at once. Oil pushed back above US$100 a barrel, the US Federal Reserve raised interest rates for the first time since 2023, and the people building the most advanced artificial intelligence systems publicly asked their own industry to slow down. Any one of these would have unsettled a nervous market. Together they produced something closer to a stampede.
The temptation in weeks like this is to treat everything as one big risk and react to the whole bundle. I think that is a mistake. These three shocks arrived together, but they travel through the economy at very different speeds, and they will not leave together either.
Sorting out which is which is most of the work.
Why this week felt different
The local numbers tell the story. The S&P/ASX 200 fell 264 points, or 2.94%, last week. On Tuesday it closed at 8,672.5, its lowest finish since mid June and 6.7% below the record intraday high of 9,296.7 set on 6 August. By the halfway point of September, the index was down 4.5% for the month, well beyond its average September decline of 1.78%.
None of that is catastrophic. It is a pullback, not a crash. But speed matters, because speed is what turns reasonable concern into poor decisions.
Shock one: oil is back above US$100, and the workarounds are wobbling
The Strait of Hormuz has been effectively closed to normal commercial traffic since late February. Daily transits have been running at a fraction of the roughly 130 ships a day that passed through before the conflict.
For months, markets had learned to live with that. What changed this week was the workaround. Saudi Arabia’s East-West pipeline, a vital route for moving crude around Hormuz, was shut after an attack, with no clear timeline for its return. Brent crude closed above US$105 a barrel and West Texas Intermediate pushed towards US$102.
Here is the point worth holding onto. Oil is not just a headline. It is a transmission mechanism.
It shows up at the petrol pump within days, in freight costs and airfares within weeks, and in wage claims and inflation expectations within months. That is why oil matters more to the next shock than it does to the share market on any given afternoon.
Shock two: the Fed has moved, and the rates story has gone global
The August US inflation report, released on 11 September, set the scene. Consumer prices rose 0.4% for the month and 3.4% over the year, with petrol accounting for more than a third of the monthly increase. Core inflation, which strips out food and energy, rose 0.3%, a touch hotter than expected. By the eve of the meeting, futures markets were pricing better than a 90% chance of a Federal Reserve hike.
The Fed delivered. Overnight, the committee voted unanimously to lift its target range by 25 basis points to 3.75% to 4.00%, its first increase since July 2023. Chair Kevin Warsh described the move as removing “a dose of accommodation”, and the committee said it would support a “timelier return” to its 2% inflation goal.
The hike itself was fully priced. What mattered more was the message around it. The Fed’s updated projections show 16 of 18 participants expecting at least one more increase this year, four of them seeing room for two, with the median rate ending 2026 around 4.1%. Officials also nudged their inflation forecasts higher and now see core PCE inflation at 3.4% by year end.
In other words, this was not framed as a one off insurance policy. It looks more like the opening move of a tightening cycle.
Warsh was also candid about the limits of his tools. He acknowledged the Fed cannot switch off an energy price shock. Its job is to stop that shock spreading into broader inflation. That is precisely the transmission problem described above.
Markets did not enjoy the message. US shares were higher before the announcement but turned lower during Warsh’s press conference. The Dow fell 1.2%, the S&P 500 lost 0.45% and the US 10 year Treasury yield pushed back above 5%, around its highest level since 2007.
The Fed is not alone. The European Central Bank moved last week, the Bank of Japan announces its decision on Friday with another hike in play, and some strategists now expect at least eight G10 central banks to lift rates by year end.
Australia is not an exception. It is closer to the front of the queue.
Markets are pricing a high probability that the RBA lifts the cash rate to 4.60% on 29 September, which would be its fourth increase this year and take the cash rate to its highest level since 2011. Australian 10 year bond yields are also sitting at their highest levels in around 15 years.
That combination matters because the Australian economy is unusually rate sensitive. Household wealth is heavily concentrated in housing, most mortgages are variable, and the housing market has already turned. Cotality’s national home value index fell 0.9% in August, the fifth consecutive monthly decline, leaving values 3.6% below the March peak. Through winter, 93% of capital city suburbs recorded falls.
Consumers have noticed. The Westpac Melbourne Institute consumer sentiment index fell 5.2% in September to 84.4, deep in pessimistic territory. Morgan Stanley’s local strategy team has gone further, moving to what it describes as a near maximum underweight on Australian shares, on the view that the local monetary and fiscal backdrop is more adverse than elsewhere.
Shock three: the builders asked to slow the build
The third shock was the strangest, because it came from inside the house.
Over the weekend of 12 and 13 September, Anthropic chief executive Dario Amodei published an essay titled “We Must Pace the Frontier”, calling for an intentional global slowdown in frontier AI development. Within hours, Sam Altman of OpenAI, Demis Hassabis of Google DeepMind and Elon Musk had publicly agreed. Altman separately said OpenAI would not go public in 2026.
Markets did what markets do. On Monday the Philadelphia Semiconductor Index fell 5.9%, SoftBank dropped nearly 11% in Tokyo, South Korea’s Kospi lost 3.3% and ASML fell around 6% in Europe. Nvidia’s Jensen Huang pushed back publicly, with President Trump dialling in on speakerphone to call the slowdown push a hoax.
It is worth being clear about what actually changed. A group of chief executives said they want to pace the development of the most capable models. Nothing, at least so far, has changed in the order books.
Oracle, reporting on 10 September, lifted its contracted backlog to US$664 billion after signing more than US$30 billion of new AI cloud contracts in the quarter. Bank of America continues to point to roughly US$3 trillion of AI infrastructure spending by 2030.
Well known investors are split. Ray Dalio wrote on 9 September that “we are now in a bubble”. Cathie Wood called the AI doom narrative “ridiculous”. Michael Burry has suggested the slowdown push is tied to upcoming listings. When the experts disagree this loudly, it is usually a sign the market is short on facts and long on narrative.
Market shocks are not all created equal
This is the distinction I think investors should focus on.
Oil and rates are transmission shocks. They move slowly, but they reach almost everything: household budgets, company margins, borrowing costs and valuations. Their effects tend to arrive after the headlines have faded, which is precisely why they are easy to underestimate.
The AI slowdown call, at least for now, is mostly a sentiment shock. It changed how much investors are willing to pay for future growth, not how much companies have already committed to spend. That could change if words become regulation, or if customers start cancelling contracts. But this week, the prices moved much further than the facts did.
Australia offers a neat illustration of how the shocks interact. Westpac recently cited the scale of data centre investment as one reason it expects the RBA to keep tightening. In other words, the AI build out is now big enough to be considered inflationary. Yet NextDC, one of the most direct listed exposures to that build out, fell 14% in a month. Building data centres consumes enormous amounts of capital long before it earns a return, and higher rates make that capital dearer.
At the same time, Firmus is reportedly preparing an ASX float that could raise up to A$7 billion at a valuation near A$50 billion. In the same week the industry’s leaders talked about slowing down, one of the largest listings in Australian history is being pitched on the idea that demand will keep compounding.
Both stories can be true. What they tell you is that the AI trade has moved from a question of whether to a question of price.
The second order effects worth watching
The first order effects are obvious: dearer petrol, higher mortgage rates and weaker technology shares. The second order effects are where the real investment questions sit.
The first is margin pressure in businesses that cannot pass on costs. Energy, freight and wages all feed into the cost base with a lag. Companies with genuine pricing power will manage. Those competing mainly on price are likely to feel it in the next reporting season, not this one.
The second is refinancing risk. Companies and property owners who borrowed on the assumption that rates had peaked may now face harder conversations with their lenders. Balance sheet strength, which looked boring during the rally, becomes a genuine competitive advantage.
The third is the wealth effect. With housing making up the bulk of Australian household wealth, even modest price declines tend to show up in discretionary spending over the following quarters.
The fourth is the cash hurdle. When cash and term deposits pay more than 4%, investors quite reasonably ask more of their shares. That does not make shares unattractive. It makes the gap between good businesses at sensible prices and fashionable stories at stretched prices far more important.
What could go wrong, and what could go right
It would be dishonest to pretend this is simply noise. The risks are real.
Oil could go higher. Another attack on Gulf infrastructure, or a prolonged pipeline outage, would add to the inflation problem just as central banks are trying to contain it. Rising rates alongside slowing growth is the stagflation scenario markets fear most, and Australia, with high household debt and a softening housing market, is more exposed to it than most developed economies.
The charts are not encouraging either. The ASX 200 has slipped below its 200 day moving average, and market technicians at IG are watching the 8,500 level as the next line of support. If that gives way, they see the March low of 8,262 coming back into view. A tightening cycle that spreads across much of the developed world also tends to compress valuations for longer than investors expect.
The AI debate could harden too. If the slowdown call turns into coordinated regulation, the spending assumptions behind many AI linked valuations would need to be revisited.
But the counterpoint matters. Markets tend to overprice clustered bad news. A credible reopening of Hormuz would pull oil sharply lower and ease pressure on inflation. A Fed that has now shown it is serious about inflation could, in time, help anchor expectations and take some heat out of long bond yields. And AI demand, judged by contracted backlogs, has not yet shown any sign of cracking.
The risk is not only that things get worse. It is also that investors sell good assets at poor prices just before the fog lifts.
What should long term investors actually do?
This is not a call to make heroic macro bets. Nobody knows exactly when Hormuz reopens or how many more hikes the RBA has in it. The practical question is how to hold a portfolio through a period when the macro backdrop has become less forgiving.
A few principles seem sensible.
Separate the shocks. Ask of each holding whether it is exposed to a transmission shock, such as energy costs and interest rates, or a sentiment shock, such as a shift in narrative. The first deserves more attention than the second.
Look hard at balance sheets. In a rising rate world, low debt and strong cash conversion are not defensive luxuries. They are the difference between a company that can invest through the cycle and one forced to raise capital at the wrong moment.
Respect pricing power. Businesses that can lift prices without losing customers are the natural hedge against an oil led inflation problem.
Distinguish backlog from cash. In AI and infrastructure, contracted revenue is encouraging, but it only matters if it converts into cash flow and decent returns on capital. Oracle’s shares are down more than 20% this year despite a record backlog, which tells you the market is already asking that question.
Do not extrapolate one week into a decade. Selloffs driven by a cluster of headlines often create the best opportunities for patient investors, particularly among quality small and mid caps that get sold alongside everything else.
Rebalance rather than react. If a portfolio has drifted after a strong run, a volatile month can be a reasonable time to tidy it. That is very different from abandoning a plan because of a bad week.
TAMIM Takeaway
In a single week, oil pushed back above US$100, the Federal Reserve raised rates for the first time since 2023 and signalled more to come, global bond yields hit multi year highs, and AI’s own leaders called for a slowdown. The ASX 200 responded with its sharpest fall in months.
The market has treated these as one big risk. They are not. Oil and rates are slow moving transmission shocks that will shape inflation, household spending and company margins for months after the headlines fade. The AI slowdown call, for now, is mostly a sentiment shock that has moved prices far more than it has changed spending.
For long term investors, the right response is neither panic nor bravado. It is discipline: strong balance sheets, genuine pricing power, sensible valuations and a willingness to buy quality when the crowd is busy selling everything at once.
Headlines arrive together. Their consequences rarely do.
