Australian business conditions drop to six-year low in October: NAB

The NAB survey provides further evidence that the RBA's five rate increases this year are taking effect, reducing the likelihood of a sixth hike. Despite slowing demand, high input costs and underlying inflation still above the target argue against an early move toward looser policy. This leaves the cash rate unchanged at 4.85%, a position that does little to support the Australian dollar through rate expectations. Weaker domestic data add to the pressure on the Aussie, which is already being traded as a proxy for AI-related equity sentiment. Australian short-dated bond yields are the most likely to move if markets begin pricing in rate cuts further ahead.

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Companies in Australia face pressure from weakening demand and rising costs, a situation that mirrors the RBA's own challenge.

Key points from the NAB survey:

• The business conditions index from NAB dropped 1 point to -2 in October, its lowest since August 2020, amid a sharp decline in forward orders.
• Business confidence slid 1 point to -15, well under the long-term average of +5.
• Retail saw the weakest readings for confidence, conditions and forward orders, while construction also weakened.
• Purchase cost growth edged up 0.1 percentage point to a quarterly rate of 2.4%.
• NAB noted that cost pressures still pose a risk to inflation, while slowing growth could weigh on labour demand.
• The RBA has raised rates five times this year to 4.85%, an 18-year peak, with underlying inflation at 3.6% in September.

A National Australia Bank survey released Tuesday showed that Australian business conditions hit a six-year low in October, driven by a steep drop in forward orders. The data indicate that domestic demand is weakening due to elevated borrowing costs and ongoing cost pressures.

The business conditions index edged down 1 point to -2, its lowest since August 2020. Business confidence also fell 1 point to -15, well below the long-run average of +5. According to NAB, conditions have been trending lower gradually in recent months, indicating that growth has slowed further in the second half of 2026 from an already soft first half.

Among industries, retail had the lowest confidence, conditions and forward orders. Construction, which had performed strongly this year, also began to soften.

Input costs continue to be a challenge. Purchase cost growth rose 0.1 percentage point to a quarterly 2.4%, keeping input price pressures high despite slowing demand.

According to NAB, this combination encapsulates the RBA's predicament. The bank stated that cost pressures are still a major risk for inflation, but growth is decelerating and labour demand could weaken in coming months. In response to persistent inflation, the RBA has hiked rates five times this year to 4.85%, an 18-year high. Underlying inflation stood at 3.6% annually in September, above the central bank's 2-3% target band.

The survey reinforces indications that the RBA's tightening is having an effect. With forward orders declining and confidence very low, the argument for additional rate rises appears less strong, although high costs and above-target inflation mean an early pivot to easing is improbable. For the Australian dollar, already hit by the decline in AI-related stocks, weaker domestic data provide additional cause for caution.