Interest Rate Decision Looms as Inflation Data Awaited

Australia's interest rate outlook is finely balanced, with economists saying tomorrow's inflation data could sway expectations in either direction. A stronger-than-expected reading might bring another rate hike as soon as September, while a sufficiently weak figure could revive hopes of cuts.

The market currently prices a roughly 50-50 chance of a hike, making the latest inflation report a decisive factor ahead of the Reserve Bank of Australia's (RBA) next meeting.

Expert Warns of 'Crossroads' Moment

Fort Lake Asset Management founder Christian Baylis told Sunrise on Tuesday that Australia is "right at the crossroads," with even a small deviation from forecasts capable of changing the conversation entirely.

"The numbers to look out for there: if we get 3.6, we'll get the alarm bells ringing for potential hikes, potentially even in September," he said.

"If we get three, I think the conversation will start to turn, talking about cuts."

Baylis also cautioned that returning inflation to the target range would not undo years of price increases already absorbed by households.

"What people have to realise, it's not just getting back to the inflation level; you have to address the past years of excess inflation," he said. "That's why everything feels so expensive."

He additionally argued that government policy was limiting productivity and making the RBA's task more difficult.

Banks Reverse Forecasts, Predict November Hike

Two of Australia's big four banks reversed their interest rate forecasts on Thursday. ANZ and CBA now predict a 0.25 per cent hike in November, which would lift the cash rate to 4.6 per cent—the highest since October 2011.

NAB also confirmed its cash rate forecast is under review following the latest inflation figures.

The moves come after Wednesday's data showed inflation for the 12 months to July at 3.5 per cent, and the trimmed mean—the RBA's favoured underlying measure—at 3.6 per cent. Both figures exceeded market forecasts of 3.2-3.3 per cent and 3.5 per cent respectively.

Prior to this, all big four banks had predicted the RBA's next move would be a rate cut, though not until 2027.

The RBA board is scheduled to meet during the first week of November. The central bank will also release minutes from its last meeting, offering insight into how close members came to considering another increase.

Impact on Mortgage Holders

According to comparison site Canstar, a 0.25 percentage point hike in November would add about $91 to the monthly repayment on a $600,000 loan with 25 years remaining. For those with a $1 million mortgage, the impact would be more significant.

Canstar data insights director Sally Tindall said the ANZ and CBA u-turns are a reminder of how quickly forecasts change. The stubborn inflation figures will force the RBA board to debate the merits of a rate hike when it meets in five weeks.

Inflation Drivers Remain Persistent

Housing costs rose by 5.0 per cent in the 12 months to July, with new dwellings prices up 5.7 per cent. Annual food inflation sits at 3.2 per cent, driven primarily by meals out and takeaway, which rose 4.5 per cent.

Automotive fuel prices rose 7.5 per cent in July after falling for three months in a row.

Economists widely expect headline inflation to ease to 3.3 per cent, driven largely by lower electricity prices. However, the RBA's next interest rate decision is scheduled for September 29, and the outcome remains uncertain.