The case for another interest rate rise has hardened after July’s inflation surprise, but the economy the Reserve Bank would be trying to cool is already losing jobs, wage momentum and housing demand.
The argument is no longer simply about whether inflation is falling. It is about how much additional economic pressure the RBA should accept to make it fall faster.
Judo Bank has made the most aggressive call, forecasting 25 basis point increases in September and November that would take the cash rate from 4.35 per cent to 4.85 per cent by the end of 2026.
Senior economist Matt De Pasquale said inflation pressures were spread widely, with 40 per cent of the CPI basket rising by more than 0.5 per cent during July. He expects prices to increase by between 1 and 1.1 per cent in the September quarter, well above the RBA’s forecast.
“Our base case is now for 25 basis points in September and November, taking the cash rate to 4.85 per cent by the end of 2026,” De Pasquale said.
Financial markets are pricing a less aggressive path. The implied probability of a September rise jumped from 17 per cent to 38 per cent after the CPI release, with one increase fully priced by February 2027. ANZ now expects a November rise, Deutsche Bank has moved to September, UBS favours November and NAB is reviewing its previous call for rates to remain unchanged.
Judo Bank has made the most aggressive call, forecasting 25 basis point increases in September and November that would take the cash rate from 4.35 per cent to 4.85 per cent by the end of 2026
Westpac remains on the other side of the debate. Its economists expect the RBA to leave rates unchanged through the rest of 2026, arguing that the labour market and wages are softer than the central bank expected and that housing costs were broadly in line with forecasts.
That division reflects an inflation report capable of supporting two competing arguments.
Economist Stephen Koukoulas said markets were “now pricing in a 25bp rate hike late 2026/early 2027”, but argued that measured observers were also watching unemployment, wages and wealth erosion.
The RBA could drive inflation down faster with another increase, he said, “but at what cost?”
Koukoulas also accused critics of allowing hostility towards Labor to obscure the direction of the inflation figures after Treasurer Jim Chalmers said inflation had moderated.
On the narrow question of headline inflation, Chalmers was correct. The annual rate has moved from 4.6 per cent in March to 4.2 per cent in April, 4 per cent in May, 3.8 per cent in June and 3.5 per cent in July. It has fallen for four consecutive months.
But that does not settle the interest rate argument.
Prices rose 1 per cent during July in original terms and 0.6 per cent after seasonal adjustment. The annual headline rate was expected to fall further, to 3.3 per cent, while trimmed mean inflation rose 0.5 per cent during the month and remained at 3.6 per cent annually.
The annual rate is cooling, but July itself was hot.
Against that result, evidence of economic weakness is becoming harder to dismiss. Unemployment rose to 4.5 per cent in July as employment fell by 15,800 people.
Annual wage growth slowed to 3.2 per cent in the June quarter, down from 3.4 per cent a year earlier. Private sector wages grew by 3.1 per cent, below both headline and underlying inflation.
The RBA’s own August minutes acknowledged that labour conditions had eased by more than expected and national home values had fallen about 1.5 per cent from their March peak. Consumer sentiment was described as very weak, while softer housing demand had flowed into fewer new housing loans.
The fall in housing wealth remains modest after years of strong gains. The RBA noted that values were still about 5 per cent higher than a year ago and roughly 50 per cent above their pre-pandemic level. But the change in direction matters because weaker housing wealth can restrain spending and confidence.
Cotality’s spring outlook provides further evidence that demand is retreating faster than sellers are responding.
Only 33,193 homes were newly listed in the four weeks to August 23, which was 8.2 per cent below the five-year average. Yet the total number of properties advertised for sale reached 137,491, 1.7 per cent above the five-year average and 17.3 per cent higher than a year earlier.
That apparent contradiction tells the story. Fewer owners are putting homes on the market, but the stock already available is accumulating because buyers have pulled back.
New listings were more than 14 per cent below average in Sydney and more than 9 per cent lower in Melbourne. Brisbane’s total advertised stock has moved from about 43 per cent below average in January to more than 16 per cent above average in August.
Cotality expects a cooler spring selling season as falling values, constrained buyers and rate uncertainty cause owners who can wait to delay selling. New listings have ordinarily risen by almost 25 per cent between late August and mid-November, but a smaller increase is expected this year.
Another rate rise would reinforce those conditions by lifting mortgage repayments, reducing borrowing capacity and placing more pressure on household spending.
Cotality expects a cooler spring selling season as falling values, constrained buyers and rate uncertainty cause owners who can wait to delay selling
The case for tightening is that this is precisely how monetary policy works. Weaker demand makes it harder for businesses to pass higher costs to customers, reducing the risk that inflation becomes embedded.
The limitation is that higher rates cannot produce more oil, construction materials or homes. Fuel rose 7.5 per cent in July, while new dwelling costs increased 5.7 per cent over the year and rents rose 3.6 per cent. Monetary policy can suppress demand around those price increases, but it cannot remove their supply causes.
The RBA’s August minutes show the board is alive to both risks. Several members believed further tightening could be required, while others warned that the labour market, consumer confidence and housing downturn could weaken more rapidly than expected. The board ultimately decided that the existing cash rate appeared to be working and that it had time to assess more data.
The next decision is due on September 29. The board will receive another inflation report, labour market figures and the June-quarter national accounts before then.
July has removed any sense of comfort about inflation. It has not proved that two further rate rises are necessary.
The next decision will turn on whether the RBA sees July as evidence that current rates are failing, or as a warning arriving just as their full cost to jobs, wages, households and housing is beginning to appear.
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