ANZ economists now expect November interest rate hike

ANZ economists now expect the Reserve Bank of Australia will hike the cash rate by 25 basis points in November.

They've made the call just hours after the release of Wednesday's CPI data which showed headline inflation eased to 3.5% in July while underlying inflation remained unchanged at 3.6%.

However, both figures came in higher than market expectations of 3.3% and 3.5% respectively.

ANZ economists said the latest data suggests there is a strong upside risk to the RBA's near-term inflation forecast.

Minutes of the RBA's August cash rate meeting, released earlier this week, showed much of the discussion was on upside risks to the central bank's inflation forecasts.

ANZ economists say in light of the July inflation data, those risks are "closer to crystallising".

November hike 'more likely'

ANZ economists noted a larger share of the CPI basket is now rising above a 3% annualised pace on a one-, three-, and six-month basis.

But, they said, the "largest surprises" were from discretionary categories like restaurant meals and domestic holidays, rather than categories more directly affected by energy prices.

"This may suggest that the softening in activity is not as large as previously thought, challenging the RBA's rationale for holding the cash rate in August," ANZ's head of Australian economics Adam Boyton said.

However, ANZ said while the July data was "uncomfortably high", its economists didn't think there was a strong enough case to justify a September hike.

ANZ also noted the RBA's preference to move the cash rate at meetings where a Statement on Monetary Policy (SoMP) is delivered, meaning a November hike is more likely.

The RBA releases four SoMPs a year - in February, May, August, and November.

Case for a November hike may 'soften'

But ANZ's stance leaves some wiggle room, with the bank saying the case for a hike will soften if there are signs of a very sharp slowdown in activity between now and the November meeting.

"However, the RBA has centred its discussions on the risks around inflation remaining above target for too long and the potential flow-through to higher inflation," Mr Boyton said.

"So, activity would need to be very soft and below potential to justify a pause if the trimmed mean pulse is annualised above 3.5%."

All bets are now off for ANZ as to when the RBA is likely to make its first cut to the cash rate, previously forecast for September 2027.

The bank's economists will review that position but believe there will be another increase to the cash rate in November to 4.60%.

What are other big banks predicting?

NAB is currently reviewing its call of where the RBA could head with the cash rate in light of the July inflation data.

Meanwhile, CommBank said the new figures raise the risk further monetary policy tightening will be required, particularly in light of recent RBA commentary over upside risks.

It said its base case had been the Reserve Bank would keep the cash rate on hold, given slowing domestic activity, some easing in the labour market, and substantial tightening already delivered this year "arguing for patience".

CommBank also said the deteriorating housing market was also another factor in the case for a hold.

However, it conceded the July CPI makes its call less certain.

Westpac acknowledged the risk of a November cash rate hike but noted both the labour market and wage growth were softer than RBA expectations.

Westpac economists said their base case remains a cash rate hold for the rest of 2026, while they also expect the RBA to continue its hawkish rhetoric.