NAB economists now see the Reserve Bank of Australia holding the official cash rate at 3.60% until May 2026.
They had previously forecast two cuts to the cash rate in November and February and were among the more dovish of the major bank economists in their outlook for interest rate cuts.
But on Wednesday afternoon, in the wake of monthly inflation data for August, NAB economists changed their tune.
The Consumer Price Index (CPI) showed the annual headline inflation figure was back at 3%, up from 2.8% in July and its highest print since July 2024.
This was largely driven by the expiry of state government electricity rebates, seeing a 24.6% increase in household electricity bills.
Trimmed mean figure falls
However, trimmed mean inflation, the RBA's preferred measure which excludes volatile items, fell to 2.6% in August, down from 2.7% the previous month.
A few hours after the CPI data was released, NAB economists forecast a 0.9-1.0% quarter-on-quarter outcome for third quarter trimmed mean inflation.
This would be a 0.3ppt upside surprise to current RBA forecasts, the update said.
Official third quarter inflation figures are due to be released the week before the November cash rate decision, scheduled for Melbourne Cup Day.
NAB economists said the detail of the latest data shows that market services inflation is significantly hotter than they expected.
They said this creates considerably less certainty that inflation has settled near 2.5%, the mid range of the RBA's stated inflation target of 2-3%.
The update said it "highlights the likelihood that it will take a period of modestly restrictive policy for inflation to settle at 2.5%".
In plain-speak, it means NAB no longer sees the RBA delivering two 25-basis point cuts in November and February.
Trigger pulled on monthly data
While the RBA has repeatedly cautioned against reading too much into monthly CPI data, NAB economists said they believe the signal "is too strong to ignore".
The update said beyond the headline CPI indicator, the market services components were hotter than expected and NAB economists expected this will be reflected in the quarterly inflation print.
"These components typically tend to be more persistent than other components and paint a materially different picture to the benign outcomes seen in Q2," the update said.
NAB economists believe the RBA will now need to reconsider implications of core inflation that is now likely to annualise closer to the top of the 2-3% band over the next six months.
"We suspect it will take two, if not three, quarterly inflation prints to resolve the extent of the signal in the Q3 inflation data," the update said.
NAB now sees a terminal cash rate of 3.35% in May 2026.
Big Bank reaction
Other big banks noted the August monthly CPI data presented some upside risk to their inflation estimates.
CBA said its key takeaway from Wednesday's data is that a November rate cut is "not a done deal".
It said it will firm up its quarterly forecast in the coming weeks.
Meantime, ANZ, the only other big bank that had tipped a February 2026 rate cut, has backed away from that prospect.
It's sticking with its forecast of a November rate cut but retains the view that once the cash rate reaches 3.35%, it is "likely to stay at that level for a considerable period".
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