Australia Government Bond 10Y

Of Australia's four major banks, Commonwealth Bank (CBA), National Australia Bank (NAB), and ANZ expect further rate hikes this year. July's inflation data came in stronger than expected, reigniting concerns that price pressures remain robust. NAB expects the Reserve Bank of Australia (central bank) to move to raise rates at its next policy meeting in September, and sees the possibility of another hike in November if economic activity remains resilient. CBA and ANZ forecast a November hike, while Westpac maintains its view of holding steady. CBA's head of Australian economics, Belinda Allen, noted that price momentum has re-accelerated in underlying and domestically driven items, with the pace of disinflation stalling. She expects a November hike but said it could be brought forward to September. The RBA has held the policy rate steady for two consecutive meetings this month.

The Australian Bureau of Statistics released the July Consumer Price Index (CPI) on the 26th, which rose 1.0% month-on-month, exceeding market expectations of a 0.8% increase. The rise was mainly driven by higher fuel and travel costs. On an annual basis, the CPI slowed from 3.8% to 3.5% due to the exclusion of large increases from the previous year, but still beat the expected 3.3% rise. The trimmed mean, which indicates core inflation, rose 0.5% month-on-month, surpassing the expected 0.3% increase, raising the risk of further rate hikes. The annual growth rate was 3.6%. The Reserve Bank of Australia has implemented three rate hikes this year to bring core inflation back to its 2-3% target.

The Reserve Bank of Australia released minutes from its August meeting showing debate among the nine board members, who were split into two camps before unanimously deciding to keep the policy rate at 4.35% to await further economic data. One side argued that a rate hike might be needed to curb inflation risks that could rebound from Middle East conflict and global crude oil prices, while the other side viewed the current rate as sufficiently tight and saw time to wait for economic developments. The board identified key risks that could push inflation higher, including the global investment wave in AI and data centres, weak labour productivity, and Middle East tensions, with Brent crude jumping to 92 dollars a barrel after the United States expanded sanctions on Iran. Financial markets price only a 13% chance that the RBA will raise rates to 4.60% at its next meeting, but reflect a 67% probability of a hike by February next year.

Australia's seasonally adjusted Wage Price Index increased 3.2% year-over-year in the second quarter of 2026, matching market expectations and marking the weakest annual wage growth since the fourth quarter of 2024. On a quarterly basis, wages grew 0.8%, maintaining the steady pace seen over the past four quarters. In a Wednesday address, Reserve Bank of Australia Deputy Governor Andrew Hauser issued a hawkish warning, stating that inflation remains too high and that monetary policy may need to tighten further if upside price risks materialize. Hauser cited escalating Middle East tensions, global AI-driven investment, and soft domestic productivity as core inflationary threats. The RBA has already raised interest rates by 75 basis points year-to-date, though it opted to hold its benchmark cash rate at 4.35% for a second consecutive meeting. Following the RBA's comments and the wage data release, the benchmark S&P/ASX 200 Index slipped 28 points, or 0.3%, to 9,042 in early Wednesday trading, extending its losing streak to a sixth session and touching a two-week low, while the Australian dollar retreated below $0.71 while remaining near a ten-week high.

Australia's central bank held its cash rate steady at 4.35% for a second straight meeting but warned it might hike again if needed to control inflation. Reserve Bank of Australia Governor Michele Bullock said she personally thought it was quite possible that rates may need to go up again, keeping alive the risk of a fourth rate increase this year. The RBA said aggregate demand needed to stay subdued to reduce capacity pressures and it would do what was necessary to bring inflation back to target, including increasing the cash rate target further if upside risks materialise. Swaps now imply around a 50% chance of a rate increase in November, while pricing in an 80% likelihood of a move by early next year. Updated RBA forecasts showed inflation is now expected to move back to the 2% to 3% target band in the second half of next year, with consumer price inflation projected to ease to 3.6% by the end of the year from 3.9% in the second quarter and to 2.6% by the end of 2027.