Prospects for another Reserve Bank interest rate increase have intensified following the release of July inflation data that fell short of economist expectations, reigniting concerns about the path to the central bank's 2.5% target and the impact on millions of Australian mortgage holders.
The Australian Bureau of Statistics reported that annual consumer price inflation reached 3.5% in July, a decline from 3.8% in June but significantly higher than the 3.3% forecast by economists ahead of the announcement. More troublingly, the Reserve Bank's preferred underlying inflation gauge—the trimmed mean measure that excludes the most volatile price movements—remained flat at 3.6%, contrary to expectations for moderation.
The underwhelming result has prompted fresh speculation about whether the RBA will proceed with a fourth rate increase in 2026. Board members at the most recent meeting had signalled openness to further tightening, with minutes released beforehand indicating that several considered another hike "quite possible" should inflation prove sticky. Following the July data release, economists who had previously ruled out additional moves began reassessing their forecasts.
What do economists now expect?
Brendan Rynne, chief economist at KPMG, argued that the figures demonstrated the need for policy intervention.
"Today's data supports the view that without policy action we may be in for a long, costly grind to get inflation under control,"Rynne said, adding that
"The Reserve Bank may have missed an opportunity at the last board meeting to get ahead of the game by raising rates."
Phil O'Donaghoe, chief economist at Deutsche Bank, shifted his position to expect a move as soon as the September meeting, characterising the underlying price growth as "intolerably high".
"We think the July CPI leaves little room for the RBA to do anything other than follow through on its hawkish posturing, and the earlier it does, the better,"O'Donaghoe said.
My Bui, an economist at AMP, identified housing as a persistent challenge for the Australian economy. She maintained her forecast for a November hike but acknowledged that
"a September hike is certainly plausible."
Following the RBA's August board meeting on 10–11 August, Governor Michele Bullock held the cash rate steady at 4.35% but signalled that further tightening remained under consideration. According to reporting on the decision, Bullock stated that a further hike was still "quite possible." Market pricing after that meeting implied around a 50% chance of another increase by November.
Where is inflation rising fastest?
Several categories drove the persistent price pressures evident in the July figures. The expiration of the fuel excise relief in July contributed to a 7.5% monthly rise in petrol and diesel prices, reversing three consecutive months of declines.
Housing costs remain the most chronic inflationary pressure in Australia. Home building costs increased by 5.7% over the year to July, while rental prices climbed 3.6%. The ABS attributed construction cost growth to project home builders raising base prices to absorb higher labour and materials expenses accumulated over the period.
Food service inflation also accelerated, with takeaway and restaurant meal prices rising 4.5% annually. The ABS identified higher operating costs—including ingredient expenses and the minimum wage increase that took effect on 1 July—as key drivers of this increase.
What is the RBA's updated outlook?
The RBA's August Statement on Monetary Policy, released following the board meeting, provided a sobering assessment of the inflation trajectory. According to the bank's latest monetary policy statement, inflation is not expected to return to the middle of the 2–3% target range until early 2028—a significant delay from earlier projections. The bank's updated forecasts showed annual CPI inflation at 3.9% for 2026 and trimmed mean inflation at 3.6% for the same period, with the assumed cash rate path in the forecast table centred around 4.3–4.5%.
The RBA's assessment reflects the challenge of bringing inflation down without triggering a sharper economic slowdown. The board's previous minutes, released before the July CPI data, had already indicated scepticism about achieving the 2.5% target by the end of 2027 without further policy action, and members signalled they would respond to any evidence that price pressures were not moderating as hoped.
What happens next?
The next RBA Monetary Policy Board meeting is scheduled for 28–29 September 2026, where the board will reassess conditions in light of any new economic data. The next CPI update is due on 30 September 2026, which will provide fresh evidence on whether inflation is responding to the three rate increases already delivered this year or whether further tightening is warranted.
The decision facing the RBA reflects broader economic headwinds that have complicated the inflation fight. Earlier in the year, the Reserve Bank had flagged concerns about rising inflation and fuel shortages caused by global energy shocks, while stronger jobs data and higher oil prices had already prompted markets to price in additional rate increases. These external pressures continue to complicate the outlook for monetary policy.
