Majors tipping a 25-basis-point rise on Tuesday as sticky inflation, oil above US$100 and a hawkish signals leave little room to hold
The Reserve Bank of Australia (RBA) is widely expected to deliver a cash rate hike on Tuesday afternoon, with all four major banks – Commonwealth Bank, Westpac, NAB and ANZ – forecasting a 25-basis-point rise to 4.6%.
Markets are no less convinced, with traders pricing roughly a 95% chance of a hike. It would mark the fourth rate rise this year and take mortgage holders to the highest cash rate since 2011.
Major banks line up
The consensus came together over the weeks leading up to tomorrow’s decision from the Monetary Policy Board (MPB)
NAB made its call in late August, followed by Westpac on 19 September. Two days later, CBA and ANZ brought forward their previous November calls, leaving all four major banks now tipping a September hike.
Among the catalysts was RBA governor Michele Bullock's appearance before the House of Representatives Standing Committee on Economics, where she delivered a blunt warning: “The bottom line is that we need to get inflation back down because if we don't, that is a worse outcome across the board."
Similarly hawkish remarks from deputy governor Andrew Hauser and assistant governor Sarah Hunter added to the pressure.
Where the banks differ is on what happens next. ANZ is the most hawkish, forecasting a second 25-basis-point rise in November, which would take the cash rate to 4.85% – a level not seen since 2008.
CBA sees the risk of a follow-up hike to 4.85% if September quarter trimmed mean inflation comes in at 1% or higher, and has pushed its expected rate cuts out to August and November 2027.
The MPB vote itself may not be unanimous. Although CBA expects a unanimous decision with hawkish language, Westpac expects a split vote reflecting differing views on supply capacity and labour market slack.
Inflation remains stubborn
The Consumer Price Index (CPI) rose 3.5% in the 12 months to July, down from 3.8% in June but still above the 3.2–3.3% range most bank economists had forecast.
More importantly for the RBA, trimmed mean CPI – its preferred measure of core price pressure – held at 3.6% year-on-year, unchanged from June and above the roughly 3.5% economists expected.
Trimmed mean strips out the most extreme price movements each period to show the underlying trend. Automotive fuel prices jumped 7.5% in July after three straight monthly falls, as soaring oil costs fed through to the bottom line.
While oil prices remain elevated, the MPB will not see the next inflation reading before it votes; the decision lands a day before August inflation data is released.
Softer jobs market means little
An argument for keeping the cash rate put emerged from the labour market after Australia's unemployment rate rose to 4.6% in August, the highest since November 2021.
Yet the data was misleading. The rise came from more Australians looking for work, not from job losses, with the participation rate climbing to 67.1%, matching its record high.
Economists at the majors were unmoved following the August jobs data. CBA senior economist Ashwin Clarke said cost-of-living pressures were pushing more people into the workforce and that other labour market indicators showed no sign of sharp deterioration.
ANZ senior economist Jasmine Zheng said "inflation pressures remain persistent and higher oil prices present an additional upside risk”.
Bullock has also signalled tolerance for a softer jobs market. She told a Committee for Economic Development of Australia (CEDA) fireside chat that an unemployment rate between 4.5% and 5% would be enough to ease inflation pressure – and 4.6% sits at the bottom of that range.
Oil and the Middle East: the swing factor
Geopolitics has become central to the rate outlook.
At the time of writing, Brent Crude was sitting at more than US$105 ($150) a barrel, up from just $63 dollars this time last year, as stalled US-Iran peace talks over Hormuz conditions keep prices elevated.
As a result, Aussies are facing pump prices in the mid-$2 range, driven by damage to Saudi Arabia's East-West pipeline, Houthi activity and continued restricted traffic through the Strait of Hormuz.
US and Iranian negotiators have been exploring a phased arrangement that could reopen the strait, though previous negotiations have repeatedly collapsed near a breakthrough.
ANZ said the RBA tends to view the oil spike as "much more of an inflationary shock than a growth shock".
What does a hike mean for borrowers?
Lenders have already moved ahead of Tuesday’s rate call.
Ten lenders lifted 266 owner-occupier and investor fixed rates by an average of 0.33% in a single week with three of the big four moving within 24 hours of one another.
Westpac's increases were the largest, with some longer-term fixed rates rising by up to 0.45 percentage points to over 7%.
CBA followed by lifting its one-year fixed rate by 30 basis points from 6.59% to 6.89%, bringing it ever closer to the 7% mark.
Canstar data insights director Sally Tindall called the repricing "a pretty clear signal they believe another rate hike is coming".
Based on a $600,000 mortgage with 25 years remaining, each additional hike adds roughly $91 a month to repayments – or a cumulative $364 a month across four hikes, or $606 for a $1 million loan.
For brokers, the Finance Brokers Association of Australia (FBAA) sees opportunity in the volatility.
Chief executive Leo Gagic encouraged brokers to proactively contact clients and review loan structures, saying: "Consumers are increasingly looking for guidance, not just transactions".
