A stronger-than-expected inflation print for July has flipped the script on interest rates in Australia, with traders and economists starting to weigh the prospect of at least one more increase this year.
Markets were swift to react to the data on Wednesday; the Australian dollar and bond yields spiked while the sharemarket was sold off after headline inflation came in at 3.5 per cent for the year to July, well above expectations of 3.3 per cent.
Trimmed mean inflation, which strips out volatile price increases and is therefore the preferred measure of the Reserve Bank of Australia, topped forecasts at 3.6 per cent in July.
Bond traders ramped up bets for a fourth rate increase this year, with Deutsche Bank now tipping the central bank would have to lift rates again at its September board meeting to 4.6 per cent to tame inflation.
Previously, the investment bank had expected the RBA to keep the cash rate at 4.35 per cent for the rest of the year.
“In some ways, the RBA would love to sit through this and wait for better news on inflation next year, but I don’t think they can,” said Tim Hext, head of government bond strategies at Pendal.
“The way they’ve talked about inflation and having to be tough on it, and their low tolerance for higher inflation means they’re going to have to act in November,” said Hext.
Source: https://www.afr.com/markets/debt-markets/markets-flip-the-script-on-rates-after-hot-inflation-print-20260826-p60rrw