Interest rates turning point? Economists cool on RBA cut predictions amid inflation shock

Cash-strapped homeowners hoping for a break from the Reserve Bank of Australia may be disappointed next Tuesday when the central bank is expected to keep interest rates on hold and may even dampen hopes of more pre-Christmas cuts.

Analysts say stronger-than-expected inflation data this week is reason for caution. In August inflation rose at its fastest annual pace in a year to 3 per cent, prompting Judo Bank’s chief economic adviser, Warren Hogan, to consider removing rate cuts from his forecasts and predicting the next move will be an interest rate increase in late 2026.

“To me it’s clear the economy has turned the corner for the better and we now have evidence inflation is ‘bottoming out’ around 3 per cent,” he told The Nightly.

“Rate hikes can come into play next year if the economy continues growing and inflation looks like moving above 3 per cent. That is where the debate will likely go over summer.”

Mr Hogan’s view that no more cuts are possible remains an outlier. The average prediction is a 70 per cent chance the Reserve Bank lowers rates in November. A hold at 3.6 per cent next Tuesday is rated all but a certainty.

The central bank has cut interest rates three times in 2025 to take borrowing levels to 3.85 per cent.

RBA forecasts

The RBA’s own forecasts contained in its statement on monetary policy for August call for the cash rate to fall 20 basis points to 3.4 per cent by Christmas, with the cash rate expected to fall another 50 basis points to 2.9 per cent by the end of 2026.

However, RBA Governor Michele Bullock has repeatedly warned the market these forecasts are for guidance only and subject to revision dependent on future data. The next big focus for the market will be September quarter inflation data due October 29 and ahead of the central bank’s November 4 monetary policy decision.

“I still think the next (interest rate) move is down - it could well be in 2026 though,” said Stephen Miller, an economist and market strategist at Grant Samuel Funds Management.

“The RBA’s message on Tuesday will be they see no case for a cut, and I see little chance of a cut in November for now. The RBA will need to see September’s inflation data before it makes more moves, and there’s upside risks to the RBA’s current projections. I think they’ll be more worried about price (inflation) than the labour market.”

‘Real risk’

Australia & New Zealand Bank’s economics team warned on Friday that Ms Bullock’s comments after Tuesday’s meeting are likely to include a “hawkish” tone that warns rate cuts are not certain.

The economists said there was a “real risk” of no rate cut in November and the cash rate might fall no lower than 3.35 per cent for years as the central bank focuses on keeping inflation between 2 and 3 per cent.

Others, including AMP chief economist Shane Oliver, say the RBA pays little attention to the monthly consumer price index or the inflation data that was published last Wednesday, which is not as comprehensive as the quarterly data the central bank traditionally relies upon.

“All it (monthly inflation data) seems to do is give economists and media more to talk about and more for traders to trade on but just adds to the volatility, noise and soap opera around the RBA and interest rates with no benefit to the wider community,” said Dr Oliver.

Share market

Australia’s benchmark S&P/ASX 200 share index of the top 200 companies is down 1.6 per cent over the past month as interest rate-sensitive technology and banking stocks are dumped on worries rates will not fall as much as expected.

Shares in Australia’s biggest company and economic bellwether Commonwealth Bank are off 2.5 per cent over the past month, although are still up 9.8 per cent over the last six months.

“Share markets remain at risk of a correction given stretched valuations, risks around US tariffs and the softening US jobs market,” Dr Oliver said. “But with Trump pivoting towards more market-friendly policies and central banks, including the Fed and RBA, likely to cut rates further, shares are likely to provide reasonable gains on a 6-12 month horizon.’

Data from property consultancy Cotality (formerly CoreLogic) is expected to show Australia’s median house price growth accelerated to 0.9 per cent month-on-month from August to September.