Australia’s stubbornly persistent above-target inflation has prompted two of the nation’s largest lenders to revise their interest rate outlooks, delivering a bleak update for mortgage holders already grappling with years of rising borrowing costs. Both the Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) now confirm that additional Reserve Bank of Australia (RBA) rate increases are on the horizon to cool persistent price pressures.
NAB’s chief economist Sally Auld has reversed her earlier forecast that rates would remain on hold, now projecting a rate hike as early as the RBA’s September monetary policy meeting. Auld pointed to newly released July Consumer Price Index (CPI) data that came in hotter than RBA leaders had projected just weeks earlier, noting that the central bank’s Monetary Policy Board has repeatedly warned it would take immediate action if inflation risks continued to trend upward. Beyond September, Auld added that the outlook leans heavily toward a second additional hike in November, particularly if broader economic activity data remains resilient in the coming months.
CBA’s head of economics Belinda Allen shares the expectation of a 2025 rate hike but pushes back the timeline, arguing that current economic data does not yet justify a September increase. Even with a slower timeline, Allen warned that holding rates steady through the November meeting would shock markets and analysts, given the RBA’s laser focus on reining in inflation even as signs of a slowing economy emerge. On a slightly more positive note for struggling mortgage holders, Allen projected that the period of elevated rates could be relatively short: she forecasts the RBA could begin cutting rates as early as May 2027, with a follow-up cut in August, once inflation returns to the central bank’s target range.
Two other major Australian lenders, Westpac and ANZ, have not yet released updated rate forecasts following the July inflation release. However, independent economic analysts have echoed the big banks’ cautious outlook, arguing that the latest inflation data leaves the RBA with little choice but to resume tightening after its recent pause.
KPMG chief economist Brendan Rynne explained that the RBA’s decision to leave rates unchanged at its August meeting now leaves the central bank playing catch-up on inflation. So far in 2025, the RBA has delivered three rate hikes totaling 75 basis points, lifting the official cash rate from 3.60% to 4.35%, before pausing rate movements in June and holding again in August. “Today’s data supports the view that without policy action we may be in for a long, costly grind to get inflation under control, and the Reserve Bank may have missed an opportunity at the last board meeting to get ahead of the game by raising rates,” Rynne said.
Russel Chesler, head of investments and capital markets at global asset manager VanEck, put it more bluntly, noting that July’s data shows the “inflation fire is still smouldering” across the Australian economy. “The inflation fight is far from won,” Chesler said. “We remain firmly of the view that inflation is becoming entrenched and has little chance of returning to the 2.5 per cent midpoint of the RBA’s target range by late 2027.”
To understand why markets and forecasters are bracing for rate hikes, it is important to break down the latest inflation figures from the Australian Bureau of Statistics (ABS). While headline inflation edged lower to 3.6% in the 12 months to July, down from 3.8% in June, the core trimmed mean inflation rate – a closely watched metric that strips out the most volatile price movements to reflect underlying inflation – held steady at 3.6%, well above the RBA’s 2-3% annual target range. Market analysts had expected a sharper decline in headline inflation to roughly 3.2%, making the higher-than-forecast reading an unwelcome surprise.
Breaking down price pressures, the biggest driver of ongoing inflation was housing costs, which rose 6% over the past 12 months, followed by food and non-alcoholic beverages, which increased by 3.2%. Energy prices also continued to distort national inflation data: a sharp 2024 electricity price increase dropped out of the annual comparison, but fuel prices spiked 7.5% month-over-month in July following three consecutive months of declines. The jump in fuel prices was driven by two key factors: rising global oil prices and the partial rollback of the federal government’s temporary fuel excise subsidy, which was cut in half this July.
ABS head of price statistics Rachael McCririck confirmed that while there has been some progress on lowering headline inflation, much of that progress stems from calendar effects, as the extreme price spikes seen in July 2024 roll out of the 12-month calculation. Following the release of the inflation data, money markets immediately priced in an 87% probability that the RBA will deliver at least one additional rate hike before the end of 2025, leaving millions of Australian mortgage holders bracing for new increases to their monthly repayment.