Published: August 28th, 2026
The Reserve Bank of Australia (RBA) may have to raise interest rates before year's end after an above-concensus inflation reading softened the case for staying the course on monetary policy.
A note from ANZ predicts the RBA will lift its cash rate by 25 basis points in November, taking it to 4.60%. The bank's call follows July data showing that underlying inflation accelerated more than economists had expected, while several measures suggested that price pressures are proving broader than the central bank would prefer.
The Australian Dollar responded accordingly. AUD/USD was up around 0.3% at 0.7172 on Tuesday, extending a multi-week advance. GBP/AUD fell 0.36% to 1.8982.
The most important figure in the July release was trimmed mean inflation, the RBA's preferred measure of underlying price pressures. Trimmed mean inflation rose 0.5% in July, compared with expectations for a 0.3% increase. The annual rate held at 3.6%, leaving it above the upper end of the RBA's 2-3% target range.
Headline inflation actually eased to 3.5% from 3.8% a year earlier, but was still well above the 3.2% expected by markets.
ANZ says a larger share of the CPI basket is now recording inflation above a 3% annualised rate over one-, three- and six-month periods. That suggests the July result was not confined to a handful of volatile categories.
Some of the largest upside surprises came from discretionary spending, including restaurant meals and domestic holidays. These categories are not especially sensitive to energy prices, making the result more relevant to the question of domestic demand.
The bank's analysts argue that the breadth of the increase may indicate that economic activity has not weakened as much as the RBA had expected. That would challenge part of the reasoning behind the central bank's decision to hold rates in August.
Each of the past three years has produced a relatively strong July reading for trimmed mean inflation. ANZ suggests that some price increases associated with the start of the financial year may not be fully captured by the seasonal adjustment process, particularly in spending categories with shorter statistical histories.
That gives the RBA a reason to wait for more evidence. There is also a question of timing. The central bank places greater weight on quarterly inflation data than on individual monthly observations, and its monetary-policy decisions are generally more closely associated with meetings accompanied by a Statement on Monetary Policy.
November therefore offers a more natural point at which to act. ANZ expects the third-quarter trimmed mean to rise at an annualised quarterly pace of 1.0%, compared with its previous expectation of 0.9%. The margin for error is substantial, but another firm quarterly reading would make a November increase considerably easier to defend.
The threshold for leaving rates unchanged is therefore becoming higher. ANZ says economic activity would need to be "very soft and below potential" to justify a pause if underlying inflation were running above a 3.5% annualised pace.
The Australian Dollar has also benefited from a broader improvement in market sentiment. AUD was among the stronger-performing G10 currencies as investors responded to lower oil prices and reduced concern over long-term bond-market pressures.
CIBC Capital Markets said the Australian and New Zealand Dollars had outperformed amid a broader rebound in risk appetite. Falling Brent crude prices also helped. For Australia, which is heavily exposed to global commodity markets, a more benign oil-price environment can improve the outlook for inflation and risk sentiment at the same time.
The geopolitical backdrop remains less straightforward. Developments surrounding Iran have affected energy markets and investor expectations, although the Australian Dollar's performance has increasingly reflected conventional macroeconomic factors.
China provides the more direct regional influence. China is Australia's largest trading partner, and its demand for Australian commodities gives the Australian Dollar an additional channel through which global growth expectations are expressed.
In August, China's General Manufacturing PMI rose to 51.5 from 50.9 in July, reaching a two-month high and exceeding the roughly 51.0 expected by markets. New orders and exports strengthened, with export growth reaching its highest level in six months.
The improvement followed a better reading from China's official manufacturing PMI, providing two separate surveys pointing in the same direction.
For AUD traders, the export component is particularly interesting. Stronger overseas demand for Chinese manufactured goods points towards firmer industrial activity, which has implications for Australia's commodity exports.
The Australian Dollar's appeal earlier in 2026 rested partly on the RBA moving ahead of several other major central banks. As expectations of further Australian tightening faded, some of that advantage disappeared. July's inflation figures have reopened the trade.
A November increase would leave Australian rates at 4.60%, reinforcing the yield differential available to investors holding Australian assets. At the same time, the Australian economy is receiving support from a more constructive Chinese growth picture and improved global risk appetite.
Sterling offers a useful comparison. The GBP/AUD exchange rate has fallen back below 1.90, leaving the pound buying fewer Australian Dollars as markets digest the prospect of higher Australian rates.
The immediate question is whether July inflation proves representative or merely noisy. The RBA has reasons to wait, including the unusual seasonal pattern in July. It also has reasons to remain alert. Underlying inflation is still above target, discretionary spending is contributing to price pressures and Chinese data are providing some support to Australia's external outlook.
For the Australian Dollar, that combination has restored a trade that seemed to be fading: higher domestic yields accompanied by a reasonably supportive global backdrop.
The RBA still has several weeks of data before November. For now, ANZ's forecast has made one thing clear. A rate hike is no longer an afterthought in the Australian interest-rate market.
