Australian Inflation Surges, Boosting Rate Hike Bets

The Reserve Bank of Australia (RBA) is facing increased pressure to raise interest rates due to higher-than-expected inflation in July. The Australian Bureau of Statistics reported a 1.0% month-on-month rise in the Consumer Price Index (CPI), exceeding economist forecasts of 0.8%. This increase was mainly driven by a 7.5% rebound in fuel prices and rising travel costs.

The trimmed mean CPI, which is the RBA's preferred measure of core inflation, rose 0.5% month-on-month, its largest monthly increase in a year. As a result, market-implied odds for an RBA rate hike at the September meeting jumped from 17% to 27%, with an 80% probability priced in for a rate increase by February 2027.

The RBA's policy rate is currently at 4.35%, and a 25 bps benchmark cash rate increase would bring it to 4.60%. The Australian Dollar (AUD) strengthened 0.1% following the data release, as expectations of prolonged high interest rates provided underlying support for AUD/USD against major currencies.