RBA Set for Rate Hike as Inflation Remains Above Target

The Reserve Bank of Australia (RBA) is set to make an interest rate decision on September 29, and traders are giving it a high probability of a rate hike at 87%, according to LSEG data. Among Australia's four largest banks, only NAB sees a September hike as the baseline scenario, while the other three expect the RBA may postpone such a move until November.

One argument in favor of a rate hike is inflation exceeding the RBA's 2-3% target range. The annual consumer price index fell from 3.8% to 3.5% in July, but came in above economists' forecasts. The trimmed mean measure, which the RBA uses to assess underlying inflation, remained at 3.6%. Growth in services prices also remained above the target range, indicating domestic inflationary pressure.

Australia's economy grew by 2.1% over the 12 months to June, slightly above expectations. However, potential growth is estimated at about 2% due to low labor productivity. The RBA estimates that increased business investment, primarily in artificial intelligence projects and data center construction, has driven economic activity.

However, some economists believe the RBA should wait for full data on the September quarter before making a decision, as monthly inflation readings are considered less reliable. Additionally, a downturn in the housing market is a risk to the economy, with variable-rate mortgages widespread and house prices under pressure.