UBS and Capital Economics Predict Australian Interest Rate Hike in September

UBS and Capital Economics now expect the Reserve Bank of Australia (RBA) to raise interest rates by 25-basis points at its upcoming meeting on September 29.

This prediction comes as inflation remains elevated and above the RBA's 2-3% target band. Trimmed mean inflation has shown little sign of slowing, with Capital Economics economist Marcel Thieliant warning that the upside risks to inflation are starting to crystallise.

UBS economist George Tharenou believes the most likely trigger for an RBA rate hike would be quarterly trimmed mean inflation rising 1% quarter-on-quarter in September, above the RBA's forecast of 0.8%. He also pointed out that stronger-than-expected monthly inflation in July and June quarter GDP growth of 2.1% year-on-year are contributing to inflationary pressures.

Average monthly inflation was higher than expected in July, which may push quarterly trimmed mean inflation above the RBA's forecast of 0.8%. AMP chief economist Shane Oliver also highlighted elevated government spending as an inflationary pressure, noting that public expenditure remains around 28% of GDP compared with a pre-Covid norm of 22-23%.