Rate hike in November moves back into the base case, on more resilient household incomes and larger spillovers from the data centre boom than previously forecast.
The likelihood of an additional rate hike has risen enough to make a November hike (+25bp to 4.6%) the base case again. When we last changed our view on RBA policy, we emphasised that risks of further hikes should not be ruled out. We also said that it was prudent to continue pricing in some chance of a November hike. But with the data having consistently broken to the soft side in the lead-up to the August meeting, and pass-through from fuel to non-fuel prices easing, that probability dropped below 50% for a time. The data flow and narrative have since changed direction and shifted that probability higher again.
The main reasons for the shift are the growing evidence of a more resilient household sector, and a larger-than-expected impetus from the spillovers from the data centre boom. National accounts and internal data have pointed to stronger household incomes in Q2 and onwards, which means spending will be more resilient over the near term even with sentiment stuck at historically weak levels. Although the housing market is looking weaker than our previously published forecasts, its impact on consumer spending is more than offset by the wider boost coming from a globally-driven surge in tech-related spending. An unprecedented pipeline of investment in data centres and associated renewable electricity generation and distribution is expected to drive business investment and so GDP growth – but also limit the pace of disinflation.
Tactically, we believe RBA leadership would strongly favour a November hike over September. Overreacting to a noisy monthly print is something they have previously said they would not do. That said, if the internal members felt the situation was more urgent and wanted to get the hike done in September, we believe they could muster a majority of Monetary Policy Board (MPB) votes in favour. Either way, the September decision may see a split vote, with some members coming into the meeting with different views about supply capacity and the state of the labour market. On balance, we do not think a September hike this is the most likely outcome and expect the MPB to prefer to wait for the full quarterly inflation data and revised forecasts to confirm the need for a rate increase. Clearly the probability of the September scenario is not zero, however. We will therefore be watching today’s RBA communication closely for signs that the leadership is anxious to move.
Domestic demand growth forecasts have been upgraded, and (to a lesser extent) so are our GDP forecasts. Data centre and renewables investment are highly import-intensive. In addition, much of the upside surprise on household spending has been showing up in (imported) EVs and overseas travel. Much of the upgrade to domestic demand growth is therefore matched by higher imports, with a smaller net impact on GDP growth. There are enough spillovers to domestic activity, though, for us to upgrade the expected trough in GDP growth to around 1.5%yr over 2026, compared with the 1.0%yr we had anticipated prior to the June quarter National Accounts. This is still below the RBA’s downbeat view of trend growth – and further below our own – implying spare capacity will emerge over time.
More broadly, we have been revisiting the forecasts and overarching narratives behind those forecasts ahead of our September Market Outlook, to be published on Friday. Growth is stronger and housing prices are weaker. The tech sector is adding new cost pressures not evident previously. But while Q3 inflation is looking to be stronger than Q2 (and Q4), the higher cash rate profile means that the inflation outlook for 2027 and 2028 is little changed from before. The underlying story is one of a global technology and investment boom driving stronger business investment in Australia, supported by healthy business balance sheets. The handover from strong public demand growth has happened, and supply capacity is rising, as infrastructure projects complete and in line with the shorter lead times on data centre production.
We have not changed our assessment of the timing or number of cuts to the cash rate, pencilling in three 25bp cuts starting August 2027. This leaves the whole path for the cash rate 25bps higher than our earlier expectations, consistent with the emerging impetus from business investment. We do not have strong conviction about the exact timing of the unwind of restrictive monetary policy, but we expect the RBA to take a cautious approach given last year’s experience and the Bank’s downbeat starting assessments of capacity, labour supply and productivity growth. Trimmed mean inflation ends 2028 somewhat below the midpoint of the RBA’s 2–3% target range, and there are scenarios where inflation undershoots the target entirely in late 2028 or 2029.
The table below shows the high-level forecasts motivating our change in rates view. Further detail will be published in Market Outlook on Friday.
 the base case again. When we last changed our view on RBA policy, we emphasised that risks of further hikes should not be ruled out. We also said that it was prudent to continue pricing in some chance of a November hike. But with the data having consistently broken to the soft side in the lead-up to the August meeting, and pass-through from fuel to non-fuel prices easing, that probability dropped below 50% for a time. The data flow and narrative have since changed direction and shifted that probability higher again.){kind=link}