Jobs, tariffs and expanding war: the constantly changing variables that could force RBA's hand

What just weeks ago appeared a long shot has now doubled its probability.

An interest rate hike was given minimal chance of being imposed on borrowers but the recent escalation in Middle East fuel supply blockages, which now extends beyond the Arabian Gulf to the Red Sea, and an employment surge past all ​expectations have changed the game.

Markets now place a nearly 30 per cent chance of an interest rate rise on 12 August, up from 16 per cent two weeks ago. The probability of a hike by November has doubled to 80 per cent over the same period, according to ANZ.

Traders are now pricing in a 36 per cent chance of higher borrowing costs from next month and are now fully priced for one more increase by the end of the year.

While the seasonally adjusted unemployment rate remained at 4.4 per cent in June, according to the latest data from the Australian Bureau of Statistics (ABS), the surprisingly upbeat data showed employment shot up 76,300 in June from May, the largest increase since April last year.

Thursday’s figure was well above forecasts of a 15,300 gain and helped lift the annual pace in job gains to 1.7 per cent from 1 per cent. The RBA is less likely to raise rates when the unemployment rate is high.

By Friday, the odds of an imminent rate increase had accelerated, on the back of the renewed US-Iran conflict sending Brent crude oil prices back above $US1000 a barrel for the first time since May.

Oil prices surged after Houthi militants in Yemen attacked oil tankers in the Red Sea, disrupting a key export route used by Saudi Arabia to bypass the Strait of Hormuz. The US-Iran conflict, meanwhile, entered its 11th day and shipping through the Strait of Hormuz has been further constrained.

A 25 basis point rate rise would take the cash rate to 4.6 per cent, which would be the highest since 2011.

Tony Sycamore, an analyst at IG, said the robust June jobs report follows last month’s strong rebound “and aligns with the RBA’s view that labour market ⁠conditions ​remain resilient”.

“The RBA’s key concern ​will be that this tightness feeds into wage growth and, more broadly, into inflation in an economy where price pressures are already uncomfortably high, especially ​with crude oil up 26 per cent this month.”

In a research note, NAB Head of Markets Research Skye Masters said rising oil prices were putting pressure on bond markets by fuelling expectations of further central bank tightening.

Westpac is expecting the RBA will hike rates in August, with a follow-up hike in September still its base case but less certain.

Commonwealth Bank expects the RBA will be on hold for the rest of 2026, with two rate cuts expected in 2027. But there is a risk further hikes could be needed, bank executives have told media, if a prolonged closure of the strait and a big jump in oil prices feeds through to higher inflation.

Tariff increases muddying the waters

The imposition on Friday (24 July) of tariff hike increases on Australia, and other countries, by the US and tied to dubious claims about combating forced labour could actually add some weight to the argument the RBA should hold off on a rate hike.

Australia’s tariff rate will lift to 12.5 per cent, from 10 per cent. The new levy, imposed on dozens of countries and economic blocs, will replace a temporary 10 per cent tariff that was set to expire at the same time.

Heightened global market uncertainty leads businesses and households to delay spending and hiring, which slows the domestic job market and increases the likelihood of RBA rate reductions.

Broader trade wars tend to reduce international demand for Australian commodities and dampens domestic growth, encouraging the RBA to lower, or at least hold, rates to stimulate the local economy.

Barrenjoey’s chief rates strategist Andrew Lilley said next week’s inflation data remained the decisive factor for the RBA at its upcoming board meeting.

He said the RBA would have little choice but to raise interest rates in August if the trimmed mean inflation measure came in at 1 per cent – above Barrenjoey’s forecast of 0.9 per cent.

“The strong employment numbers make a hike more likely but the key for the RBA and the market will be the CPI,” he said.

Jonathan Kearns, Challenger Chief Economist and former RBA executive, agreed, saying a trimmed mean inflation result of 0.9 per cent or higher would be enough to justify further policy tightening.

“We’ve had high inflation for most of the almost four years, and the risk is that inflation expectations creep up,” Mr Kearns said.

“My view is that the market has been underpricing the chance of a hike – I think it’s a 50-50 call.”

Falling property prices, stronger bank competition

Josh Sale, Canstar.com.au’s Group Manager – Research, said the next three weeks will decide whether that fourth hike arrives.

“Not a single lender lifted home loan rates this week; instead, Teachers Mutual Group trimmed its variable rates, taking the tally of lenders that have cut variable rates since the RBA’s May hike to 23.

“Lenders cutting in a year where the cash rate has risen three times might look strange, but it is textbook competition. 

Mr Sale said home values fell in June at the fastest monthly pace since late 2022.

“Sydney and Melbourne are going backwards, and fewer buyers mean fewer new loans, so lenders are sharpening their new customer pricing to fight over a shrinking pool of borrowers.

“The gap between the RBA’s average variable rate of 6.26 per cent and the lowest on Canstar’s database at 5.69 per cent is worth around $209 a month in repayments on a $600,000 loan. This would more than cover another rate hike.

“You cannot control the RBA, but plenty of borrowers could claw back part of the cost of this hiking cycle with one sharp conversation with their lender, or by voting with their feet.”