Rate rise fears grow as inflation stays stubbornly high

The chorus of voices predicting another interest rate rise before 2026 is ushered out the door is growing louder.

As of Thursday (27 August), three of the big four banks were tipping the Reserve Bank of Australia (RBA) would be forced to lift the official cash rate in response to stubbornly high inflation, wage growth, and rising household spending that continues to fan the higher prices.

NAB, which became the latest bank to predict a rate rise for 2026, has raised the prospect of two rate rises before Christmas taking borrowing costs to their highest level in almost 20 years.

It now expects a hike in just under five weeks’ time following the RBA’s next Board meeting on 28 and 29 September. While it’s not part of its base case forecasts, the big four bank has not ruled out the possibility that the RBA would be backed into an economic corner requiring a second rate rise by November.

A 0.25 percentage point rate hike in September would add approximately $91 to the monthly repayment on a $600,000 loan with 25 years remaining, according to analysis by Canstar.

A further rate hike in November would add another $92 to these repayments. Across what would then be five rate hikes this year, the total increase to monthly repayments would be $456.

The latest Australian Bureau of Statistics (ABS) figures show headline inflation came in at 3.5 per cent in the year to July, down from 3.8 per cent the month prior. However, trimmed mean inflation, the RBA’s preferred measure, stayed put at an annual rate of 3.6 per cent.

The last time core inflation went down was November 2025, eight datasets ago.

Canstar’s data insights director, Sally Tindall, said “this is a troubling result for the RBA because it points to sticky price pressures that refuse to go away”.

Household spending data, released today by the ABS, shows spending for the month of July increased 7 per cent, in nominal terms, compared to the same month last year, and the highest annual increase since June 2023.

Discretionary spending has risen for the third consecutive month, and also recorded the largest increase since June 2023, at 7.8 per cent.

“These figures of elevated household spending add to the case for an RBA rate increase,” Ms Tindall said.

Ivan Colhoun, Chief Economist, CreditorWatch, said the case for a rate hike was becoming irresistible.

“Household spending was stronger than expected for the third month in succession, which might ordinarily be good news, however, the outcome reflects a combination of temporary World Cup effects, which can be expected to reverse in August, and more worryingly, price increases in a number of categories, including Food and Hotels, Restaurants and Takeaways,” Mr Colhoun said.

“These sectors have many employees likely to have been affected by the recent Fair Work Commission decision to award large minimum and modern award wage rises.

“The July CPI (consumer price index) confirmed the RBA is dealing not with upside inflation risks but with upside inflation reality.

“With inflation having been above the target for such a significant period of time, the Board will have to react by raising interest rates further at its September Board meeting or lose further credibility if it does not react.”

Impact on property market

The latest Cotality Home Value Index shows national house values fell by 0.8 per cent in July and by 2.0 per cent over the three months to July. Despite this, they remain 5.7 per cent higher than a year ago.

Higher interest rates have reduced borrowing capacity, while the Federal Budget has deliberately made investing in established residential property less attractive.

Uncertainty about interest rates and the impact of the Budget is keeping buyers on the sidelines.

Chief Economist Nerida Conisbee said Ray White’s open-home attendance has fallen to just 2.2 people per property, while Cotality’s modelled sales volumes across the combined capital cities are almost 30 per cent lower than a year ago.

“This is a market with very little activity rather than one being driven by widespread distressed selling,” Ms Conisbee said.

She added that prices are likely to fall further but not dramatically.

“The recent pace of decline allows us to test how long the downturn would need to last to produce a significant national fall.

“Since May, national house prices have fallen by an average of 0.68 per cent a month. If this continued for another three months before prices began recovering at the average rate recorded after previous major downturns, the annual result would briefly turn negative, bottoming at around 0.8 per cent below the previous year.

“If the downturn continued for another six months, the annual decline would reach around 4.9 per cent. Only if prices kept falling at their recent rate for another nine months, until April 2027, would the annual decline reach 7.9 per cent and become comparable with the Global Financial Crisis.”

Ms Conisbee laid out her argument that price declines would meet resistance as three phases unfolded.

The post-Budget adjustment was the first. The removal of negative gearing on established homes caused an immediate fall in investor lending, but the market is already adjusting,” she said.

“Higher rents and lower prices in Melbourne and Sydney are improving rental yields, which could gradually restore investor interest.”

Rising replacement costs provide another constraint.

“Building a new house now costs 51 per cent more than at the end of 2019. As the gap between the cost of new construction and established homes widens, new projects become less viable and buyers may increasingly turn to existing properties.”

Meanwhile, housing supply is falling well short of demand, she added.

The Government’s target requires 240,000 completions annually, but the National Housing Supply and Affordability Council expects around 980,000 homes over the Accord period — a shortfall of approximately 220,000.

“Sydney and Melbourne may see further price falls, and national prices could briefly decline but low transaction volumes are different from a financial crisis, with no widespread forced selling.

“Improving yields, rising construction costs and persistent undersupply are likely to limit the downturn before it reaches GFC proportions.”

RBA’s blunt tool

Whether inflation will even respond to the RBA rate increases is debatable.

Interest rate hikes are a blunt tool for tackling inflation, particularly when price pressures are driven by factors borrowers cannot control. Higher rates do little to reduce the cost of fuel, energy, construction, insurance or other supply-side pressures. Instead, they suppress demand by increasing mortgage repayments.

That places a disproportionate burden on borrowers, especially on some of the most financially vulnerable, namely recent homebuyers and younger households with larger debts.

Australia’s high level of variable-rate mortgage lending means rate increases are passed through quickly, concentrating the pain on the minority of households with mortgages, while outright homeowners and some savers can be far less affected or benefit from higher deposit returns.

The policy can also compound housing pressures by making new construction and investment more expensive, potentially constraining future supply.

Rate hikes may be necessary in some circumstances, but relying on them alone risks treating inflation by asking a relatively small group of Australians to absorb most of the economic pain.