Bond traders have reassessed their expectations for a rate cut at the Reserve Bank of Australia’s (RBA) September board meeting following the release of higher-than-anticipated monthly inflation figures. Market pricing now indicates a 28 per cent probability of a rate cut next month, a decrease from the 37 per cent probability priced in before the inflation data was released. The shift in expectations comes after the consumer price index (CPI) increased to 2.8 per cent year-on-year in July, up from 1.9 per cent in June. The consensus expectation had been for a more modest rise to 2.3 per cent.
The RBA’s preferred measure of underlying inflation, the trimmed mean, also experienced an uptick, rising to 2.7 per cent in July from 2.1 per cent the previous month. These figures suggest that inflationary pressures within the Australian economy may be more persistent than previously anticipated, prompting a recalibration of expectations among financial market participants. The central bank aims to maintain sustainable economic growth and employment, typically adjusting interest rates to manage inflation.
Despite the diminished expectations for an immediate rate cut in September, markets are still fully pricing in some monetary policy easing in November. Furthermore, an additional rate cut is anticipated in 2026, with the March or May meetings seen as the most likely timing for such a move. These expectations reflect a broader view that the RBA will eventually need to provide some level of stimulus to the economy, even if the timing of the initial move is now less certain.
