The Reserve Bank of Australia is now forecast to raise its cash rate to 4.60% in November after July inflation data exceeded expectations, strengthening the Australian Dollar's yield advantage and shifting currency market sentiment
The Australian Dollar advanced against major currencies after new inflation figures for July prompted analysts at ANZ to predict that the Reserve Bank of Australia (RBA) will raise its policy rate by 25 basis points in November. This anticipated move would lift the cash rate to 4.60%, restoring some of the currency's yield advantage that had faded as other central banks caught up earlier in the year. The shift in expectations follows a sharper-than-expected rise in core inflation, which has kept price pressures above the RBA's target range and challenged the central bank's recent decision to pause rate increases.
According to ANZ, the July trimmed mean Consumer Price Index (CPI)-a measure that excludes volatile items-rose by 0.5% month-on-month, outpacing the 0.3% forecast and keeping the annual rate at 3.6%. This remains above the RBA's 2-3% target band. Headline inflation eased to 3.5% year-on-year from 3.8%, but this was still higher than the 3.2% expected by markets. The composition of the inflation surprise was notable: discretionary categories such as restaurant meals and domestic holidays saw the largest price increases, suggesting that underlying demand remains resilient despite earlier rate hikes.
Market Reaction and Currency Moves
The Australian Dollar (AUD) responded immediately to the data, outperforming most major currencies on the day. The AUD/USD exchange rate climbed by roughly 0.3% to 0.7172, extending a multi-week uptrend. Meanwhile, the Pound Sterling weakened against the Australian Dollar, with the GBP/AUD rate falling 0.36% to 1.8982. This renewed strength in the AUD comes after a period in early 2026 when the currency had lost ground as the RBA paused its tightening cycle and other central banks continued to raise rates. The prospect of a November rate hike has now put upward pressure back into the Australian Dollar's price, especially as the Bank of England and other peers show little sign of imminent policy changes.
In the minutes from its August meeting, the RBA highlighted upside risks to its inflation forecasts, and the latest data have brought those risks closer to reality. ANZ now expects the trimmed mean inflation for the third quarter to print at 1.0% quarter-on-quarter, rather than the previously expected 0.9%, though it notes a wide margin for error. The breadth of price increases across the CPI basket, particularly in categories less affected by global energy prices, suggests that domestic demand may be stronger than previously assumed. This challenges the RBA's rationale for holding rates steady in August and increases the likelihood of further tightening.
Why Not September? Timing and Risks
Despite the strong July inflation reading, ANZ does not expect the RBA to move as soon as September. The bank points to residual seasonality in the data, noting that July has produced strong monthly inflation prints for three consecutive years, possibly due to price adjustments at the start of Australia's financial year that are not fully captured by seasonal adjustment methods. The RBA's stated preference for acting at quarterly Statement on Monetary Policy meetings also supports a November move rather than an earlier hike. ANZ argues that only a sharp slowdown in economic activity between now and November would justify another pause, especially if core inflation continues to annualize above 3.5%.
For context, the RBA last raised its cash rate to 4.35% in August after three increases earlier in the year. The July inflation figures have now cast doubt on the durability of that pause. As the market prices in a November hike, the Australian Dollar's yield advantage is being restored at a time when the British Pound and other major currencies offer little new policy momentum. This dynamic has contributed to the recent break lower in the GBP/AUD exchange rate, a move anticipated in recent forecasts and now triggered by the latest inflation data. For a broader perspective on how inflation surprises can shift currency market expectations, see our coverage of the US dollar's reaction to July inflation data in this related article.
Inflation, Policy, and Currency Implications
The RBA's next steps will depend on how economic activity evolves in the coming months. If growth slows sharply, the case for another rate hike could weaken. However, if demand remains firm and inflation pressures persist, the central bank is likely to act in November to prevent further slippage from its target. ANZ expects that a single additional hike to 4.60% should be enough to slow activity and contain inflation risks, but acknowledges that the margin for error is wide and that further surprises cannot be ruled out.
Trimmed mean inflation is a core measure used by the RBA to assess underlying price pressures, as it removes the most volatile items from the CPI basket. This approach helps the central bank distinguish between temporary shocks and persistent trends. When a larger share of the CPI basket is rising at an annualized pace above 3%, it signals that inflation is becoming more broad-based and harder to control with modest policy adjustments. The RBA's preference for quarterly data and its focus on Statement on Monetary Policy meetings reflect a cautious approach to rate changes, balancing the risks of acting too soon against the dangers of falling behind the inflation curve.
