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Steve Campbell: Why the RBA changed course on rates and what’s next
Higher inflation, resilient growth and rising oil prices have forced the RBA back into action. Pendal head of cash strategies STEVE CAMPBELL explains where to from here
- Inflation pressures remain stubbornly high
- More rate hikes may follow
- Find out about Pendal’s cash funds
THE Reserve Bank of Australia (RBA) has raised the cash rate by 25 basis points to 4.60% at its September meeting.
Following the RBA’s August meeting, the market priced in only a 15% chance of a rate hike at the most recent meeting. So what changed?
Expectations for a rate hike increased following the release of the July monthly inflation data in late August. The data showed trimmed mean inflation rising by 0.5% for the month and 3.6% over the year. The annual number was higher than expected and saw the market price a rate hike at the RBA’s next meeting in September as being 50/50.
The national accounts then showed economic growth increasing by 0.4% in the second quarter and 2.1% over the year. The quarterly number was slightly better than expected. The RBA’s Statement on Monetary Policy (SoMP) had forecast annual growth of 1.9%. The market moved to price a hike at 69%.
The icing on the cake has been the increase in the oil prices. The Brent November contract rose from $82 to a peak of $105 in mid-September. The price has subsequently come back however bond yields remain elevated, as do bowser prices.
The Australian three-year government bond rate peaked at 5.05% before recovering some ground. A three-year rate around 5% says that the RBA is not done hiking, and cuts shouldn’t be expected anytime soon either.
What is driving inflation?
The RBA in its statement pushed a lot of blame onto fuel prices. Perhaps it wanted to avoid the current criticism being pushed by many that excessive government spending has been boosting domestic inflation.
A key area behind this year’s hikes has been housing inflation.
The graph below shows the contribution to overall CPI from the items in housing inflation. This has risen from ~0.4% in mid-2025 to around 0.9% now, with the bulk coming from the new dwelling component.
This is not house price inflation – this is the inflation involved in the inputs into housing. This captures the inflation challenge facing the RBA.
Building material costs are rising due in part to the conflict in the Middle East.
At the CEDA conference in late September Governor Michele Bullock also pointed out other supply shocks stemming from the Russia-Ukraine conflict and tariffs. It’s the combination of these supply shocks that risks embedding higher inflation expectations.
And the housing sector also faces labour cost pressures from the growth in data centre capital expenditure that compete for electricians, plumbers and other tradies.
Data centres themselves will not add to net economic growth in the build-out phase. Most of the components are imported and will weigh on the National Accounts net export contribution.
Yet they can add to inflationary pressures on a few fronts as they compete with other sectors for labour and materials.
Electricity prices can be expected to rise. The risk of a drought is increasing. Water prices (and food inflation) may also add to inflationary pressures. Overall, the pressure on inflation remains too high.
Where to from here?
The RBA is unlikely to stop at a single hike. In an unfortunate piece of timing the August monthly inflation series is released tomorrow. We also get the more comprehensive quarterly inflation series in late October along with another monthly inflation series release.
The RBA will have a clearer inflation picture for the next meeting on Melbourne Cup Day. Currently, expectations sit at 1.0% trimmed mean for the third quarter CPI, well above the 0.6% to 0.7% comfort zone.
This should see November priced as another likely hike.
Find out about
Pendal Managed Cash Fund
Steve Campbell, Head of Cash Strategies
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal Managed Cash Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332 AFSL 431426.
It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and we recommend that you seek professional advice.
The product disclosure statement (PDS) for the relevant Pendal Income and Fixed Interest fund, issued by PFSL, should be considered before deciding whether to acquire, dispose, or hold units in this Fund. The relevant PDS and Target Market Determination can be obtained by calling 1300 346 821 or visiting our website www.pendalgroup.com.
To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. All investing involves risk including the possible loss of principal.