RBA rate hike not expected before 2026

The Reserve Bank of Australia is unlikely to raise interest rates again until at least 2026, based on market expectations and economic forecasts. The central bank held rates steady in August after June-quarter inflation came in softer than anticipated, signaling its tightening cycle may have ended.

RBA pressure eases as inflation cools

David Bassanese, chief economist at Betashares, told investors during a recent webinar that the decision to pause in August reflected a shift in market sentiment. “That was enough for them to leave rates on hold in August, and markets now broadly think the RBA is done raising rates,” he said.

Trimmed-mean inflation, the bank’s preferred measure, fell to 3.6% in the June quarter—slightly below expectations. Forecasts suggest it will continue easing to around 3% by mid-2025, though Bassanese warned that progress depends on economic growth slowing as planned. If growth remains strong, another rate hike could still happen.

GDP growth is expected to dip to 1.4% year-on-year by the December quarter, well below the 2% trend. Unemployment is projected to rise to 4.5% by the end of this year and edge toward 4.8% by 2028. Bassanese said if inflation cools to 3% by mid-2025, rate cuts could begin in the first half of next year.

Fed faces different pressures as energy prices rise

While Australia’s outlook appears stable, the U.S. Federal Reserve is dealing with a more volatile inflation picture. Markets still expect at least one rate hike by the end of the year, though Bassanese believes the Fed may avoid further tightening if inflation continues its downward trend—unless energy prices spike again.

Phil Mackintosh, chief economist at Nasdaq, pointed to the Iran conflict as a key driver of recent inflation pressures. “Rising rates are largely about the Iran war,” he said. “Before the conflict, markets expected rate cuts. Since it started, expectations have flipped, and there’s now a real risk of hikes instead.”

The Strait of Hormuz, a critical shipping route, has seen disruptions as Iran blocks vessels and the U.S. restricts Iranian exports. Mackintosh noted that while the conflict has caused shipping delays, the impact on oil prices hasn’t been as severe as past crises. Still, the Fed remains cautious about waiting too long to act if inflation reignites.

Beyond geopolitics, Mackintosh identified two other inflation factors: fading tariff effects and massive spending on artificial intelligence infrastructure. “The AI build-out involves significant capital expenditure, which is starting to add to inflation,” he explained.

Global markets have remained resilient, driven by strong corporate earnings. Bassanese described the Australian market’s performance as unsustainable over time. “Our market could keep climbing with global trends, but I’d be surprised if it outperforms,” he said. “Our earnings outlook is weaker and still being revised down, while global earnings are stronger and in some cases being upgraded.”

One scenario where Australia might outperform is if global tech stocks suffer a major correction. “We’re underweight technology, so if the big global tech names falter, we might see a rally—just because we don’t fall the same way,” he said, referencing the Australian speed skater’s unlikely 2002 Olympic gold after competitors crashed.

The RBA’s next move will depend on incoming inflation data. For now, the central bank seems content to wait. Whether that patience lasts through 2025 may hinge as much on global energy markets as on domestic economic conditions.

Recent reforms in financial advice could further influence Australia’s economic outlook by improving access to professional guidance.

Bassanese