Commonwealth Bank economists now expect the Reserve Bank of Australia (RBA) to raise the official cash rate by 0.25 percentage points to 4.85% when its Monetary Policy Board meets next week.
The change comes as the RBA warns inflation is likely to run higher than it expected only a few months ago, with pressure coming from higher energy costs, the global AI investment boom and capacity constraints at home.
“The key question is whether four hikes this year is enough,” CommBank Head of Australian Economics Belinda Allen said in a new research note.
Recent RBA communication suggest the answer is no.
A November increase would be the fifth rate rise of 2026.
Inflation risks are becoming reality
RBA Governor Michele Bullock said on Wednesday that some of the risks identified in the central bank’s August forecasts had since materialised or were in the process of doing so.
“Inflation will therefore likely be higher than was our base case in August,” Bullock told a Senate economics committee.
The RBA had previously expected inflation to return to around the midpoint of its 2% to 3% target range in late 2027.
Global energy prices are now much higher than the RBA assumed in August following a re-escalation of the conflict in the Middle East. Bullock said the AI boom and extreme weather were also pushing up some agricultural and technology-related prices.
But the pressure is not only coming from overseas.
The RBA now believes the labour market is “a little tighter than we had previously judged”, despite the recent rise in unemployment, Bullock said.
Weak productivity is another concern because it limits how quickly the economy can grow without generating more inflation.
Allen said this reassessment of domestic capacity pressures was a major factor behind CommBank’s changed rate call.
“As a result, we see the hike in November as an insurance hike to protect against these forces,” she said.
“Acting early and acting decisively should manage the risk of inflation being higher for even longer.”
From a live meeting to a hike call
CommBank had still been forecasting rates would remain unchanged in November ahead of the latest quarterly inflation figures, but warned the decision was finely balanced.
Senior Economist Trent Saunders had forecast trimmed mean inflation, a measure of underlying inflation closely watched by the RBA, would rise 1.0% over the September quarter and 3.6% over the year.
The quarterly Consumer Price Index (CPI) published by the Australian Bureau of Statistics on Wednesday matched that forecast at 1.0%, while annual trimmed mean inflation came in at 3.7%.
Allen said the result affirmed CommBank’s view that another rate rise was on the cards, even though the numbers were broadly in line with its expectations.
Inflation “overall remains too high”, she said. The main reason for the change of call has been recent RBA communication.
Allen pointed to a change in the RBA’s tone since its September rate rise, highlighting the more dovish message at Bullock’s September press conference, which was corrected by more recent RBA communications.
Market pricing for a November increase has also risen sharply and now sits at about 90%, according to CommBank’s analysis.
Higher rates are already slowing the economy
The case for another increase comes despite growing signs that four rate rises this year are already weighing on activity.
Bullock said the full impact had yet to flow through because monetary policy works with a lag.
Household spending growth has been moderating, housing prices have fallen across Australia and new housing lending has declined.
That lag was also a key theme when RBA Assistant Governor Christopher Kent spoke with Allen at Commonwealth Bank’s Global Markets Conference this month.
Kent said monetary policy operates with “long and variable lags”, while describing financial conditions as somewhat restrictive. The question for the RBA, he said, was whether they were “restrictive enough”.
Allen said CommBank’s own data was also showing the slowdown taking hold, with card spending slowing, unemployment rising and sentiment surveys remaining pessimistic.
“A more subdued economy will be the cost of bringing inflation back to target in a reasonable timeframe,” she said.
“But the RBA has picked a side and is leaning into the fight.”
What happens after November?
CommBank expects the economic cost of higher rates to become clearer over coming months, with weaker growth, softer home prices and higher unemployment than previously forecast.
Allen expects the RBA’s updated forecasts next week to show higher inflation, reflecting both fuel prices and its reassessment of domestic capacity pressures.
CommBank also expects the RBA to downgrade growth further and lift its unemployment forecasts.
If rates rise in November, Allen expects the RBA to remain on hold in December and February as it waits for more evidence of how the economy and inflation are responding.
She said the RBA was unlikely to declare victory over inflation and would probably continue to signal that rates could rise again if needed.
CommBank has rate cuts pencilled in for August and November 2027 if enough progress has been made on inflation, although Allen said “a large degree of uncertainty remains on timing”.
