RBA now likely on hold after split-call November rate rise: CommBank economists

The Reserve Bank of Australia is now likely to keep interest rates on hold as the economy slows, CommBank economists say, but persistent inflation means another increase next year cannot be ruled out.

The call follows the RBA’s decision on Tuesday to lift the official cash rate by 25 basis points to 4.85%, its fifth increase this year. The move takes the cash rate to its highest level since 2008.  

The decision was split, with six Monetary Policy Board members voting for the increase and three preferring to leave rates unchanged.

CommBank Head of Australian Economics Belinda Allen said the split showed some Board members were placing greater weight on the downside risks to growth, housing and the labour market, as well as the time it takes for earlier rate increases to work through the economy.

“Overall though we think the RBA will remain on edge as we enter 2027 but will ultimately keep rates on hold,” Allen said.

The RBA said in its November Statement on Monetary Policy that slower demand was needed to bring inflation down, while unemployment was expected to rise further. 

Inflation keeps the RBA on edge

CommBank and the RBA are now closely aligned on the outlook for inflation.

The RBA expects headline and underlying inflation to remain above 3% until late 2027, with headline inflation forecast to peak at 4.5% in the December quarter. Inflation is not expected to return to the midpoint of the 2% to 3% target until around mid-2028 according to RBA forecasts.

Higher fuel and other commodity prices linked to the Middle East conflict are adding to price pressures, but the RBA is also concerned about domestic capacity constraints, weak productivity and rising inflation expectations.

“The RBA's inflation profile is now very close to ours,” Allen said.

CommBank expects trimmed mean inflation to be 3.6% at the end of 2026, with quarterly increases of 0.9%, 0.8%, 0.7% and 0.7% over the following year.

The latest assessment follows CommBank’s decision last week to forecast a November rate increase as inflation risks built. At the time, Allen said a more subdued economy would be the cost of returning inflation to target.

Signs the slowdown is taking hold

The question now is how much further the economy slows as this year’s five rate rises work through households and businesses.

CommBank expects annual economic growth to trough at 1% in mid-2027, before recovering to 2.1% by the end of 2028. The RBA expects growth of 1.6% in mid-2027 and 1.5% at the end of 2028.

The difference is one of degree and timing as well as cash rate expectations. The RBA’s near-term forecasts have received support from a stronger outlook for business investment, particularly spending on data centres, while CommBank expects a sharper but shorter slowdown before rate cuts later in 2027 helps fuel an economic recovery. 

CommBank economists this week said households would bear much of the weight of the slowdown, with annual spending growth forecast to fall to 0.7% by mid-2027 as higher rates, inflation and a softer labour market weigh on household budgets.

Housing is already showing clear signs of that pressure. In analysis published earlier on Tuesday, CommBank economists said home prices were on track for their largest downturn since the  monthly data began.  

The lag between changes in interest rates and their full effect on the economy has also been a recurring theme for the RBA. Assistant Governor Christopher Kent recently told Allen that monetary policy continued to work through housing, household wealth, borrowing costs, saving decisions and the exchange rate, but operated with “long and variable lags”. 

What could prompt another rate rise?

CommBank expects the cash rate to remain at 4.85% in December while the RBA assesses incoming inflation and activity data.

But Allen said another increase in 2027 remained a risk, particularly if inflation again surprised on the upside or there was insufficient evidence that demand was slowing. 

“The risk remains the need for further tightening of monetary policy in 2027,” she said.

CommBank’s central case is that the slowdown already under way will increasingly reduce inflationary pressure.

“We expect this November rate hike to add to the slowdown in growth and gradually bring inflation back to target,” Allen said.

CommBank continues to foresee two 25 basis point cuts in August and November 2027, taking the cash rate to 4.35%, although the timing remains uncertain.