CreditorWatch sees RBA raising rates again by November

CreditorWatch expects the Reserve Bank of Australia to raise interest rates again by November, following the central bank's decision to leave rates unchanged in August.

Ivan Colhoun, CreditorWatch's chief economist, said the latest board meeting showed a stronger bias towards further tightening than markets and most economists had expected. He noted that the board considered a rate increase, but not a cut.

"I remain comfortable with the view that the RBA will likely have to raise interest rates further to ensure inflation returns to target," Colhoun said.

He said the board is waiting to assess the effects of the previous three rate rises before deciding whether more action is needed, with that assessment likely to come into sharper focus by the September or November meetings.

Colhoun said inflation risks remain tilted to the upside, which he sees as significant because the RBA has often shifted policy in line with such risk assessments within three months. He also said the governor indicated during questioning that she personally thought the bank might need to tighten again.

He said it was unlikely inflation would improve enough by then because wage growth remains elevated and business demand is still being supported by investment linked to artificial intelligence. He added that the earlier slowdown in capacity utilisation recorded in the NAB business survey had largely reversed.

Survey split

Separate comments on the latest NAB Business Survey pointed to a widening gap between industries. Business conditions rose one point to +4, which Colhoun described as still reasonable given recent rate rises, higher oil prices and a steep increase in minimum and award wages.

Construction recorded the strongest business conditions for a second straight month, while Mining and Finance, Property and Business Services also strengthened. At the same time, consumer-facing parts of the economy remained under pressure, with Retail Trade and Recreation and Personal Services still weak.

Colhoun said that pattern reflects the uneven impact of higher interest rates, fuel prices and labour costs, alongside stronger demand tied to artificial intelligence, renewables and defence spending. He said the divide is becoming more pronounced across the economy.

"The same factors are contributing to elevated rates of cost increase that make it unlikely that the RBA will be able to be confident that inflation will return to target any time soon," Colhoun said.

CreditorWatch's analysis suggests the construction sector is a particular concern for the inflation outlook. Building materials prices have risen faster than the inflation target for years, while the industry's unionised workforce can influence pay expectations elsewhere in the economy.

Colhoun said firms' wage expectations have strengthened, partly because of the 4.8% rise in modern award wages from 1 July and ongoing cost-of-living pressure. In his view, inflation is unlikely to moderate to 2.5% while wages growth remains at 3.5% or above.

Purchase cost measures in the NAB survey remained elevated, though below the levels seen during the immediate Iran conflict shock and below pandemic-era peaks. Labour costs, however, jumped sharply in the latest survey, which Colhoun linked to the award wage rise.

Pressure points

The RBA's updated forecasts were little changed from three months earlier, although GDP growth was revised slightly higher. Colhoun said that probably reflected stronger investment themes in artificial intelligence and construction, even as the bank continued to describe demand as slowing.

He questioned the central bank's broader narrative of a capacity-constrained economy, but said some areas still show clear pressure, particularly the labour market and construction. Construction firms now report the highest capacity utilisation of any industry in the NAB survey, reinforcing concerns that inflation in that part of the economy may remain stubborn.

State-level data also showed divergence. Western Australia reported very strong business conditions, in line with high prices for selected commodities, while Victoria recorded a sharp rise. New South Wales posted a negative reading for business conditions, which Colhoun said bears watching because of the state's size and wider influence on the national economy.

Other parts of the survey were weaker. Profitability and forward orders were less positive overall, though Colhoun said results varied by industry and still showed considerable strength in Mining and Construction.

For financial markets, he said the upcoming second-quarter GDP figures could carry more weight than usual because they may shape the RBA's view of spare capacity in the economy after weather-related weakness affected first-quarter growth.

"This continues to suggest to me that the RBA will have to raise interest rates further later in the year in order to return inflation to target, with a move by November likely," Colhoun said.