Short-term gain, medium-term pain for AUD if RBA hikes, NAB says

For the Australian dollar, the outlook is mixed. A rate increase today, along with any suggestion of another move in November, would provide short-term support, yet NAB reckons the interest-rate advantage Australia currently enjoys over other G10 economies could shrink if investors start to anticipate an earlier easing from the RBA than its counterparts. With a 25bp increase almost fully priced in, the market's response is likely to depend on the accompanying statement and Governor Bullock's press briefing, especially on whether the board leaves the door open for November. AUD/USD has hovered near 0.70, with a firm US dollar and rising Treasury yields already acting as headwinds.

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Earlier

• RBA preview: 25bp hike to 4.60% widely expected as sticky inflation lingers

• Sticky core inflation pushes RBA towards its highest cash rate since 2011
• RBA preview: A 25 bps rate hike is priced in, but what comes after that?
• All four major Australian banks now forecast RBA hike to 4.60% on September 29
• RBA governor Bullock flags inflation risks as higher neutral rates come into focus
• RBA's Bullock says supply shocks hard for policy to manage, flags second round risk
• RBA's Hunter says rates may need to rise again as inflation risks stay tilted higher

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NAB contends that the RBA's upcoming rate rises could push the Australian dollar higher in the short run, but could also put Australia among the first G10 nations to have to unwind its tightening.

Summary:

• A 25bp hike to 4.60% is widely expected today, with NAB flagging a significant chance of an additional move in November.
• Australian interest rates have shifted from the bottom of the G10 band to close to its top, according to NAB.
• NAB argues Australia is not like the US, pointing to a gradual increase in unemployment, shrinking business margins, falling home prices and less robust growth indicators.
• Should the RBA implement the hikes that markets have priced, NAB suggests the central bank could eventually lower rates ahead of other G10 central banks.
• Markets are not factoring in a substantial easing cycle for Australia, NAB observes.
• The conclusion is that extra increases may underpin the AUD in the short term, but the medium-term danger is that Australia ends its tightening first and is then one of the first to reverse.

National Australia Bank believes the RBA might be one of the first Group of Ten central banks to conclude its tightening and begin easing, even though it is set to increase the cash rate by 25 basis points to 4.60% on the day. The announcement is scheduled for 2:30pm AEST (0430 GMT / 0030 US Eastern time), with Governor Michele Bullock holding a press conference that follows an hour afterwards.

According to NAB, Australian interest rates have shifted from the lower end of the G10 spectrum to the upper end. The bank sees a real possibility of another rise in November, having already predicted a September increase back in late August. Reaching 4.60% would mark the highest cash rate since November 2011 and the fourth hike of 2026.

The core of NAB's case is that Australia is in a different position from the US. The bank highlights a slow increase in unemployment, squeezed business margins, declining house prices and less convincing growth indicators. Given that, it argues that should the RBA undertake the tightening already reflected in market prices, the central bank may subsequently be able to lower rates earlier than its G10 counterparts. NAB also observes that traders are not anticipating a major Australian easing cycle.

Turning to the Australian dollar, NAB says additional rate rises could provide near-term support, but the medium-term outlook is the reverse. The bank suggests Australia might be the first to stop raising rates and then one of the first to reverse direction.

This assessment comes against a backdrop of markets leaning decisively toward a rate increase. A Reuters survey showed 33 out of 34 economists predicting the move today, and all four major banks also expect it. There is less agreement on what follows. In the same poll, 26 of 31 respondents expected the cash rate to remain at 4.60% at the end of December, a small number saw 4.85%, and the median projection put the rate at 4.35% by the end of 2027, though forecasts diverged markedly from the third quarter of that year. CBA has indicated that a September-quarter trimmed mean inflation figure of 1% or higher could prompt another hike, and it has delayed its initial forecast for a cut to August 2027. Westpac has raised the possibility of a divided board vote.

The focus now shifts to the RBA's policy statement and Bullock's press conference to see whether November is still an option, and how quickly market pricing would advance expected cuts if the tightening cycle is over.