Australia rates more likely to rise again, warns economist

CreditorWatch Chief Economist Ivan Colhoun has warned that Australian interest rates are more likely to rise again than fall, citing new readings on consumer sentiment and business conditions.

The latest Westpac-Melbourne Institute Consumer Sentiment survey showed a modest lift in confidence in July, but overall sentiment remained historically weak. NAB's June Business Survey pointed to an economy diverging sharply by sector, with construction and mining outperforming while consumer-facing and interest rate-sensitive industries struggled.

Colhoun said the incoming indicators support the view that the Reserve Bank of Australia is not yet at the end of its tightening cycle. His central case is for the RBA to remain on hold for several months before considering further rate rises later this year or early next year.

Consumer confidence rose 4.1% in July, following a pull-back in oil prices and reduced immediate fears of further RBA hikes.

Even so, the index remains about 10% lower than a year earlier and sits in the bottom 10% of readings in the survey's 50-year history, signalling entrenched household pessimism.

Survey components point to persistent pressure on family finances. Measures of expected economic conditions over the next 12 months, whether now is a good time to buy a major household item, and family finances compared with a year ago all remain sharply weaker than a year earlier.

House price expectations deteriorated further, with the index falling another 8% in July and 27.5% over the year, in line with a broadening housing downturn.

One of the more positive signals in the sentiment report came from unemployment expectations, which fell 7.1% over the month and are now close to their average over the past two years.

Colhoun said earlier spikes in job-loss fears appeared to reflect geopolitical tensions and petrol costs rather than a clear deterioration in labour demand. He continues to track SEEK job advertisements, which show only slight softening.

"Consumer confidence rose 4.1% in July, though this still leaves the index in deeply pessimistic territory, 10% lower than a year ago and in the bottom 10% of readings in the 50-year history of the survey. The responses of various categories of consumers suggest that lower fuel prices and reduced expectations of further interest rate rises were behind the improvement in the index this month. Westpac noted some deterioration in responses over the course of the survey week as the situation in the Strait of Hormuz deteriorated again, suggesting an even better result might have occurred," said Ivan Colhoun, Chief Economist, CreditorWatch.

Business conditions in NAB's survey were steady at +3 index points in June. That is only slightly below the long-run average and does not yet point to a substantial economy-wide slowdown.

Forward-looking measures such as forward orders and profitability improved slightly. Capacity utilisation has eased since January but was unchanged in June, suggesting some slack rather than a deep downturn.

The survey also revealed a pronounced multi-speed pattern across sectors. Construction and mining reported the strongest conditions, while manufacturing, retail trade and wholesale trade were notably weaker, partly because of higher energy and transport costs.

Finance, property and business services also showed softer conditions, which Colhoun linked to higher interest rates, recent tax changes and signs of weakening housing activity.

Recreation and personal services, which cover many discretionary spending categories, have been deteriorating since mid-2025. The sector weakened further after interest rates and oil prices began rising again from February.

Cost pressures in the NAB survey remain elevated, although purchase costs have eased slightly from their March peak. A rare monthly fall in retail prices offers tentative evidence that the latest inflation pulse may be less persistent than during the pandemic period if oil prices retreat.

Wage developments are adding complexity for the central bank. The 4.75% increase in minimum wage and award rates from July, almost double the RBA's inflation target, is likely to keep underlying price pressures firm.

Across the states, Western Australia stands out for stronger business conditions, consistent with elevated commodity prices. Victoria remains generally soft, while Queensland has shown a noticeable weakening trend since February, coinciding with higher interest rates and fuel costs.

New South Wales, the largest state economy, saw a partial rebound in conditions in June after a sharp fall the previous month. Colhoun said capacity use has risen in construction and mining since January, but declined in finance, property and business services, transport and utilities, and wholesale trade.

He also questioned the strength of the broader economy's "capacity constrained" narrative. In his view, only the labour and housing markets still show clear signs of tightness.

Colhoun expects the ongoing global AI investment wave to complicate the RBA's effort to return inflation to target. He also sees a similar risk bias toward higher interest rates emerging in the United States.