NAB’s Auld warns RBA could resume hikes by early 2026 as capacity squeeze threatens inflation
Australia’s soft landing is narrowing the RBA’s room to maneuver, with National Australia Bank’s Sally Auld flagging a potential return to rate hikes in the first half of 2026 if growth re-accelerates and the labor market tightens further—an outlook that tilts hawkish versus market expectations and could underpin the Aussie.
Key points
- NAB chief economist Sally Auld says the Reserve Bank of Australia may need to raise rates as soon as early 2026 if activity strengthens and labor conditions tighten.
- Australia is close to full employment, with output expected to return to trend next year, leaving little spare capacity.
- Above-trend growth risks reigniting inflation via stronger wages and capacity-driven price pressures.
- Structural bottlenecks—weak productivity and limited near-term labor supply gains—lack a quick fix.
- Market angle: Auld’s call is more hawkish than current pricing, posing upside risks for front-end AU yields and offering a potential floor for AUD if data surprise positively.
Why this matters for markets
Auld’s view reframes the Australian narrative: rather than debating the timing of cuts, the focus shifts to whether the RBA might need to re-tighten if demand overshoots supply. With the economy operating near capacity and unemployment low, any growth surprise risks translating quickly into wage and price pressures. That dynamic argues for higher sensitivity in the front end of the curve and leaves the Australian dollar better supported on positive data prints.
Capacity constraints are the swing factor
Auld notes Australia’s “soft landing” has left conditions tight:
- Labor market: already near full employment, limiting slack to absorb stronger demand.
- Activity: output is expected to revert to trend next year, further compressing remaining capacity.
- Supply side: weak productivity and limited near-term boosts to labor supply mean there’s “no short-term fix” to ease capacity pressures.
In this setup, even a modest re-acceleration in growth could push inflation higher, forcing the RBA to contemplate renewed tightening as early as the first half of 2026.
FX and rates takeaways
– Front-end AU yields: Skewed to the upside if data firm. Traders may favor pay positions in 1–3Y tenors on upside growth or wages surprises.
– AUD: A hawkish RBA path versus peers and stronger domestic data could place a floor under the currency, particularly if global risk sentiment is stable.
– Volatility: FX vols could lift around key prints (wages, CPI, jobs) as the market recalibrates RBA probabilities.
What to watch next
– Quarterly CPI and trimmed-mean inflation trends.
– Wage growth and unit labor costs.
– Job gains, participation, and unemployment.
– Productivity indicators and updates on migration/labor supply.
– Business surveys for capacity utilization and pricing intentions.
Outlook
Auld’s remarks position Australia as an outlier among major economies: with limited slack and a still-resilient backdrop, the next move is not necessarily a cut. For traders, that implies asymmetry in front-end rates and a constructive bias for AUD on positive domestic surprises. As always, the supply side—productivity and labor availability—will determine whether the RBA can sit tight or must lean hawkish again.
FAQs
What did NAB’s Sally Auld say about the RBA’s next move?
She warned the Reserve Bank of Australia may need to raise interest rates as soon as the first half of 2026 if growth accelerates and the labor market tightens further.
Why would the RBA hike when inflation has been easing?
Australia is operating near full employment with output returning to trend, leaving little spare capacity. In that environment, an upswing can quickly feed into higher wages and prices, risking a renewed inflation pulse.
How is this view different from current market pricing?
Auld’s outlook is more hawkish than prevailing expectations. Markets have been leaning toward steady policy or eventual easing; her call introduces upside risks for front-end yields if data firm.
What does this mean for the Australian dollar?
AUD could find a floor if domestic data outperform and the RBA path turns more hawkish relative to peers. Stronger growth and wage prints typically support the currency, barring a deterioration in global risk sentiment.
What indicators should traders watch to gauge this risk?
Focus on quarterly CPI (especially trimmed mean), wage growth and unit labor costs, employment and participation, productivity data, and business surveys on capacity utilization. These will shape RBA expectations.
This article was produced by BPayNews.
