The July Consumer Price Index (CPI) rose by 2.8% year-on-year, a sharp increase from the 1.9% recorded in June and the highest annual rise since mid-2024. The lift was broad-based, with housing costs up 3.6%, food and non-alcoholic beverages rising 3.0%, and alcohol and tobacco climbing 6.5%. Electricity was the standout contributor, surging 13.1% as state rebates expired in New South Wales and the ACT. Underlying measures also strengthened, with the trimmed mean CPI rising to 2.7% from 2.1% and core inflation, excluding volatile items, at 3.2%.
This release immediately unsettled market expectations for a September rate cut. The probability of easing at that meeting has now fallen to just above 20%, with investors and economists acknowledging that the RBA will want to see greater evidence that inflation is returning sustainably toward its target. At the same time, many analysts argue that timing effects from rebates and seasonal travel costs heavily influence the July outcome. If that is the case, inflation is expected to moderate again in August, potentially opening the door for the Bank to ease policy later in the year. The current consensus now points to November as the more likely window for the next cut, provided that wage and employment data confirm a softening of the backdrop.
The RBA itself remains cautious but open-minded. Earlier this month, it lowered the cash rate by 25 basis points to 3.60%, its third cut of the year. Policymakers stressed that further easing would depend on the flow of data, particularly inflation dynamics, labour market strength, and measures of consumer and business confidence. Market pricing suggests that the cash rate could move gradually lower to around 3.1–3.35% by early 2026, though the path is now likely to be more measured than investors expected just weeks ago.
For credit markets, the implications are clear. The July inflation spike looks more like a temporary disruption than the beginning of a new upward trend, but it does introduce short-term volatility. Spreads have already responded, widening modestly as investors recalibrate their expectations for rate cuts. In the meantime, a defensive posture is warranted—maintaining liquidity buffers and ensuring flexibility in covenant structures while monetary policy remains in flux.
For the SME and mid-market corporate sector, the shifting rate environment presents both challenges and opportunities. Borrowers remain sensitive to funding costs, and while a September cut is now unlikely, the expectation of easing later this year provides a more straightforward pathway for businesses planning investment and expansion. Even the prospect of lower rates in November is beginning to improve sentiment, with firms more confident that debt-servicing costs will gradually ease into 2026. This forward visibility supports greater willingness to commit to growth projects, particularly in industries that rely on access to working capital and trade finance.
Importantly, private credit markets are well-positioned to benefit from this transition. With banks remaining cautious in their lending appetite, particularly toward SMEs with less tangible collateral, non-bank lenders are increasingly stepping into the gap. As rate volatility persists, businesses are seeking funding partners who can provide certainty and speed of execution, rather than just headline pricing. This environment reinforces the value proposition of specialist private credit managers, whose ability to tailor solutions directly addresses the financing needs of growing firms.
In addition, the gradual easing cycle, even if slower than anticipated, underpins asset quality in SME and mid-market lending portfolios. Lower funding costs over the medium term should ease cash flow pressures for borrowers, helping maintain stable repayment performance. This is particularly relevant given the resilience shown by Australian businesses in the recent high-rate environment, where arrears have remained contained despite a significant increase in borrowing costs. A modest turn in the rate cycle is likely to extend that resilience further.
In summary, inflation has temporarily re-accelerated, unsettling near-term policy expectations. A September cut is now less likely, but November remains firmly in play if data cooperate. For investors, this means preparing portfolios for a delayed but not derailed easing cycle, with the opportunity to take advantage of spread adjustments once the inflation pulse subsides. For SMEs and mid-market corporates, the outlook is cautiously optimistic. A clearer line of sight to lower rates should support investment appetite, strengthen debt-servicing capacity, and expand the role of private credit as a key funding channel for growth.