Hot inflation lifts Melbourne Cup rate-hike chances and derails ASX 200's push to record highs

The Australia 200 trades 17 points (-0.19%) lower at 9147 at 2.20pm AEST.

ASX 200 falls as hot inflation data lifts RBA rate hike expectations

A promising start to today's session appears set to end in frustration after the ASX 200 jumped 56 points (+0.61%) in early trading to a high of 9220.6, just 76 points short of its early-August record high of 9296.7, before reversing lower after today's hotter-than-expected July inflation update just about sealed the deal for a fourth Reserve Bank of Australia (RBA) rate hike this year.

The Australian Bureau of Statistics (ABS) inflation report showed the annual rate of headline inflation came in at 3.5% in July, down from 3.8% the previous month but well above the 3.2% expected. The RBA's preferred measure, the trimmed mean, remained at 3.6% for a second straight month, above the 3.5% forecast, with the largest contributors to core inflation being restaurant meals (1.2% month-on-month (MoM)), new dwellings (0.4% MoM) and rents (0.3% MoM).

In the RBA's Statement on Monetary Policy earlier this month, the Bank lowered its forecast for headline inflation to 3.6% for December 2026 (from 4.0%) and its forecast for the trimmed mean to 3.3% (from 3.5%). The problem now coming through loud and clear is that trimmed-mean inflation is proving stickier than hoped, showing no signs of moderation after the 75 basis points (bp) of rate hikes delivered earlier this year.

Markets reprice the rate outlook

This development will not be viewed kindly by the RBA after it has repeatedly noted inflation remains too high and a willingness to tighten rates to ensure 'that high inflation does not become embedded'.

With the ABS's next inflation update not due until Wednesday, 30 September, one day after the RBA's 29 September Board meeting, and inflation still well above the Bank's target band, the Australian interest rate market has repriced hawkishly.

It is now pricing in 8 bp (a 33% chance) of a 25 bp hike at the September meeting, up from 4 bp this morning, and 19 bp (a 78% chance) of hikes by November, up from 12 bp this morning.

A hawkish repricing like the one seen today is quite literally kryptonite to an interest rate-sensitive index like ASX 200. What makes it worse is that the next potential RBA rate hike is lining up for the same day and time as the 'race that stops the nation', the Melbourne Cup.

ASX 200 technical analysis

ASX 200 spent the better part of 17 weeks confined within an 8500 - 9000 range before releasing that pent-up energy at the start of August and hitting a fresh record high of 9296.7. From that high, we were expecting a pullback towards 9000 and that view has played out well, with the index last week hitting a low of 9019.50 before this week's rebound.

Looking ahead, provided ASX 200 holds above the 9000 - 8900 support region (former top-of-range resistance, now support), we expect to see a retest and break of the 9296.7 record high in the weeks ahead.

ASX 200 daily candlestick chart

• _{Source: TradingView. The figures stated are as of 26 August 2026. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}