Westpac says the Reserve Bank of Australia will likely leave interest rates on hold for the rest of the year, even after a hotter-than-expected July inflation print raised the odds of a November rate hike.

In a client note, the bank said monthly inflation rose 1.0% in July, while the core trimmed mean measure increased 0.5%. Both figures were above expectations, prompting speculation about a possible rate increase despite a slight slowdown in the annual inflation rate.

Westpac said the risk of a November move has increased, but it still expects the central bank to remain steady through year-end.

The bank pointed to more stable housing cost inflation as one reason for that view. New dwelling costs and rents came in broadly as expected, and Westpac said the ongoing housing market downturn is limiting developers' ability to pass higher trade material costs on to buyers.

Westpac said the main upside surprises in the July data came from durable goods, including motor vehicles and household items, as well as household services such as restaurants and domestic travel. It said some of the move likely reflected sales timing and rising chip prices, rather than a broader acceleration in underlying inflation.

While market services inflation remains above the Reserve Bank's target, Westpac said softer-than-expected labour market conditions and weaker wage outcomes reduce the likelihood of a November hike. That makes the next labour market releases especially important for investors and policymakers trying to gauge whether the inflation surprise is being reinforced by broader demand conditions.

The bank expects the RBA to keep a cautious tone in its public comments on inflation risks, but said that is unlikely to translate into a rate rise before the end of 2026.

Westpac's view places it at odds with banks that have already shifted to forecasting a September or November hike, treating the July inflation beat as noise rather than a clear sign of renewed price pressure. The bank's emphasis on labour market and wage data suggests it sees the RBA giving greater weight to employment conditions than to the headline CPI surprise ahead of the next meeting.

By highlighting stable housing inflation and restrained developer pricing power, Westpac is arguing that the strongest parts of the July print, particularly durable goods and discretionary services, likely reflected one-off timing effects rather than broad-based price pressure.

A continued hold call from a major bank could temper some of the market repricing seen since Wednesday's data, although the divergence between Westpac and more hawkish peers leaves room for volatility around upcoming labour market releases.