Australia’s interest rate outlook is balanced on a knife’s edge, with economists warning tomorrow’s crucial inflation data could send expectations in either direction.

A stronger-than-expected result could put another rate hike on the table as soon as September, while a sufficiently weak figure could revive hopes of cuts.

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With the chance of a hike currently viewed as 50-50, the latest inflation report card could prove decisive ahead of the Reserve Bank’s next meeting.

Rates could ‘go either way’

Economists widely expect headline inflation to ease to 3.3 per cent, driven largely by lower electricity prices.

But Fort Lake Asset Management founder Christian Baylis said Australia remained “right at the crossroads”, with even a small departure from the forecast capable of changing the conversation entirely.

“The numbers to look out for there: if we get 3.6, we’ll get the alarm bells ringing for potential hikes, potentially even in September,” he told Sunrise on Tuesday.

“If we get three, I think the conversation will start to turn, talking about cuts.”

“We’re right at the crossroads at the moment. It’s currently priced for a 50-50 hike, but it’s sensitive. We’re right on the precipice here, it could go either way.”

Fort Lake Asset Management founder Christian Baylis says crucial inflation data could send rates either way. Credit: AAP, Sunrise

Why everything feels so expensive

While the RBA has traditionally aimed to keep inflation between 2 and 3 per cent, Baylis said its updated remit placed greater emphasis on the 2.5 per cent midpoint.

He warned returning inflation to the target range would not undo years of price increases already absorbed by households.

“What people have to realise, it’s not just getting back to the inflation level; you have to address the past years of excess inflation,” he said.

“That’s why everything feels so expensive, because we’ve had years and years of excess inflation above that 2.5 per cent level.

“And we have to address the sins of the past, and we have to address the inflation of the future.”

He also argued government policy was limiting productivity and making the RBA’s task more difficult.

“Government has to get out of the road; they have to reduce red tape; they have to allow businesses to be more productive if they want to make the RBA’s job easier,” he said.

The next crucial clue

Notes from the Reserve Bank’s last board meeting will also be released, offering a clearer indication of how close members came to considering another increase.

Together, the inflation figures and meeting minutes could determine whether borrowers need to brace for higher repayments or can begin looking towards eventual relief.