Reserve Bank holds interest rates steady amid stubborn inflation fears

RBA Governor Michele Bullock has revealed a rates rise for 2026 was discussed at the bank’s final meeting for the year as the board held firm on 3.6 per cent for the next two months at least.

The RBA Governor has revealed a rates increase for 2026 was discussed at the final board meeting of the year where rates were held at 3.6 per cent.

The revelation comes as she conceded the Bank would potentially look to hike rates “at some point next year”.

In its December decision the RBA kept its cash rate target at 3.6 per cent, confirming the market’s expectations as higher than expected inflation rates stymied hopes of an end-of-year cut for Australian households.

RBA Governor Michele Bullock said a 2.5 per cent headline inflation target was still the objective.

She said there had been no discussion of dropping rates at this month’s board meeting but flagged a rise was on the cards.

“We didn’t consider the case for a rate cut at all,” she said.

“We didn’t explicitly consider the case for a rate rise at this meeting, but we did consider and discussed quite a lot the circumstances of what might need to happen if interest rates were to rise next year.

“If inflation continues to be persistent and looks like it is not coming back down towards the board’s target, I think that does raise questions about how tight financial conditions are and the board might have to consider whether or not it’s appropriate to keep interest rates where they are, or in fact, at some point raise them.”

Inflation will remain the key factor for future rate movements, the Bank’s Board confirmed in a statement.

“The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures,” the statement said.

The announcement – a unanimous decision by the Bank’s board members – sees rates staying static for the fourth month in a row.

It comes after many pundits expected late 2025 cuts before the shock inflation figures in November that were followed by continuing high CPI increases in December.

RBA Governor Michelle Bullock says high inflation has stymied hopes of an end-of-year rate cut.

Federal Treasurer Jim Chalmers welcomed the RBA’s cautious decision.

“Our economic strategy has brought inflation down substantially from its peak while keeping our economy growing and keeping unemployment low,” he said.

“The private sector has resumed its rightful place as the key driver of growth, powered by the strongest growth in private investment in almost five years.

“The RBA has acknowledged this in their decision today, noting that private sector growth and investment are both strengthening.”

Shadow Treasurer Ted O’Brien slammed the government for continued high inflation and rates.

“Australia’s economy is stagnant, with per-capita GDP flatlining in the most recent September quarter,” he said.

Echoing the RBA’s own statement economists agree rates decisions in the new year will be based on inflation.

Graham Cooke, head of consumer research at Finder, said the sentiment of market watchers polled by his firm had swung quickly.

“Just a few months ago, another rate cut looked within reach. Now, we have the most divided panel I’ve seen in years. Nobody knows which way the RBA will go next,” he said.

While Deloitte Access Economics Partner, Stephen Smith said the December decision should come as no surprise.

“No surprises” says Deloitte Access Economics partner, Stephen Smith. Photo: Supplied

“The reasoning of the RBA’s Monetary Policy Board in its decision today balances the risks to inflation and growth while recognising the uncertainty in global markets … inflation needs to be watched carefully,” he said.

“We expect the Bank to adopt a wait-and-see approach over the next few months until it can determine whether the current rate of economic growth is sustainable.”

KPMG chief economist Dr Brendan Rynne welcomed the hold, adding he didn’t see the need for a rate rise in the new year.

“While it might not be the news mortgage holders were looking for, the RBA was right in holding off on any change to the cash rate, be that up or down,” he said.

“We believe the RBA should not hike rates early in the new year, but instead continue to wait for the next few months to better understand whether the recent rises in inflation are the start of an upward trend or a temporary blip that will dissipate.”

Householders shouldn’t plan for a rate cut in 2026, Canstar Data Insights director Sally Tindall believes. Picture: Supplied.

Canstar.com.au data insights director, Sally Tindall said there was no certainty around what the RBA would do in early 2026.

“At this stage, not even the RBA knows with any great certainty whether its next move will be up or down,” she said.

Other economists are still predicting rate cuts in the new year, among them RSM Australia Economist, Devika Shivadekar.

“Given the RBA’s data-dependent stance, future decisions will be guided by incoming economic indicators, and greater clarity should emerge as fresh data becomes available in the new year,” she said.

While Adam Bowe, Executive Vice President and Head of Australia Portfolio Management at PIMCO also believes there could be rate cuts in coming months.

“PIMCO believes monetary policy remains restrictive which will weigh on growth and inflation over the next year,” he said.

Originally published as Reserve Bank holds interest rates steady amid stubborn inflation fears