RBA readies for rate hikes in 2026 after holding fire
Experts are now expecting two hikes within the next year after Michele Bullock warned Australians her board is having ‘uncomfortable’ discussions.
Reserve Bank governor Michele Bullock has warned Australians that her board is having “uncomfortable” discussions about whether interest rates can be held for much longer in an overheating economy, with experts now expecting two hikes within the next year.
While Jim Chalmers said Australians would have “preferred” a rate cut and played down higher inflation as partly temporary, financial markets boosted the odds of two 0.25-percentage-point rate hikes by November next year as capacity constraints in the economy fuelled prices.
Amid record government spending of more than 28 per cent of GDP and with many economists expressing concerns about how such levels feed into a heated economy, Ms Bullock hinted at continued fiscal restraint, saying that government policy had been doing a good job “up until recently”.
“The government at the moment seems focused on what they need to do to continue the fight against inflation. And up until recently, I think monetary policy and fiscal policy, we were doing a good job,” Ms Bullock said. “They have a lot of things to juggle, and at the same time, try and make sure that they contribute to bringing inflation down, which I think is very top of mind for them.”
Dr Chalmers dismissed the concerns over spending, saying on Tuesday that “the Reserve Bank hasn’t actually said that public spending is going to factor in their decision throughout this whole year”.
The RBA has previously said that government spending had accounted for about half of all GDP growth in recent years and confirmed a link between big deficits and higher interest rates.
The governor expressed a hawkish view on inflation on Tuesday and indicated that, given the pick-up in economic momentum had been “stronger than anticipated” the central bank was now done with its interest rate easing cycle after delivering three 0.25 per centage point cuts this year.
“I would say at this moment that, given what’s happening with underlying momentum in the economy, that it does look like additional cuts are not needed,” Ms Bullock said following the bank’s decision to hold the official interest rate at 3.6 per cent.
“If inflation continues to be persistent and looks like it is not coming back down towards the board’s target, then … the board might have to consider whether or not it’s appropriate to keep interest rates where they are.”
Official figures showed a surprise jump in the headline inflation rate to 3.8 per cent last month and underlying inflation reaching 3.3 per cent – both well out of the RBA’s target range, leaving investors placing bets for rate rises next year.
Ms Bullock said that if such momentum in the economy continued “it is likely to add to capacity pressures”.
On Tuesday, the NAB Business survey, closely watched by the RBA, showed that capacity pressures hit their highest level in 18 months, placing upward pressure on inflation.
The utilisation rate rose for the fourth consecutive month and is now above the long-run average in six of eight industries.
NAB chief economist Sally Auld said capacity constraints risked higher inflation.
“The survey continues to tell us that businesses are capacity constrained and that if economic growth accelerates further from the current starting point, we may quickly see additional pressure on prices,” Ms Auld said.
HSBC chief economist Paul Bloxham said the RBA was now working on hope that the last inflation figures were more a product of temporary factors.
“The RBA has a lot of hope that inflation will start to head back to its target, but the evidence that it has presented in its own communication suggests that this may not happen,” Mr Bloxham.
“Our central case is that the RBA’s next move is up and that rate hikes will begin by the September quarter 2026, although we see tangible risk that rates could rise earlier than that.”
Other economists such as Nomura’s Andrew Ticehurst are sticking by forecasts that rates will remain unchanged next year.
“We continue to forecast an unchanged cash rate through 2026 but agree with market pricing that risk clearly tilts towards a higher cash rate as we move through 2026,” Mr Ticehurst said.
A 0.25-percentage-point rate cut on Tuesday would have reduced monthly repayments for an average mortgage of $694,000 by about $103, according to analysis by Compare the Market. Such savings would have further fuelled recovering consumer spending and potentially stoked inflation further.
KPMG chief economist Brendan Rynne said the RBA’s decision to hold was right.
“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,” Dr Rynne said.
“We believe the RBA should 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.”
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout