RBA rate hikes feared next year
Any hope of the Reserve Bank cutting rates again has evaporated with some now tipping rate hikes will start next year.
Higher than expected inflation has killed off any hope of the Reserve Bank cutting interest rates again with forecasts turning to rate hikes predicted to start in 2026.
Economists dramatically scaled back their expectations for interest rate relief after another surprise jump in inflation dealt a blow to households hoping for cheaper mortgage repayments.
The money market now sees only about a 12 per cent chance of the RBA cutting rates again in the year ahead.
If recent trends persist, the RBA may need to hike soon. The Australian dollar rose from around US64.75c to US65.08c on the news. The local stock market trimmed its intraday rise but was supported by a rapidly recovering US market.
October’s inflation figures showed prices rose 3.8 per cent over the year, well above the 3.6 per cent economists had expected. More worryingly, the trimmed mean measure that strips out volatile items climbed to 3.3 per cent, versus 2.9 per cent expected.
“Elevated and broad-based inflation pressures evident in the third quarter were largely sustained in October,” said NAB senior markets economist Taylor Nugent.
The figures represent a major setback for rate cut hopes. Up until a few weeks ago, economists and financial markets saw a good chance of another interest rate cut before year-end and at least 50 basis points of cuts by mid-2026 amid weak economic growth and consumer sentiment. But the case for further rate cuts began to unravel after higher-than-expected quarterly inflation data at the end of October.
Wednesday’s monthly figures confirmed those fears.
Barrenjoey chief economist Jo Masters said the detail in the data saw her revise up forecasts for December quarter trimmed mean inflation to 1.0 per cent from 0.8 per cent.
That would be a very uncomfortable outcome for the RBA, she said.
“No matter how much you try and sugar coat it, it’s a shocker and means pretty much - if you’re being honest with yourself - zero chance of a rate cut and just increases the chance that the next move in rates will be a hike,” said Bell Potter stock broker, Richard Coppleson. The Reserve Bank’s Statement on Monetary Policy earlier this month predicted that inflation would stay above the midpoint of its 2-3 per cent target band until at least the end of 2027. Its forecasts assumed one more interest rate cut around mid-2026.
However, several economists are now raising the prospect of rate hikes if inflation continues to accelerate.
“Unfortunately, inflation is high enough that the RBA may have to give serious consideration to raising rates,” said Callam Pickering, economist at global job site Indeed.
“Households should brace themselves for the worst type of Christmas present.”
UBS chief economist George Tharenou changed his view: he now predicts interest rate hikes to start from the December quarter of 2026.
The inflation problem appears to be homegrown and broadbased.
Services inflation jumped to 3.9 per cent over the year from 3.5 per cent in September. Housing costs rose 5.9 per cent annually, driven by electricity prices that surged 37.1 per cent as government rebates rolled off and rents continued to climb.
RBC chief economist Su-Lin Ong finds didn’t see any positive signs in the report.
“An array of our favoured inflation metrics all appears to suggest the underlying pulse of inflation has accelerated over the last three to six months,” she said.
Moreover, the data shows 64 per cent of the inflation basket was running above 3.5 per cent on an annualised basis, almost 30 percentage points higher than in June.
AMP deputy chief economist Diana Mousina noted that both measures of inflation “are at the top end or above the Reserve Bank’s 2-3 per cent inflation target and way above the 2.5 per cent target the RBA is now focusing on.”
Betashares chief economist David Bassanese warns that “unless inflation does convincingly drop, there’s a risk the RBA will instead have to consider higher rates in 2026 on the view that the economy is still operating at an overly high level of capacity.”
The inflation data marks the first release of a new complete monthly consumer price index, which adds some uncertainty. The measure has limited history, which undermines the accuracy of seasonal adjustments. However, most economists agree that the extent of the upward surprise is significant enough to change the outlook for monetary policy.
Capital Economics senior economist Abhijit Surya now sees little chance that rate cuts would be on the RBA’s agenda anytime soon.
“If anything, there are growing risks to our view that the Bank will resume rate cuts in the second half of next year,” he said.
The shift in market expectations represents a dramatic turnaround from a just week ago, when traders were pricing in multiple rate cuts through 2026. Those hopes now appear firmly dashed by the stubborn persistence of inflation pressures across the economy.
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