Magic number that could decide an interest rate hike
Reserve Bank governor Michele Bullock and members of her rate-setting panel will remain connected to the Australian Bureau of Statistics website.
Their focus on Wednesday will ultimately boil down to a single figure: the trimmed average inflation figure for the December quarter.
Traders are betting their money on a rate hike at the Federal Reserve’s next meeting after a shocking report on the labor market showed no signs of softening in the employment market, raising fears that inflation will remain above the central bank’s two to three per cent target range.
ANZ economists Adam Boyton and Aaron Luk said a surprise drop in the unemployment rate to 4.1 per cent in December and a stronger-than-expected 65,200 job gain the statistics bureau reported on Thursday had marginally increased the likelihood of a rate hike on February 3.
But inflation figures, particularly the trimmed average that excludes variable items such as electricity costs to provide an underlying measure of inflation, still remain a key factor for the Federal Reserve.
Mr Boyton and Mr Luk said an average of 0.8 per cent or lower for the December quarter would likely result in the Reserve Bank holding.
But a figure of 0.9 percent or higher would likely push borrowers into further mortgage distress, depending on the details of the crackdown.
NAB senior economist Taylor Nugent predicts the average will be trimmed by 0.9 percent due to higher new car prices and a strong seasonal increase in travel prices.
NAB, the most hawkish among the big banks, expects interest rate hikes in February and May as a result.
But there are still reasons for doves to remain hopeful.
AMP economists Diana Mousina and My Bui said the large one-off jump in employment growth, compared with a gradual softening in growth over most of 2025, suggested “some unreliability” in Thursday’s employment data.
The huge increase in young people aged 15 to 24 entering employment suggests that there may also be seasonality in hiring at Christmas, resulting in some payback the following month.
Ms. Mousina and Ms. Bui said forward-looking indicators such as declining job openings and job openings, as well as a projected slowdown in the growth of health care, education and government-related jobs, should dampen some labor market momentum in 2026.
They maintained the view that the recent revival in inflation was only temporary and that the Central Bank would keep interest rates steady this year, but acknowledged that the risk of a rate hike in February was high.
This view is becoming increasingly unpopular among market economists and bond traders.
Money markets are currently pricing the probability of a rate hike in February at 60 percent, with nearly two rate hikes priced in before the end of the year.
Following labor pressure, the Australian dollar rose above $68c for the first time since October 2024.
Meanwhile, banks started to increase interest rates in anticipation.
Commonwealth Bank and Macquarie increased fixed mortgage loan rates by up to 0.7 percentage points at the beginning of January.
“The fixed rate trend is ending, but there are still plenty of lenders offering interest below five per cent,” said Sally Tindall, director of data insights at Canstar.
“How long they can last is a different question.”
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