February is live: RBA warns of impending rate hike
Federal Reserve governor Michele Bullock couldn’t be clearer: We expect the next move on interest rates to be up, not down.
In a media conference far more hawkish than the non-committal statement that accompanied the central bank’s decision to keep the cash rate at 3.6 per cent, Ms Bullock dashed any shred of hope for borrowers still waiting for further rate cuts.
He told reporters that the RBA board was disturbed by the level of inflation, which rose to 3.8 per cent in October – well above the two to three per cent target range.
Strong economic growth, a tight labor market and a lack of spare supply capacity in the economy mean the risks of inflation coming in higher rather than lower than expected are more severe.
What all this points to is that there is no room for the RBA to cut rates again in 2026.
“Is there a possibility of a long hold or a rate hike from here? I couldn’t put a probability on those, but I think those are two things the board will be looking at closely as we go into the new year,” the governor said.
Markets were mostly inactive following the interest rate announcement Tuesday afternoon.
But following Ms. Bullock’s hawkish comments, bond traders have priced in the possibility that the interest rate could rise as much as 40 percent in February.
The Australian dollar rose 0.26 per cent to 66.49 US cents as the ASX200 fell.
Just a few months ago, interest rates markets were pricing in another rate cut or two.
Although its base case is for the cash rate to remain steady, Commonwealth Bank’s Australian economic chief Belinda Allen said the RBA’s next meeting in February would be lively.
Ms Allen said the door was open to a rise in February if December quarter inflation data was high enough or showed price pressures were permanent rather than temporary.
“Labor market data will also be important. Attention will soon turn to Thursday’s labor force survey,” he said.
“A return to a tighter labor market will increase the likelihood of a raise.”
If the RBA raises 25 basis points in February, this would add almost $90 more to monthly repayments for the average borrower with a $600,000 mortgage.
Borrowers unhappy with forecasts of doom and gloom may want to consult Westpac’s economic team for a second opinion.
Economists Sian Fenner and Justin Smirk were unimpressed by the hawkish rhetoric and reiterated their belief that the economy has more capacity than the RBA fears and that the recent rise in inflation is temporary and will soon subside.
“Therefore, our current reference is for two more 25 basis point rate cuts, but not until mid-2026,” they said.
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