Red-hot inflation shows RBA may have cut rates too far
Investors believe the Federal Reserve is more likely to raise interest rates rather than cut them following a “concerning” inflation reading.
Analysts were caught off guard when the Australian Bureau of Statistics announced on Wednesday that consumer prices rose a more-than-expected 3.8 per cent in the 12 months to October.
The result shook markets, which until a few months ago had expected the central bank to cut the cash rate once or twice from its current level of 3.6 percent.
The recent resurgence in price pressures has dampened expectations, but traders still think another downward move is more likely than an uptrend.
IG market analyst Tony Sycamore said the interest rate market was pricing in cuts of around 12 basis points in 2026 ahead of “hot” inflation data.
“It is pricing in an interest rate increase of approximately 12 basis points for 2026,” he said.
This strengthened the Australian dollar against the dollar but spooked stock investors, with the ASX200 index retreating nearly 40 points following the news.
HSBC chief economist Paul Bloxham said the fact that growth is on the rise and inflation is rising shows that cash interest rates are not slowing down the economy.
“Today’s numbers for the RBA should be worrying,” he wrote in a research note on Wednesday.
“An argument can be made as to whether the RBA has already cut the cash rate too much.
“Our baseline scenario sees the RBA remaining on hold until 2026 and rate hikes starting in early 2027. Today’s pressures raise the risk that rate hikes may need to be made sooner than that.”
Analysts at investment banks Barrenjoey and UBS tipped the Reserve Bank to raise rates in 2026 following pressure, but economists at ANZ and Westpac were still forecasting at least one more rate cut in 2026.
JP Morgan analyst Tom Kennedy said the upside surprise meant there was clearly a risk of inflation exceeding Reserve Bank forecasts, but he did not think this was “enough for rate hikes to creep into the RBA’s internal discussions”.
“We continue to see the RBA on hold until 2026, with increases likely to occur from early 2027,” he said.
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