RBA reveals what’s needed to avert rate hikes in 2026
By the end of January, Australians will have a clearer picture of whether they can expect a rate hike next year.
Quarterly inflation data to be released by the Australian Bureau of Statistics on January 28 will confirm or alleviate the Reserve Bank’s fears that upward price pressures are built into the economy.
NAB chief economist Sally Auld said minutes of the RBA’s last rate-setting meeting, published on Tuesday, reflected the central bank’s board’s concern that inflationary pressures were expanding into more persistent factors.
The December meeting marked a notable hawkish shift at the bank.
Governor Michele Bullock said at a press conference after the meeting that the board did not explicitly consider the issue of increasing interest rates, but they discussed the conditions under which rates should increase in 2026.
According to the minutes, two things must actually happen to prevent interest rate increases.
First, inflation data need to show that recent increases in price growth are due to variable or temporary factors rather than more permanent items such as market services and new homes.
Both have grown faster than expected in recent months.
Secondly, the RBA will need to be convinced that financial conditions are still restrictive and therefore putting downward pressure on inflation.
The board decided that this was still too difficult to say, with some members arguing that the acceleration in house prices, lower risk premiums and aggressive banking competition showed that conditions were no longer restrictive.
Others said the gradual increase in unemployment in 2025 showed that conditions were still restrictive.
It is not yet known whether this debate will be resolved at the next meeting in February.
Markets are pricing in the possibility of a rate hike of a quarter to a third in February.
Investors’ reaction was muted on Tuesday, given the RBA’s hawkish comments in early December.
Ms Auld said the NAB’s forecast for a 0.9 per cent rise in the RBA’s preferred core measure of inflation in the December quarter would make it harder for the board to counter an increase.
But JP Morgan analyst Tom Kennedy believed headline inflation was running at 0.8 percent in the quarter; This clearly challenged the bank’s predictions.
“We maintain our view that the RBA will remain on the sidelines in 2026,” he said.
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