RBA expected to hike interest rates in February
Persistent inflation has some economists predicting that the Reserve Bank of Australia (RBA) will raise interest rates at its first meeting of the year in February.
Commonwealth Bank economist Ashwin Clarke says the bank has revised its forecasts, now expecting a 25 basis point cash rate rise in February.
"Australia has ended 2025 in a cyclical upswing. While growth has improved, progress on inflation has stalled," Clarke says.
"We expect GDP growth to pick up a little further over the next six months, from 2.1%/yr in Q3 25 to peak at 2.4%/yr in Q1 26 before settling down to 2.2% by end 2026. With growth above capacity and a resilient consumer, we expect inflation to show signs of persistence.
"As a result, we now expect the RBA will hike the cash rate by 25bp in February to ensure inflation is returned to the mid-point of the target band by the end of 2027."
Despite expecting a rate hike to kick off the year, Clarke said the bank doesn't expect a large hiking cycle, saying the RBA would be "fine tuning".
CBA expects the cash rate to sit at 3.85% at the end of 2026.
"The risk sits with a larger hiking cycle if growth has more momentum and inflation more persistence than we predict," Clarke says.
IG market analyst Tony Sycamore agrees a February hike is on the table.
"The [RBA] board will continue to prioritise the more established quarterly CPI for gauging underlying momentum, with December-quarter data due ahead of the February 3 meeting," Sycamore says.
"The RBA forecasts trimmed-mean inflation to rise 0.8% QoQ in Q4. A print at or below this level would likely keep the cash rate steady at 3.6%, while a reading of 1% or higher could trigger a 25bp hike in February."
However, not all experts agree. Betashares chief economist David Bassanese says there is still a possibility the RBA will cut interest rates this year.
"Critical to the outlook... is whether inflation can moderate without the need for more monetary restraint and slower economic growth," he says.
"On the expectation that inflation will moderate from the strong pace evident in the September quarter, the RBA is expected to leave interest rates steady in the first half of 2026, with two rate cuts still expected, albeit delayed to August and November."
Get stories like this in our newsletters.
