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Major banks predict new year cash rate rise
Banks have cast their predictions for a cash rate rise in the new year, amid higher-than-anticipated inflation, dimming mortgage holders’ hopes for relief.
Two major banks have cast their predictions about whether the Reserve Bank of Australia (RBA) will decide on a further cash rate hike at its next meeting in February.
Last week, the RBA decided to hold the cash rate at 3.60 per cent, remaining cautious following persistent inflation.
The Commonwealth Bank of Australia (CBA) forecast that the RBA would lift the cash rate by 0.25 percentage points in February to help bring inflation back under control.
CBA head of Australian economics Belinda Allen said that the economy had picked up more momentum than expected, preventing inflation from easing.
“A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3 per cent,” she said.
According to the CBA, inflation's persistence showed price pressures were becoming more widespread, with economists predicting it may take until late 2027 for inflation to return to the middle of the RBA’s target range.
“Inflation has proven more stubborn than forecast and we see signs of inflation persisting. That’s a key reason the RBA may need to act,” Allen said.
The bank said that if the RBA did raise interest rates at the start of next year, it would be a fine-tuning move, not necessarily the start of a large pile-up of hikes.
However, it warned that the RBA may need to raise rates more than once if household spending or business investment turned out to be stronger than expected.
National Australia Bank (NAB) has also weighed in, predicting a 25 basis point rate hike in February, likely followed by another in May to take the cash rate to 4.1 per cent.
“Inflation accelerated in Q3, and we forecast a 0.9 per cent quarter over quarter (qoq) for trimmed-mean in Q4, suggesting inflationary pressures have persisted,” the bank said.
NAB said that it believed an inflation outcome of such a magnitude would force the RBA to execute a “modest recalibration of monetary policy” in the first half of 2026.
“50 bps of tightening should see the real cash rate align to a more appropriate level, taking monetary policy to a setting better able to sustain an economy growing at trend but no stronger,” it said.
It said that by acting early, the RBA will maximise its chances of returning inflation towards the appropriate trajectory, while keeping growth at trend and the labour market close to full employment.
Last week, RBA governor Michele Bullock flagged a rise could be in the cards next year, but said the decision would be made on a meeting-by-meeting basis.
"I don't think there are interest rate cuts on the horizon for the foreseeable future. The question is, is it just an extended hold from here, or is it the possibility of a rate rise?”, she said.
"I couldn't put a probability on those, but I think they're the two things that the board will be looking closely at coming into the new year.”
She said before the next meeting, the board will consider more data on the labour market and inflation, including the quarterly trimmed mean.
“These will be important inputs into our updated forecasts and for the Board’s deliberations in February,” she said.
“We remain focused on returning inflation to target while maintaining the unemployment rate as low as possible,” Bullock concluded.