Maxco Futures — Economists at the Commonwealth Bank of Australia (CBA) now expect the Reserve Bank of Australia (RBA) to raise its policy rate by 25 basis points at its first policy meeting of 2026, scheduled for February. If realized, this move would lift the cash rate to around 3.85%.
The key reasons behind this projection include:
- Stronger-than-expected economic growth, supported by solid consumption, investment, and labor market dynamics. This strength suggests the economy is operating at or even above capacity.
- Persistently sticky inflation, which continues to pose upside risks and reduces the likelihood of near-term rate cuts, instead reopening the possibility of further tightening.
- Recent remarks from the RBA Governor, signaling that interest rates are unlikely to be reduced in the near future, while leaving the door open to rate hikes should incoming economic data justify such action.
Some analysts also see the possibility of more than one rate hike in 2026, depending on how inflation and economic activity evolve during the first quarter of next year.
Implications of RBA Monetary Policy
RBA interest rate policy plays a critical role across several sectors of the Australian economy:
1. Credit and Mortgage Markets
An increase in the policy rate is typically followed by higher lending rates, including home mortgages. Several major Australian banks have already begun adjusting fixed-rate home loans in response to signals pointing toward a potential RBA rate hike.
2. Consumer Sentiment
Recent data show a sharp decline in consumer sentiment in December 2025, driven by concerns over inflation and the renewed risk of higher interest rates. This highlights growing household anxiety over living costs and borrowing expenses.
3. Capital Markets
Equity market reactions underscore sensitivity to monetary policy signals. Major indices such as the ASX 200 declined following RBA statements that acknowledged the possibility of future rate increases.
Macroeconomic Landscape: Balancing Risks and Outlook
CBA’s rate hike forecast reflects a meaningful shift in market and economist expectations compared with just a few months ago, when many anticipated further rate cuts in 2026. This shift underscores that the RBA’s policy direction depends not only on current data but also on forward-looking economic projections that continue to evolve.
Meanwhile, other major Australian banks are also revising their outlooks—some still see the risk of rate cuts in the second half of 2026, while others support the case for additional hikes should inflation remain elevated.
Conclusion
CBA’s projection of an interest rate hike signals a notable shift in Australia’s monetary outlook for the year ahead:
- The RBA is expected to raise interest rates in early 2026 (February) in response to resilient economic growth and persistent inflationary pressures.
- This policy stance reflects the central bank’s cautious approach in balancing economic growth with inflation control amid complex global and domestic dynamics.
- The potential impact will be felt across credit markets, household consumption, and Australia’s capital markets.
Ade Yunus, ST WPA
Global Market Strategies