The United States’ rapidly escalating dispute with Denmark over the sovereignty of Greenland could force the Reserve Bank to hold interest rates as global volatility spikes.
Renewed talks in the US about control, trade leverage and influence over the self-governing nation have been wreaking havoc on stock and bond markets throughout January.
US president Donald Trump. Picture: Alex Wong/Getty
Controversial talk of tariffs against European countries aiming to preserve Greenlandic and Danish authority of the North American island has left many Aussies questioning the risks to the local economy.
Unless conditions quickly ease, the impact of the volatility between the US and Europe could well twist the RBA’s hand when it comes to its first interest rate decision of the year in less than two weeks.
While the central bank's one of two major jobs is to keep a lid on rising inflation in Australia, unsettled global markets and question marks on growth create a fine balancing act for governor Michele Bullock to follow at February's meeting.
Another question is what to make of the fall in the unemployment rate - the other one of the RBA's main jobs is to promote full unemployment - and what that means for an economy still facing inflation woes and low productivity.
From hike to hold
During a year of steady progress on bringing down inflation, the Reserve Bank was able to successfully deliver three cash rate cuts in 2025, despite geopolitical unrest in the middle east and Europe.
Borrowers were able to take advantage of cuts in February, May and August to pocket hundreds in savings last year after battling against sustained high rates since 2022.
It was welcome relief for many, while higher demand saw the median price of a home in Australia jump 8.8% to a record high of $880,000 by December.
May's rate cut in particular was a cautious one in light of Trump's Liberation Day tariffs wreaking havoc on markets mere days earlier.
Australians had three cash rate cuts in 2025. Picture: Getty
However, a new inflation uptick dating back to October was the start of market expectations for the bank’s 3 February decision moving from a cut to a hold scenario and then on to a strong rate hike forecast.
Expectations for a 0.25% rate hike on the Australian Stock Exchange RBA rate tracker jumped from 25% to 60% in one day this week.
Tied to both stronger labour market data and rising political unrest, the expectation for a hike presents a bleak picture for mortgage holders hoping for more easing.
Reserve Bank Governor Michele Bullock will have plenty to consider at the next February monetary policy decision. Picture: John Appleyard
“The impact of a breakdown in relations and possible retaliatory action, such as European Union ceasing to implement the already agreed trade deal, adds to growth risk and is not helpful for maintaining inflation credibility,” said Michael Tang, Commonwealth Bank macro and rates strategist.
“It will create some risk aversion, adding to curve steepening pressure.”
Why Greenland?
It’s now more than five years since president Trump first expressed interest in an idea to ‘purchase’ Greenland from Denmark.
Kulusuk, Greenland. Picture: Getty
The island’s unique position between Europe and North America sees it benefit from proximity to Arctic shipping routes, while its rich deposit of minerals and expansive space makes it an appealing place for infrastructure.
Around 55,000 people live in Greenland, with the majority holding Danish citizenship.
It has been predominantly self-governing since 1979 and has an unusual property market with no private land ownership.
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