Aussies are being warned to prepare for a difficult start to 2026, with home loans set to take a hit as interest rates likely rise.
Commonwealth Bank (CBA) and National Australia Bank (NAB) have both updated their cash rate forecasts this week, pricing in a cash rate hike at the first Reserve Bank of Australia’s (RBA) 2-3 February meeting.
It comes amid rising concerns about the uptick of both headline and underlying inflation, along with unexpected economic resilience and growth.
Inflation has been creeping back up since September. Picture: Getty
The RBA hasn’t put the cash rate up in two years, delivering three cuts this year after finalling putting a lid on the post-Covid high inflation period.
The three rate cuts – though well-spaced out and cautious – have contributed to the dial now moving back in the opposite direction.
While the bank most recently kept rates on hold following its December meeting, governor Michele Bullock has warned there are no more cuts on the horizon.
“The question is, is it just an extended ‘hold’ from here, or is it a possibility of a rate rise,” she said in a post-rate decision press conference last week. “They are the two things the board will be looking closely at coming into the new year.”
The unexpected resurgence of inflation has been the talk of the market since September quarterly inflation data confirmed figures were higher than the RBA has forecast.
October Consumer Price Index data from the Australian Bureau of Statistics (ABS) confirmed this, showing trimmed mean inflation was up 3.3% annually.
This trimmed mean measure of inflation, which strips out volatile and one-off price movements, is the figure the bank relies on for its cash rate decision making.
Both figures are outside the RBA’s 2-3% target range, while Ms Bullock has said she expects headline inflation to remain high for another 12 months.
RBA governor Michele Bullock says the bank is expecting 12 more months of higher headline inflation. Picture: NCA NewsWire / Martin Ollman
'Back-to-back hikes'
NAB is expecting not one but at least two rate hikes in that time, confirming this week its forecast is now for back-to-back hikes in February and May.
“The governor was unusually forthright in her press conference, stating that evidence of persistent strength in inflation could prompt a policy response from the RBA,” the bank stated.
CBA, Australia’s largest lender, has priced in its 25-basis point increase to the cash rate in February by pointing to the “sudden macroeconomic shifts” in recent months.
"Stronger [economic] activity has arrived at a time when the economy is already close to its capacity constraints,” said head of Australian economics Belinda Allen in a note.
NAB is expecting back-to-back rate hikes at the start of next year. Picture: supplied
“That strength is keeping inflation from easing. A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3%.”
Westpac U-turn
Having long anticipated two more rate cuts for 2026, Westpac this week also announced a dramatic shift to its forecast.
Following the inflation surprises, markets immediately rushed to the other side of the boat to price in rate hikes," chief economist Luci Ellis said. "The probability of a hike is not zero, and the RBA was right to warn the community of the possibility."
The bank has revised its outlook for the cash rate to an extended hold for the whole of 2026.
Westpac chief economist Luci Ellis said the bank now anticipates an ongoing hawkish approach from the RBA. Picture: supplied
"Inflation is expected to moderate in 2026, but not soon enough to induce the RBA to step back from its current hawkish view of the risks," Ms Ellis explained.
"If our inflation and labour market view is right, by the end of 2026 it will become apparent that domestic inflation pressures have eased. This would leave the way clear to remove remaining policy tightness in the first half of 2027 – we pencil in February and May 2027 for that normalisation."
The final big four lender, ANZ, currently forecasts an extended hold at 3.60% throughout next year and has not priced in any rate cuts or hikes.
Ahead of the next decision in early February, the RBA will be looking to assess how high discretionary spending throughout Christmas and new year will add further demand onto the economy.
RBA governor Michele Bullock has said not to expect any more cash rate cuts. Picture: News Corp Australia
With demand likely to further outstrip supply in the lead up to the decision, it's expected inflation will creep up even further.
Inflationary data expected from the ABS in the first week of January will shed some light on how consumer spending and economy activity fared heading into the holiday period.
A more up-to-date picture of how seasonal spending has played out will not come until closer to the RBA’s next meeting.
The Australian Stock Exchange shows markets were pricing in a 27% chance of a rate hike as of 12 December.
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