Reserve Bank Faces Pressure to Hike Rates as Inflation Persists
Concerning new inflation data has left the Reserve Bank of Australia with "little choice" but to implement at least one interest rate increase this year, with experts suggesting a move could come as early as next week. Economists are warning that a "bitter pill" is on the horizon for approximately 3.5 million Australian households with mortgages, following the release of Australian Bureau of Statistics figures on Wednesday.
Inflation Data Exceeds Reserve Bank Targets
The Consumer Price Index rose by 3.8 percent in the year to December, while underlying inflation, which excludes volatile items, increased by 3.3 percent over the same period. With inflation remaining outside the Reserve Bank's target band of 2-3 percent, economists believe the RBA's rate-setting board will be compelled to increase the cash rate from 3.6 percent to 3.85 percent when they convene for their first meeting of the year on Tuesday.
"We expect the Bank to raise rates by 25 basis points at its meeting next week, followed by another hike in May," stated Abhijit Surya, senior APAC economist with Capital Economics. "We suspect that will be enough to stamp out the excess demand in the economy, though markets remain wary about the possibility of further tightening."
Potential Impact on Mortgage Holders
Should the RBA increase the cash rate to 3.85 percent on February 3, an owner-occupier with a $600,000 mortgage could face an additional $90 per month, assuming banks pass the rate hike on to their variable customers, according to financial comparison service Canstar.
"It's a bitter pill for borrowers to swallow, particularly when just five months ago there was a chance we'd see at least one, if not two more cuts," said Canstar's data insights director Sally Tindall. "Thankfully, many borrowers are in a good position to take a hike on the chin, having kept their monthly repayments the same after the three cuts in 2025."
Tindall added that "this cruel twist back to hikes is a stark reminder that borrowers and renters are often asked to do much of the heavy lifting when it comes to reining in inflation."
Detailed Inflation Analysis
The trimmed mean, which removes more volatile items including food and energy costs to provide clearer insights into inflation trends, increased by 3.3 percent in the 12 months to December 2025, surpassing the forecast of 3.2 percent. Quarterly trimmed mean came in at 0.9 percent for the three months to December.
"Today's quarterly CPI report suggested the hot underlying inflationary pressures evident in the September quarter persisted into the December quarter," noted Betashares chief economist David Bassanese. "Consistent with the recent tightening in the labour market, this suggests the lift in economic growth over the past year has already run into inflationary roadblocks."
Market Expectations and Economic Outlook
Traders are currently pricing the chance of a February rate hike at approximately 70 percent. If this occurs, it would mark the first interest rate increase since November 2023.
Bassanese stated that the Reserve Bank "seemingly has little choice but to throttle back current economic momentum through at least one, possibly two, rate hikes" in the first half of 2026. "All up, it appears to be game, set and match for a rate rise at the February policy meeting," he declared.
The economist further explained: "What's more, if the March quarter 2026 CPI report is also firm (with trimmed mean quarterly inflation of 0.8 percent or more), the RBA might also raise rates again at the May policy meeting. To my mind, two rate hikes — given our highly indebted and interest-rate-sensitive economy — should be more than enough to dampen economic growth again and rein in ongoing inflation pressures in areas such as housing, travel and hospitality."
Preparing for Potential Rate Increases
Tindall emphasized that a return to rate hikes would present challenges for households managing tight budgets. "If you've got a mortgage, it's time to start preparing," she advised. "Understand what your monthly repayments would look like if we saw not just one, but two hikes in quick succession and make sure you can clear this figure."
The financial expert recommended that "regardless of what your home loan buffer looks like, now's an opportune time to sense check your variable rate before a rate hike materialises." She noted that "Canstar data shows there are currently over 40 lenders offering at least one variable rate under 5.25 percent, however, one hike could see the goal posts shift this to the mid-5's."
