National Australia Bank (NAB) has adopted a more hawkish stance on the Reserve Bank of Australia’s (RBA) monetary policy outlook, forecasting two 25 basis point rate rises in 2026. NAB expects the first increase in February, followed by a second in May, a view that sharply contrasts with current market expectations.
NAB believes persistent inflation risks and continued resilience in parts of the domestic economy will compel the RBA to resume tightening. This is despite widespread market assumptions that interest rates have already peaked. NAB’s outlook aligns with a recent warning from Citi, which also cautioned that markets may be underestimating the possibility of further RBA action should inflation remain stubborn.
In comparison, money markets remain sceptical. Current pricing suggests a 74% chance that the RBA will leave rates unchanged at its February meeting, with a full 25 basis point hike not expected until August. This disparity highlights a growing divide between bank economists and market participants regarding the future path of Australian monetary policy.
NAB points to inflation dynamics as the primary driver for tightening. Although headline inflation has eased, underlying price pressures—especially in the services sector—remain elevated. The RBA has consistently stated it will not tolerate prolonged deviations from its inflation target. NAB expects ongoing evidence of domestic cost pressures will prompt the RBA to act sooner than the market currently anticipates.
The predicted February hike is particularly significant given the RBA’s usual preference to raise rates only when confident that inflation is trending sustainably downward. NAB’s forecast suggests the RBA may now see greater risk in tolerating inflation than in protecting economic growth, especially if labour market strength persists.
A follow-up rate increase in May would signal that the RBA considers current policy settings still too loose. This could trigger a rapid repricing in interest rate markets, particularly at the front end of the curve, where expectations currently point to a prolonged period of steady rates.
Overall, NAB’s outlook emphasises the risk that markets are complacent about Australian rates. Investors could face upside surprises if inflation proves more persistent than widely anticipated.
Following NAB’s more hawkish shift, the Australian dollar (AUD) has received some support.
Original Source: Eamonn Sheridan of investinglive.com
