Australia’s economy is showing signs that further monetary tightening is likely, prompting Commonwealth Bank of Australia (CBA) economists to predict a 25 basis point rate hike by the Reserve Bank of Australia (RBA) in February. This forecast contrasts with prevailing market scepticism about near-term rate increases.
Other institutions also foresee rate hikes in 2026. Citi expects two RBA hikes, starting in February and followed by another in May, citing rising inflation risks. Similarly, National Australia Bank (NAB) anticipates two increases, challenging market expectations of a prolonged rate pause.
CBA’s view hinges on stronger and more persistent economic momentum than the RBA had predicted. Economic growth rebounded sharply through the second half of 2025, with GDP now estimated to be tracking around its potential rather than below it. This broad-based pick-up is primarily driven by household consumption, supported by recovering real disposable incomes and the continued use of savings buffers.
The labour market remains a crucial factor behind the tightening call. Employment growth has held firm, indicators show limited spare capacity, and unemployment is forecast to stay low despite slowing population growth. Wage growth remains elevated relative to productivity, according to CBA, signalling domestic cost pressures that could prevent inflation from returning smoothly to target without additional policy tightening.
Inflation dynamics also support the case for hikes. Although headline inflation has eased, underlying measures remain sticky. Services inflation and trimmed-mean Consumer Price Index (CPI) are falling only gradually, while inflation expectations have crept up in both consumer surveys and market-based measures. This raises concerns that inflationary pressures could become entrenched unless policy settings are strengthened.
CBA further highlights that financial conditions have unintentionally loosened. Equity markets have rallied, the Australian dollar has depreciated at times, and household spending has exceeded expectations. Together, these factors risk slowing disinflation, and maintaining steady rates for too long could allow demand to outpace supply amid ongoing capacity constraints.
While timing remains delicate, CBA believes the RBA will see early action as the lower-risk approach. A February rate rise would reinforce the Bank’s inflation-fighting credibility and increase the likelihood of inflation returning sustainably to target, even if this means keeping monetary policy restrictive for an extended period.
Original Source: Eamonn Sheridan of investinglive.com
