Cash rate steady amid growing expectation of 2026 rate hike

The Reserve Bank of Australia has kept the cash rate at 3.6% to end 2025, with markets now pricing in a 100% chance of a rate rise next year.

The RBA’s decision to hold the cash rate comes as no surprise after last month’s October inflation figures came in higher than expected. 

But it seems the monetary policy board has been less hawkish than many commentators.

Headline inflation rose to 3.8% in October while the RBA’s preferred measure, the trimmed mean, came in at 3.3% – both well outside the central bank’s target band of 2% to 3%.

After the data was released, many economists and markets went into overdrive, wiping forecasts of further rate cuts in the current downcycle with many saying the next rate movement will be higher.

But in her post-meeting media conference this afternoon, RBA governor Michele Bullock said it was too early to jump at one set of data.

She said the board judged the increase in underlying inflation was due to temporary factors.

Inflation has “picked up”

However, Ms Bullock acknowledged inflation has “picked up more recently”, reiterating the phrase used in the statement released with Tuesday’s decision.

But she said the board was also wary of recent changes to inflation data collection methods, now providing a monthly print of trimmed mean inflation instead of the traditional quarterly reading.

Ms Bullock also revealed there was no talk of cutting the cash rate at any time during the two-day December meeting with more discussion of what conditions might bring about a future rise.

She said it appeared additional rate cuts are not needed.

Tuesday’s decision to keep the cash rate on hold was unanimous among board members.

Downcycle over?

For mortgage holders, Tuesday’s decision signals the end of the 2025 cutting season, which saw three interest rate drops in February, May, and August.

The 75-basis points worth of cuts to the cash rate over seven months effectively put more money into pockets, as variable-rate mortgage repayments largely fell in line.

It also made some contribution to a 2.5% rise in household consumption over the year, one factor in restoking inflationary pressures in the economy.

It shows balancing cash rate calls with wider economic repercussions is more difficult than it looks.

No cooling in property market – yet

For those looking to get into a heated property market, Tuesday’s hold in the cash rate may provide a window for jumping in while interest rates are steady.

Home values are rapidly escalating on the back of record investor lending and the launch of the federal government’s expanded 5% Deposit Scheme in October.

Three interest rate cuts have also played a role although property market analysts expect home value growth to slow on the back of a speculated cash rate hike some time in 2026.

But that is to jump the gun.

What next for interest rates?

The next monetary policy meeting is scheduled for 2-3 February 2026.

It will follow the release of key inflation data on 28 January – a dataset Ms Bullock referred to numerous times as being an important gauge of inflationary pressures in the economy.

After Tuesday’s meeting, National Australia Bank economists said February is “now a live meeting for a rate hike”. 

But ANZ economists were more measured.

They said they expected the RBA Board to remain data dependent and that the cash rate would remain on hold at 3.6% for an extended period.

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