Australians are once again holding their breath. After years of rising mortgage repayments and persistent price hikes, the question remains: will interest rates finally hold steady, or is another increase waiting just around the corner? The Reserve Bank of Australia (RBA) has given a hint — but the real answer will depend on the data due in January.
Inflation at the Heart of the Decision
The RBA’s next big test arrives on January 28, when the Australian Bureau of Statistics releases its latest inflation report. The results will either calm nerves or fuel new worries about the direction of the economy. If inflation is slowing, the RBA may keep rates on hold. But if prices remain stubborn, 2026 could open with another uncomfortable rate hike.
At the December policy meeting, the RBA made it clear that it is watching inflation closely. Board members expressed concern that price growth was spreading beyond volatile areas like fuel or fresh food, into longer-term categories such as market services and new dwellings. Those are the areas that typically signal “sticky” inflation — the kind that doesn’t fade quickly.
Two key things must happen for Australia to avoid another round of rate rises. First, the RBA must be convinced that recent price increases are temporary. Second, it must believe that financial conditions are still tight enough to cool spending and take pressure off prices. Both of those conditions are looking uncertain.
The Debate Inside the RBA
The December meeting also revealed how divided the RBA board has become. Some members argued that the economy is running too hot — with house prices climbing and banks competing aggressively for customers — suggesting that monetary policy is no longer restrictive enough. Others pointed to the rising unemployment rate as a sign that the pressure is already working.
It’s a tricky balance: slow the economy too much and jobs disappear; let it run too hot and inflation gets out of control. The RBA is walking a tightrope between those two outcomes, and there’s little room for error.
Economists Split on What’s Next
Market economists are reading the signs differently. Some expect the RBA to remain cautious, keeping the cash rate unchanged through most of 2026. Others think inflation will force at least one more hike before mid-year. Predictions vary, but one thing is clear — the central bank will wait for hard evidence before making its next move.
Analysts from NAB have warned that if core inflation jumps by 0.9% in the December quarter, the RBA may find it difficult to justify staying on hold. Meanwhile, JP Morgan believes the increase will be slightly softer, at 0.8%, leaving enough breathing space for the RBA to sit tight. It’s a small difference, but one that could mean the world for homeowners already stretched thin.
What’s at Stake for Households
For millions of Australians with mortgages, even talk of a potential rate rise is enough to cause anxiety. Household budgets are still fragile after two years of cost-of-living pressures, and wage growth hasn’t kept up. A single rate hike could push more families to the brink, particularly those who locked into low fixed-rate loans during the pandemic and have since rolled onto much higher variable rates.
On the other hand, the RBA faces intense pressure to protect the value of the dollar and keep inflation in check. Too much leniency could undo years of tightening, reigniting the very problem it’s been trying to solve.
Waiting for the Verdict
For now, all eyes are on the upcoming inflation report. By the end of January, Australians will have a clearer picture of where things are heading. If inflation eases, the RBA may finally step back and give borrowers some breathing room. But if it doesn’t, 2026 could begin with yet another reminder that the fight against inflation is far from over.
Either way, one thing feels certain: the next few months will set the tone for Australia’s economic story in 2026 — and for millions of households, the stakes couldn’t be higher.
