It’s the start of a new year, but not a reset. Interest rates remain under close watch in Australia, and while nothing has moved yet, the next few months could prove decisive. Expectations have shifted — again — and the Reserve Bank is keeping its options open.
From Rate Cuts to Pause to Hike Risk
Just a few months ago, financial markets were still flirting with the idea of further rate cuts in early 2026. That changed quickly. By the end of last year, the conversation had turned towards a prolonged pause, and now, the focus is increasingly on the possibility of new hikes.
The cash rate currently sits at 3.6%, unchanged since August 2025. But in her final public remarks of the year, RBA governor Michele Bullock made it clear: she doesn’t expect cuts anytime soon. Instead, the board will weigh either holding steady or tightening policy if inflation proves stubborn.
Market forecasts have shifted accordingly. While there’s only about a 30% chance of a hike in February, that probability climbs steeply from March onwards. By June, markets are pricing in a 93% likelihood of a rate increase.
Inflation Will Set the Tone
As ever, the Reserve Bank’s thinking revolves around inflation data. The upcoming release of the Consumer Price Index (CPI) for November and December will heavily influence the tone of the RBA’s next meeting, scheduled for February 3–4.
Governor Bullock has said repeatedly that if inflation remains persistent and doesn’t return towards the 2–3% target band, the board will need to reconsider whether current settings are tight enough. Still, she’s avoided offering any timeline — leaving the door open to a meeting-by-meeting approach, reports ABC News.
Beyond inflation, labour market data also plays a role. In November, the unemployment rate held steady at 4.3%, but employment numbers dipped. That nuance may give the board pause, even as inflationary pressure remains in focus.
Households Watching Closely
Any decision on rates carries weight for households already navigating higher mortgage costs. While average variable rates sit around 5.5%, fixed rates have started rising again. A single 0.25 percentage point hike could add between $90 and $150 per month to repayments on a typical mortgage, according to estimates from Canstar.
Savers, meanwhile, are seeing mixed outcomes. The average ongoing savings rate remains modest at just over 3%, and not all institutions have passed through previous rate increases to deposit products. That trend is likely to continue in 2026.
A Year of Gradual Uncertainty
The RBA will meet eight times in 2026, and unlike past years, the path forward feels less predictable. The central bank has adopted a more flexible meeting structure, and markets are adjusting their expectations more frequently in response.
For now, the signal is clear, even if the timing is not. The RBA is not preparing to ease policy. If anything, it’s preparing for the opposite — depending on what the next round of data reveals.
