The RBA is widely expected to hike the cash rate by 0.25 percentage points on Tuesday, with all Big Four banks predicting the move. (Source: AAP)
The Reserve Bank of Australia (RBA) is under pressure to hike interest rates this week after inflation jumped higher than expected. While all of the Big Four banks unanimously expect a 0.25 per cent lift of the cash rate to 3.85 per cent on Tuesday, there’s a “wild card” that could throw a spanner in the works.
The Consumer Price Index rose 3.8 per cent annually in December, up from 3.4 per cent in the year to November. Trimmed mean inflation rose 3.3 per cent annually, up from 3.2 per cent. Both are outside the central bank’s target band.
Westpac and ANZ have now flipped their expectations and are expecting a February hike, joining Commonwealth Bank and NAB who changed their calls to a hike back in December.
RELATED
Commonwealth Bank head of Australia economics Belinda Allen said a hike was needed to ensure inflation returned to the mid-point of the RBA’s target band by the end of 2027, but it wasn’t a done deal.
“A rate hike next week is our base case. But is not a forgone conclusion. There will be nuances to the debate for a rate hike by the Board. We expect the Board to weigh up between an on-hold decision and a rate hike,” Allen said.
The RBA’s reaction function will be the “wild card”, she added, with uncertainty over the Board’s urgency to hike.
Do you have an interest rates story to share? Contact tamika.seeto@yahooinc.com
“In December, Governor Bullock was hawkish. The Board discussed what conditions they would need to see to lift the cash rate, but the switch to actually hiking could be slower than we anticipated,” she said.
The board could use the February meeting to warn about the need for higher rates and prepare the community, Allen said, relying on tighter financial conditions to “do the heavy lifting”.
It may also be worried about the global backdrop and opt to hold off, or take a “wait and see” approach to see how persistent inflation is.
CBA’s Belinda Allen, NAB’s Sally Auld and Westpac’s Luci Ellis have all pencilled in a February interest rate hike on Tuesday. (Source: CBA/NAB/Westpac)
NAB chief economist Sally Auld said the door was “wide open” for the RBA to deliver a hike on Tuesday. The bank is expecting rate hikes in February and again in May.
“We should bear in mind that, as the Deputy Governor said earlier this year, it’s not just about the inflation numbers,” she said.
“So the bank’s reaction function is not just a mechanical response to where inflation prints, but they will step back and take a look at the bigger picture.”
Story Continues
Auld said inflation was clearly running stronger than they expected, along with growth, with global growth expectations also being revised up.
Westpac chief economist Luci Ellis said there was a “small chance” the board would hold and expected debate on the merits of holding or hiking.
“With market and public expectations already primed, though, the Board is likely to see little reason to wait,” she concluded.
This would be the first time the RBA has raised interest rates since late 2023.
Here’s a summary of the major banks’ predictions:
CBA: One 0.25 per cent hike in February to take cash rate to 3.85 per cent
Westpac: One 0.25 per cent hike in February to take cash rate to 3.85 per cent
NAB: Two 0.25 per cent hikes in February and May to take cash rate to 4.10 per cent
ANZ: One 0.25 per cent hike in February to take cash rate to 3.85 per cent
More than half (51 per cent) of the 33 experts and economists surveyed by Finder this month expect the RBA to hike the cash rate in February. This comes after just 9 per cent predicted a hike back in December.
AMP chief economist Shane Oliver is one who expects the RBA will keep the cash rate on hold at 3.6 per cent, but admits it will be a “very close call”.
“On balance we think that, given the cross currents and in particular the downtrend in trimmed mean inflation, the RBA should and probably will leave rates on hold and wait for more information but it’s a close call and not one we have a lot of confidence in,” Oliver said.
“We would put the probability of a hike as being around 49 per cent versus 51 per cent for a hold.”
If there is a hike, Oliver said it would be a case of “one and done”.
Finder found that homeowners on the average home loan of $693,802 would see an average increase of $109 to their monthly repayment should the RBA raise the cash rate on Tuesday. That works out to an annual increase of $1,131.
Head of consumer research Graham Cooke said talk of a rate hike could feel like a “cold shower for homeowners after a brief reprieve”.
“Many who refinanced or entered the market during the 2025 easing cycle may feel blindsided, as the pivot from falling to rising rates in just six months has created significant whiplash,” he said.
Homeowners have been urged to take a look at their interest rate and make sure it is still competitive.
Get the latest Yahoo Finance news – follow us on Facebook, LinkedIn and Instagram.