The Reserve Bank of Australia (RBA) is widely expected to raise the cash rate to 3.85% at its first policy meeting of the year, but a minority of economists argue this could be a mistake. They warn that a hike might undermine the recent economic recovery, which has only strengthened in the past two quarters after a prolonged period of weak growth.
AMP's deputy chief economist, Diana Mousina, describes the decision as a close call, with a 50-50 chance of a hike or hold. She notes that while quarterly underlying inflation remains high, monthly data shows moderating price growth in key areas such as rents and durable goods. Mousina believes inflation is more likely to cool than heat up through 2026, even without a rate rise, and that a hike is unnecessary for the current economy.
Stephen Koukoulas of Market Economics also advocates for a hold, citing a weaker underlying trend in the labour market despite a drop in unemployment to 4.1% in December. He argues there are no signs of inflationary pressure in wages and points to global uncertainties, including Donald Trump's chaotic policymaking and a slowing Chinese economy. Koukoulas warns against being spooked by inflation fears, urging the RBA to enjoy the recent economic sunshine.
Deutsche Bank's chief economist, Phil O'Donaghoe, adds that a rate hike would set Australia apart from global peers, who are more likely to ease rates through 2026. He cautions that a February hike, just six months after the last easing, might need to be quickly reversed, highlighting the lack of a domestic mining boom to justify such a move.
