Financial markets are now pricing in a 100% chance that the Reserve Bank of Australia (RBA) will raise interest rates in 2026, a sharp reversal from expectations of a cut just two weeks ago. The shift follows unwelcome inflation data, with consumer price growth jumping to 3.8% in October, well above the RBA's 2-3% target range.
The higher rates would be a blow to mortgage holders, including over 85,000 first-home buyers who have benefited from three rate cuts in 2025. Sally Tindall of Canstar noted that fewer banks now offer loans below 5%, and fixed rates are expected to rise further as lenders adjust to the changing outlook.
Despite the market's hawkish turn, some economists believe the RBA is more likely to hold rates steady through 2026. AMP's Shane Oliver, who abandoned his forecast for another cut, argued that markets may be overestimating the risk of hikes, citing rising unemployment and uncertainty over inflation data reliability.
The changed outlook is expected to cool the hot property market, with Westpac now forecasting national price growth of 6% in 2026, down from a previous estimate of 9%. However, affordability remains at record lows, offering little relief to aspiring homeowners.
All eyes are on the RBA's final decision for 2025 on Tuesday, where analysts expect the cash rate to remain at 3.6%. The board's commentary will be scrutinised for any pushback against the market's rate hike expectations.
