Financial markets now certain the RBA will hike interest rates in 2026
Financial markets are now pricing in a 100% chance that the Reserve Bank of Australia (RBA) will hike interest rates in 2026, according to recent forecasts. This move would significantly impact mortgage holders and potentially cool down the overheating property market. The latest predictions represent a sharp shift from just two weeks ago when traders anticipated an even chance of either a rate cut or hike by the RBA's May meeting.
The change in sentiment comes as inflation data indicates a concerning trend, and national accounts and household spending figures suggest the economy is accelerating into the new year. Adam Donaldson, head of interest rates strategy at the Commonwealth Bank, stated that the market now believes the RBA won't further reduce rates.
The Australian Bureau of Statistics data reveals a 3.8% consumer price growth in the year to October, surpassing expectations and exceeding the central bank's 2-3% target range. This surge in prices will likely lead to higher mortgage costs, affecting over 85,000 first-home buyers who benefited from rate cuts in 2025.
Experts warn that the dwindling number of banks offering loans at below 5% interest rates may further increase fixed rates as banks adjust to the RBA's shifting cash rate expectations. Sally Tindall, director of data insights at Canstar, advises borrowers to consider fixing their mortgages at the lowest possible rates, despite the challenge of outsmarting the banks.
The rapid rise in home prices, driven by three rate cuts this year, has made affordability the worst on record. This has attracted first-time buyers and property investors alike, with analysts predicting a 6% national home value increase in 2026, compared to the earlier forecast of 9%.
As the RBA prepares to deliver its final rates decision for 2025 on Tuesday, analysts predict a hold at 3.6% cash rate, but they will be keen to observe any pushback against the market's recent 'hawkish' stance. While traders have quickly adapted to the rate hike prediction, economists believe the RBA is likely to maintain its current rate throughout 2026.
AMP's chief economist, Shane Oliver, has abandoned the view of another rate cut, but he also believes financial markets are overestimating the chances of higher rates. Oliver highlights the rising unemployment trend, indicating a soft jobs market, and questions the reliability of the new monthly consumer price index and the fragility of consumer spending.
