Hotter-than-expected inflation figures have prompted the major banks to swiftly reassess their interest rate forecasts, with all four now predicting a February hike.
Australia’s four major banks have lined up behind a interest rate rise following the Reserve Bank of Australia (RBA) cash rate decision next week, after the Australian Bureau of Statistics (ABS) revealed hotter-than-expected December quarter inflation figures on Wednesday (28 January).
The ABS data revealed headline inflation had accelerated to 3.8 per cent in the 12 months to December 2025, clearing market expectations of 3.6 per cent and up from November’s 3.4 per cent annual reading.
The RBA’s preferred trimmed mean measure edged higher to 3.3 per cent year on year from 3.2 per cent, with quarterly core inflation dipping only slightly to 0.9 per cent.
The largest contributors to the rise were housing at 5.5 per cent, food and non-alcoholic beverages at 3.4 per cent, and recreation and culture at 4.4 per cent.
Over the month of December, CPI climbed 1 per cent in original terms against forecasts of 0.7 per cent.
Quarterly headline inflation moderated to 0.6 per cent from 1.3 per cent in the September quarter.
ANZ shifts to ‘insurance’ hike case
Before the release of December’s CPI figures, Australia and New Zealand Bank (ANZ) had forecast an extended on-hold period.
However, on Wednesday, the bank’s head of Australian economics, Adam Boyton, said the trimmed mean’s 3.3 per cent year-on-year outcome – surpassing the RBA’s forecast of 3.2 per cent – alongside increases in the employment rate, warranted action from the RBA.
“With trimmed mean inflation in Q4 of 3.35 per cent y/y (to two decimal places) above the RBA’s forecast from the November SMP of 3.2 per cent, and the unemployment rate ending 2025 at 4.1 per cent, we now expect the RBA to raise interest rates by 25bp on 3 February,” Boyton said.
Boyton said that the central bank would conclude that a single interest rate hike of 0.25 per cent would help ensure inflation returns to target levels.
“In the wake of an interest rate increase, we would anticipate material softening in leading indicators of activity such as auction clearance rates, consumer sentiment and business conditions/confidence,” he said.
“Accordingly, we view this as a single ‘insurance’ tightening, not the start of a series of rate hikes.”
NAB doubles down on February-May hikes
National Australia Bank's (NAB) senior economist, Taylor Nugent, maintained the bank’s pre-existing call for hikes in both February and May, which would lift the cash rate to 4.1 per cent.
He framed it as a measured response to inflation exceeding RBA projections amid strengthening private sector growth and minimal economic spare capacity.
“Q4 CPI confirms inflation stronger than RBA forecast,” Nugent stated.
“NAB continues to expect the RBA will recalibrate policy to lean against inflation, seeing hikes in February and May.”
NAB stressed that its dual 0.25 per cent hike outlook, which has been in place since late last year, had gained further validation following the fresh inflation figures.
Westpac: Inflation delivers ‘casting vote’ on hike
Similarly, Westpac has updated its forecasts.
Westpac previously predicted the RBA would hold the cash rate at 3.60 for an extended period of time.
However, chief economist Luci Ellis said the December CPI figures were the “casting vote” in a tight economic picture, tipping the scales for a 25-basis point lift.
“December quarter inflation had the casting vote and voted ‘Yes, hike’. RBA to raise cash rate at February meeting to 3.85 per cent,” Ellis said.
“Further rate hikes are possible but are ‘one-and-done’ as a base case.”
She highlighted that the trimmed mean’s 0.9 per cent quarterly rise and 3.4 per cent annual result were the clearest signal of underlying inflationary trends.
“This is one reason why inflation gets the ‘casting vote’ at the RBA’s February meeting,” Ellis said.
CBA maintains single rate hike call
The Commonwealth Bank of Australia’s (CBA) Economic Insights team, meanwhile, reaffirmed its call to shift from a prolonged hold to a February 25-bp rise.
The bank, however, said the economy required tempering via a single hike, due to what it described as persistent yet non-accelerating pressures.
“We expect the RBA to lift the cash rate by 25bp to 3.85 per cent next week as per our call from December,” CBA said.
“We are still of the view that the economy only needs some fine-tuning in the form of one rate hike.
“A rate hike in February should be enough to see inflation settle back close to target by the end of the forecast horizon.”
CBA anticipates a hawkish RBA statement and said the bank would refrain from committing to further steps, potentially via a non-unanimous vote.
Money markets reacted sharply to the news, lifting the probability of a 25-bp rise next Tuesday from 61 per cent pre-release to 72 per cent.
The RBA’s Monetary Policy Board, which will meet on 3 February, will consider whether to hold the cash rate at 3.6 per cent, hike to 3.85 per cent, or drop to 3.35 per cent – an outcome the majors deem unlikely.
The RBA last hiked interest rates in November 2023.
[Related: Majors broadly predict hikes as job lift heightens caution]
