Major lenders have reiterated that January’s inflation results will keep the Reserve Bank leaning towards further tightening as opposed to an early pivot.
Australia’s big four banks have sharpened their rate views after January’s CPI report, warning that stubborn core inflation will keep the Reserve Bank of Australia (RBA) on a tightening path, making a May cash rate hike increasingly likely.
The ABS monthly CPI indicator, released on Wednesday (25 February), showed headline inflation running at 3.8 per cent in the 12 months to January 2026, unchanged from December’s annual rate.
In monthly terms, the index rose 0.4 per cent on an original basis and 0.5 per cent seasonally adjusted – a firmer‑than‑usual start to what is typically a subdued month.
Trimmed mean inflation – the RBA’s preferred underlying measure – edged up to 3.4 per cent over the year, from 3.3 per cent in December.
This keeps core inflation well above the RBA’s 2–3 per cent target band.
Housing remained the main driver with costs edging up 6.8 per cent, up from 5.5 per cent in December, while annual inflation for food and non‑alcoholic beverages slowed to 3.1 per cent from 3.4 per cent.
Recreation and culture prices rose 3.7 per cent, down from 4.4 per cent, as domestic travel costs eased.
Yet electricity was the standout pressure point, with billed prices up 32.2 per cent in the year to January, from 21.5 per cent in December.
The figures arrive just weeks after the RBA lifted the cash rate to 3.85 per cent in February and warned that the “recent run of underlying inflation data had been too strong for the Board to look past.”
ANZ maintains ‘extended hold’ base case
ANZ senior economist Adelaide Timbrell said the key surprise was the underlying measure, pointing out that the “higher‑than‑expected annual increase in the trimmed mean was due to a mix of a little more inflation in January, but also historical revisions”.
On the policy outlook, Timbrell cautioned that “the trimmed mean outcome adds some further risk that the RBA will hike the cash rate in May”, given the way the first month of the quarter tends to foreshadow the full quarterly core outcome.
Based on those historical correlations, she said “the monthly trimmed mean outcome still points to a 0.8 per cent q/q trimmed mean (albeit with upside risk) for Q1” – a pace that would leave underlying inflation running too high for the bank’s comfort.
Yet despite this, ANZ continues to assume the cash rate will remain on an extended hold at 3.85 per cent through 2026, with the bank stressing that any May move would be contingent on the March quarter CPI overshooting the RBA’s forecasts.
NAB doubles down on May hike
National Australia Bank was more forthright with senior economist Taylor Nugent describing January’s inflation as “still too high – broadly as expected.”
He said that the data “confirms price pressures continue to run above the RBA’s target band, leaving them on track for additional tightening.”
“We don’t think the detail in today’s data will pressure their rolling assessment much,” he said and added that “a 0.8 per cent qoq trimmed mean for Q1 (if realised) is consistent with our view for a hike to 4.1 per cent in May”.
NAB therefore retained its existing forecast that the RBA would move to raise the cash rate by 25 basis points in May and then pause for an extended period.
“After a May hike, NAB sees the RBA on hold at 4.1 per cent until late 2027,” Nugent said.
Commonwealth Bank backs May rate rise
Commonwealth Bank’s economics team joined the other majors in warning that January’s CPI report kept underlying inflation too high for the RBA’s comfort.
“The firmness in underlying inflation observed in late 2025 has carried into the new year,” the bank said.
CBA highlighted that “the RBA’s preferred measure of market services inflation rose to 0.4 per cent/mth in January, lifting the annual rate to 3.4 per cent/yr”, which they described as “notably stronger than our expectations”.
On the key quarterly measure, CBA said that “while our current estimate for quarterly trimmed mean inflation remains 0.8 per cent/qtr in Q1 25, today’s data suggest the risks are now tilted towards a 0.9 per cent outcome”.
Crucially, CBA’s interpretation is that such an outcome would be incompatible with a pause‑and‑wait strategy.
They said that “quarterly underlying inflation is likely to be too strong to be consistent with the RBA’s objectives”, and with the quarterly trimmed mean data due in late April, this timing “reinforces our expectation that the RBA will raise the cash rate by 25bp at its May meeting”.
Westpac: Inflation profile intact, tightening bias preserved
Westpac senior economist Justin Smirk characterised the January CPI as “a touch stronger than expected, with minimal risk to our March quarter estimates.”
He emphasised that January was “seasonally a soft month” and that with the monthly series still relatively new, the bank expected to see “ongoing revisions to the CPI seasonal factors with the ABS fine-tuning the process as they gather more data.”
Even so, Westpac is not backing away from its view that underlying inflation will remain uncomfortably high in the near term.
“Consistent with our preliminary review, we see little risk to our current inflation profile,” Smirk said.
Westpac’s prediction for interest rates remains unchanged, with the bank tipping a further 0.25 percentage point hike in May.
[Related: RBA flags hotter economy as majors broadly tip May hike]
