MNI INTERVIEW: RBA Feb Meeting Live, 4% Rate Over 2026 Eyed

The Reserve Bank of Australia Board could raise the 3.6% cash rate by 25 basis points as early as February, if Q4 underlying inflation prints above expectations, with the policy rate likely to move into the low 4% range over 2026, a former RBA senior economist told MNI in an interview.

“If that December quarter underlying CPI comes out hot, I've got to say February is live,” said John Simon, head of the RBA’s economic research department from 2014 to 2024. He noted his medium-term view for the nominal neutral rate is around 3.5% assuming anchored inflation expectations, though this assumption is increasingly strained as high inflation persists. 

“Conditional on inflation expectations remaining anchored, and there not being that kind of resurgence in people's cost-of-living feelings leading them into wage demands and so on... I would think low fours would be where you would be. So, one hike, maybe two, depending on how it plays out,” he said.

However, if spikes to headline inflation, amplified by electricity subsidy effects, flow through to household sentiment and wages, he warned that expectations could drift. “There may be need for more just to deal with that.”

The RBA will receive a fresh CPI update on Jan 28, just a week ahead of its Feb 3 policy meeting, with markets currently assigning a 22.6% probability to a rate increase. Simon has warned previously that the RBA's overly optimistic inflation view risked a H1 hike. (See MNI: RBA's Q3 CPI Miss Ups H1 Hike Odds - Ex Research Chief) 

TONE SHIFT

Simon, now an adjunct fellow at Macquarie University, also highlighted the shift in tone by Governor Michele Bullock following this week's board meeting, noting her more hawkish language appearing to remove any chance of future cuts, pushed yields higher and market expectations of hikes to increase. (See MNI RBA WATCH: Board Sees 2026 Hike Risks, Cuts Ruled Out)

"The future path of interest rates or solid expectations about that has as much influence as the current cash rate,” he said, arguing the Bank’s reliance on market pricing to set the expected policy path is “broken” and contributing to volatility.

The higher market path, once plugged into the Bank's forecasts, will also lead mechanically to lower inflation forecasts, he added. “That's what's doing the work there, rather than what they're actually setting the cash rate as. And they should really cut out that middleman and add some clarity,” he continued.

Simon said the volatility in rate expectations shows monetary conditions are not in a “minor tweaking” phase. While the Board's latest decision was unsurprising, the abrupt shift in market pricing now “does some of the work for the bank without it actually having to move rates.” 

What some have portrayed as a resurgence of inflation is, in his view, a continuation of unaddressed pressures. “We never got [inflation] under control. What we've got is still the same net pressure on inflation that really hasn’t been handled.”