MNI RBA WATCH: Board Sees 2026 Hike Risks, Cuts Ruled Out

The Reserve Bank of Australia Board sees the balance of risks tilted toward a potential rate hike in 2026 to contain inflation, with cuts firmly off the table, Governor Michele Bullock said, adding that policymakers will reassess the restrictiveness of the 3.6% cash rate in the new year.

Bullock’s comments at a press conference followed the Board’s unanimous and widely expected decision to hold the cash rate at 3.6% on Tuesday, marking a third consecutive pause. (See MNI RBA WATCH: Board To Hold At 3.6%, Contemplate 2026 Outlook) The Board’s discussion centred on the likelihood of a prolonged hold and the potential need for a hike sometime in 2026, she added.

RBA overnight index swaps rose sharply after her remarks, with markets fully pricing in a 25 basis point increase by June and a 4.32% cash rate by September.

“The board will do what it thinks it needs to do to get inflation back to 2.5% and it's uncomfortable the conversation we had today, [the board] is uncomfortable where it is,” she told reporters, pointing to recent strong inflation prints. 

INFLATION DATA

Headline inflation rose 3.8% y/y in October, 20bp above expectations, while trimmed mean inflation climbed 3.3% y/y, 30bp above forecasts, according to the first full release of the Monthly CPI. This followed Q3 headline inflation, which rose 3.2% y/y, 20bp above expectations and up from 2.1% in Q2, while trimmed mean reached 3.0%, 30bp above forecast. 

“If inflation continues to be persistent and looks like it is not coming back down towards the board's target, then I think that does raise questions about how tight financial conditions are, and the board might have to consider whether or not it's appropriate to keep interest rates where they are, or, in fact, at some point raise them," Bullock noted, declining to clarify a timeline. "It's going to be a meeting by meeting decision." 

The Board will focus on whether capacity constraints remain and labour market tightness continues into early 2026, she continued. “When we come back to this in February… we'll be reassessing whether or not we think capacity is still a bit tight, and we'll be reassessing whether or not we think financial conditions are really just a little bit tight, or whether or not, in fact, they are effectively not putting any downward pressure on inflation.”

Bullock said the September quarter’s 1.0% q/q trimmed-mean print was a key concern and downplayed the significance of the ABS's new 'full' monthly data, noting it was not seasonally adjusted. (See MNI POLICY: RBA Sees Balanced Risk, Despite Monthly CPI Shock) “What we're looking for in underlying inflation is some sort of clues to whether or not that large increase… was just a whole lot of unrelated one off factors, or whether or not it was demonstrating that there is underlying capacity pressures in the economy.”

NEUTRAL DIFFICULTY

Bullock stressed the difficulty in interpreting data near neutral policy settings. “As we get closer to neutral on the interest rate, and as we get closer to balance on the economy and the employment, it just gets harder… jumping at one number would not be the appropriate thing to do,” she said.

She also reiterated that policy easing is not under consideration. “I don't think there are rate cuts in the horizon for the foreseeable future. The question is, is it just an extended hold from here, or is it possibility of a rate rise?”

The Board will next meet on Feb 3.