Talk of an early 2026 cash rate increase is premature, according to a leading economist, who argues the Reserve Bank of Australia (RBA) is more likely to keep rates steady next year than return to tightening.
In Bendigo Bank's final economic update for 2025, the bank's chief economist, David Robertson, said market pricing had swung too quickly towards renewed hikes in the cash rate, despite only limited evidence that further tightening will be needed in the near term.
The market has quickly moved from pricing in one more rate cut in 2026 to now pricing in two hikes, Robertson said. While the possibility that the easing cycle is over is clearly much more likely after recent inflation data, the proposition that the RBA may need to hike rates early next year does seem very premature.
The economist's central case is for the cash rate to be left unchanged throughout 2026, mirroring the broadly steady pattern seen in 2024, although he noted that the policy outlook remains data dependent once the RBA meets again in February.
If the RBA do need to adjust rates next year, I'd suggest a cut is still as likely as a hike, Robertson said.
Inflation setback limits scope for further cuts
Robertson cautioned that recent inflation data have made additional rate reductions harder to justify in the short term, particularly for those hoping for lower borrowing costs.
The recent jump in core inflation to 3.3%... was a setback for those looking for lower interest rates, with broad-based price pressures, but particularly high inflation for housing, travel and accommodation, he said.
He also indicated that clear evidence of easing price pressures would be required before the RBA could reopen the door to cuts. For mortgage portfolios, this implies that the current cash rate level may represent a floor for some time, even if an early hike is not Robertson's base case.
2025: shallow easing and private demand-led growth
Reviewing 2025, Robertson said the RBA had delivered the modest easing cycle that had been anticipated, taking the cash rate towards a more neutral level of about 3.5%. That shift, together with lower inflation earlier in the year, provided meaningful support to household incomes and private sector activity.
There was a recovery in household disposable income and spending thanks to the cash rate cuts and lower inflation in 2025, and a resulting pick-up in private sector demand, the economist said.
Robertson noted that private demand, via both business investment and household consumption, has been the main driver of growth, even as external factors weighed on the national accounts.
Growth for Q3 was held back a little by net trade and drawdowns in inventories, but the economy is growing at just over 2% year-on-year, he pointed out.
From a housing and credit perspective, moderate growth combined with improved disposable income has helped underpin loan demand, while elevated living costs and serviceability buffers continue to shape borrower capacity.