For much of the past year, the conversation around interest rates in Australia has centred on when the Reserve Bank would finally be in a position to cut. That assumption is now being tested.
A growing number of economists are warning that persistent inflation could force the RBA to lift the cash rate at its first meeting of the year in February. While this is far from a consensus view, it represents a clear shift in the narrative and one that borrowers and investors should not ignore.
Why A February Rate Hike Is Being Discussed
The catalyst for this change in outlook has been inflation. The September quarter data surprised on the upside, raising concerns that price pressures are proving more stubborn than previously expected.
Commonwealth Bank economist Ashwin Clarke now expects the RBA to increase the cash rate by twenty-five basis points in February. In his view, Australia ended 2025 in a cyclical upswing, with economic growth improving but progress on inflation stalling.
Economic growth is expected to lift from around 2.1 per cent to a peak of 2.4 per cent in the coming quarter, before easing back toward 2.2 per cent by the end of 2026. With growth running above capacity and the consumer remaining resilient, inflation risks are beginning to skew higher.
Market participants are now watching the December quarter inflation data closely. According to IG market analyst Tony Sycamore, the RBA is likely to place significant weight on the upcoming quarterly CPI figures when assessing underlying momentum.
“A trimmed mean inflation result at or above one per cent would likely be enough to trigger a twenty-five basis point hike in February,” Sycamore says.
Fine-Tuning Rather Than A Full Hiking Cycle
Importantly, even those expecting a February move are not calling for a renewed tightening cycle. The prevailing view is that any increase would be a fine-tuning exercise rather than the start of an aggressive hiking phase.
Commonwealth Bank expects the cash rate to sit at 3.85 per cent by the end of 2026. The risk, as Clarke notes, is that stronger growth and more persistent inflation could force the RBA to do more than currently forecast. For now, that remains a secondary scenario rather than the central case.
Not Everyone Agrees
Despite the growing discussion around a potential hike, there is still a credible alternative view. Betashares chief economist David Bassanese argues there remains a pathway for inflation to moderate without the need for further monetary restraint.
Under this scenario, the RBA would leave rates unchanged through the first half of 2026, with rate cuts delayed until later in the year. While this outlook has become less certain, it highlights just how finely balanced the current environment remains.
What This Means For Borrowers And Investors
The key takeaway is not that rates are guaranteed to rise, but that the assumption of imminent cuts can no longer be taken for granted.
Higher than expected inflation has put rate increases back on the table, even as economic growth shows signs of improvement. Any move higher is likely to be modest and targeted, rather than the start of a prolonged tightening phase.
For borrowers, this reinforces the importance of maintaining cash flow buffers and conservative serviceability assumptions. For investors, it is another reminder that long term outcomes are driven less by short term rate moves and more by strategy, structure and asset quality.
As always, the RBA will follow the data. The next inflation print may well determine whether February delivers a hold, a hike, or simply more uncertainty.
