We look ahead to the February 2026 RBA rate review in the light of the strong labour market result for December, and the high CPI inflation readings

By Sophia Rodrigues*

The Reserve Bank of Australia is almost certain to lift the cash rate next week as it judges a more restrictive monetary policy will be needed to bring inflation to the 2.5% target midpoint.

The cash rate is expected to go up to 3.85% from 3.60% following the end of two-day deliberations on February 3.

The market is pricing over 75% probability of a 25bps hike, and economists are now overwhelmingly in this camp, with the majority changing their view after the latest inflation data.  

The December inflation data, published by the Australian Bureau of Statistics Wednesday, confirmed persistent inflation pressures, rising more than the RBA’s most recent projections.

Headline consumer price index (CPI) rose 3.8% year-on-year in December, taking the average for the December quarter to 3.7%. This is well above the RBA’s forecast of 3.3% in the November Statement on Monetary Policy.

The Australian Bureau of Statistics moved to monthly inflation as the official headline series from October. The RBA’s inflation target is now the monthly headline, and in December it stood at 3.8% versus the 2-3% band with focus on 2.5% midpoint.

However, as the headline is often affected by volatile moves in prices, the RBA uses trimmed mean as one of the key measures to gauge underlying inflation pressures in the economy.

Trimmed mean rose 0.9% quarter-on-quarter in the December quarter and 3.4% year-on-year, exceeding the RBA’s 3.2% forecast.

The inflation data “reinforce our view that the RBA will lift the cash rate by 25bp at its February meeting,” said Belinda Allen, the head of Australian economics at Commonwealth Bank.

“Underlying inflation remains too strong to be consistent with the RBA’s objectives, labour market conditions are still tight, and consumer spending is picking up,” added Allen, who’s had a February hike call since December 16.

The view on the RBA monetary policy shifted significantly in late November to a tiny probability of a rate hike from a largely flat profile, after the October monthly inflation came in higher than expected.

The data, along with other indicators, led to a shift in the RBA’s signalling at the December meeting, with Governor Michele Bullock revealing the Board discussed scenarios in which it might have to raise the cash rate.

“The recent run of data suggests there may be more tightness in the economy than previously assessed,” Bullock said after the December meeting.

Economists at Citi shifted their RBA call in mid-December to 50bps of hikes in 2026 from a prolonged hold, with a forecast for the first hike in February. 

“Given CPI in line with our view, coupled with a tight labour market and high household spending, we cement our 2026 outlook view that the RBA would hike twice by 25bps in February and May,” said chief economist Josh Williamson on Wednesday.

The inflation data compelled several economists to change their call from a hold forecast for 2026.

Westpac chief economist Luci Ellis was one of them. 

“December quarter inflation had the casting vote and voted ‘Yes, hike’,” Ellis said in a note.

RBC Capital is now forecasting two hikes, one in February and the next in May. 

“We’re not wedded to timing, but believe the path of least regret is to act sooner rather than later, then go again in May unless Q1-26 CPI shows enough material signs of improvement or the labour market weakens,” RBC wrote in a note.

Among the first forecasters of the change in RBA outlook to tightening, UBS economist George Tharenou reiterated his call for a February hike, noting “inflation is way too high.”

The case for a 'hold'

However, there are still some who believe the RBA will resist a hike next week.

“On balance, a hold remains the more defensible outcome, particularly when domestic inflation dynamics are set against heightened and asymmetric global risks that could escalate quickly and threaten broader financial stability,” RSM economist Devika Shivadekar said.

That said, Shivadekar admitted she was leaning towards a hike, noting the RBA Board could judge “establishing a firmer policy stance early in the year is preferable, even if followed by a prolonged period on hold.”

Westpac’s Ellis also reckons “there is still a small chance they hold, and we expect the Board to debate the merits of holding versus raising the cash rate at the meeting.”

UBS’s Tharenou, on the other hand, is clear hike is the only strong option next week.

He expects the revised economic forecasts to be “materially hawkish” and enough for the RBA staff to explicitly recommend a stronger case for an immediate rate hike, rather than the alternative case of a hold for now to watch for more inflation data.

His view could be regarded as consistent with RBA communication in December, including the minutes of that meeting.

The minutes suggested the preconditions for a lift in the cash rate in the near term are more likely to be met versus one where the cash rate could be left on hold for some time.

The RBA had already assessed the labour market to be a little tight in December, and the recent data showed a fall in the unemployment rate, which is now below the RBA’s November projections.

Household spending was also stronger than expected, likely resulting in an upgrade to the RBA’s assessment in December of “greater confidence in their judgement that the labour market was still a little tight and the output gap still positive.” 

If the RBA meets expectations for a 25bps hike, it would mark a quick turnaround from a 25bps cut delivered in August 2025.

The quickest U-turn on record is May 8, 2002, when the RBA hiked by 25bps to 4.50%, after lowering 25bps to 4.25% on December 5, 2001 under Governor Ian MacFarlane.

Sophia Rodrigues is the founding editor of Central Bank Intel, a professional journalist watching the Reserve Bank of Australia.