Westpac shifts to rate rise, all big four eyeing RBA hike next week
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More news: Westpac economists have settled their expectation that the RBA will hike rates next week following a higher than expected December quarterly inflation print, cementing the bank’s view after sitting on the fence following better than expected unemployment data.
Westpac chief economist Luci Ellis stressed that “when the economy is close to full employment and full capacity utilisation, it is hard to know which side of the line it is on”. As such, the bank had been waiting on the inflation print, which has now tipped the scales.
“With trimmed mean as the clearest signal of the underlying inflation trend, its 0.9% [quarter-on-quarter], 3.4% [year-on-year] quarterly result in the December quarter implies that the RBA is likely to raise rates at the February meeting,” Ellis said in a research note.
Beyond a February hike however, Ellis said it is not clear if it will be “followed up with a sequence of moves”.
“Expect a ‘wait-and-see’ stance, with a clear willingness to follow up to be communicated following the meeting,” Ellis said.
HSBC reiterated its expectation for a 25 basis point hike in February and another in Q3. It also expects the RBA to signal “that even more tightening may be needed” in a statement accompanying its rates decision next week.
“Today's much anticipated CPI print for Q4 2025 confirmed that much of the pick-up in inflation in the Q3 2025 numbers has proved to be persistent, rather than due to temporary factors, as the RBA had hoped,” HSBC chief economist Paul Bloxham said.
“That is, as it has turned out, the Q3 print did mark a change in direction for the inflationary impulse.”
ANZ, BoQ now expect RBA rate hike next week
More news: ANZ and the Bank of Queensland now expect the RBA to hike interest rates next Tuesday following a higher than expected inflation print for December.
ANZ head of Australian economics Adam Boyton now expects the RBA to raise interest rates by 25 basis points as a “single ‘insurance’ tightening, not the start of a series of rate hikes”.
“In the wake of an interest rate increase we would anticipate material softening in leading indicators of activity, such as auction clearance rates, consumer sentiment and business conditions/confidence,” Boyton said in a research note.
Boyton also highlighted that while price pressures increased throughout the second half of 2025, “most top-down inflation indicators continue to suggest” that inflation will return to the target range over 2026 and into 2027.
Bank of Queensland chief economist Peter Munckton said “almost all the main CPI measures are comfortably above the RBA’s target band” and argued “a quarter percentage point cash rate hike will likely be locked and loaded for the February meeting”.
He also noted the Q4 CPI data was “more difficult than usual to read” as the ABS prioritised its new full monthly data for the first time. However, he admitted that “having monthly data is the right thing and it will become increasingly focused upon over time”.
Moody’s Analytics head of Australian economics Sunny Nguyen said “the monthly underlying pulse isn’t huge, but the level is the message: underlying inflation is still starting with a 3, and it’s not coming down fast enough on its own”. She said the latest CPI print “is the kind that dares the RBA to prove it means what it says” given its hawkish shift since the end of 2025.
Speaking to journalists in Brisbane, Treasurer Jim Chalmers said inflation is being driven by a rebound in private sector spending and is not the fault of government spending.
“This is about a strong recovery in the private sector, strong recovery in private spending, not a reflection on public spending. Public final demand growth went down, not up, over the past year when it comes to the contribution made to our economy," Chalmers said.
“The story of 2025 was a big resurgence in the private sector as some of that public final demand growth, the measure of public spending, took a back seat to a recovery in the private sector.”
He also described the inflation increase as "unwelcome but unsurprising" in a statement.
"Temporary factors drove some of the tick up, with inflation still expected to decline over time," Chalmers added.
Market swings on December inflation data, rate hike bet ‘finely balanced’
More news: Markets reacted sharply to higher-than-expected December inflation data but whether the Reserve Bank of Australia will hike interest rates next Tuesday continues to hang in the balance, according to economists.
The ASX 200 sharply fell following the CPI release, before briefly rebounding. At 11:54 am AEDT the benchmark index had slipped 0.04% to 8,938.1 before rebounding slightly. Currency traders also reacted, with the AUD-USD exchange rate lifting above $0.70 per US dollar on the news.
BNY APAC Macro Strategist Wee Khoon Chong said “the higher-than-expected inflation reading, coupled with the strong labour market data released earlier in the month, is likely to further stoke near-term interest rates hike expectations”.
“The market is pricing around a 50% chance of a hike at February’s RBA meeting,” Chong said.
Chong noted that Q4 trimmed mean inflation of 0.9% on a quarter-on-quarter basis was slightly below the 1% increase in Q3. However, Q4 trimmed mean inflation lifted 3.4% year on year, accelerating from 3% in Q3.
RSM Australia economist Devika Shivadekar similarly said the February decision is a “narrow call, around a 55:45 proposition with the RBA potentially opting to move pre-emptively and hike now rather than risk having to tighten more forcefully later”.
But Shivadekar argued that “a hold remains the more defensible outcome” given the backdrop of “heightened and asymmetric global risks” with monetary policy expectations remaining “finely balanced”. She said the latest data “confirms inflation remains sticky rather than re-accelerating".
However, she said the RBA’s “patience may be wearing thin” and may opt for a “firmer policy stance early in the year” even if this is followed by a prolonged hold.
CPI rises 3.8% in 12 months to December
The news: The consumer price index (CPI) increased by 3.8% in the 12 months to December 2025, higher than the consensus expectation for a 3.6% lift in the headline figure.
Trimmed mean inflation for the 12 months to December came in at 3.3%, up from 3.2% in the 12 months to November. This is in line with the market consensus.
The numbers: The CPI increase in the year to December was higher than the 3.4% recorded in the 12 months to November.
Annual inflation was predominantly driven by housing (+5.5%). This is followed by recreation and cultures (+4.4%) and food and non-alcoholic beverages (+3.4%)
Housing was again driven by changes in electricity costs (+21.5%) in the 12 months to December as the impact of electricity rebates timing continues to affect prices. The ABS highlighted state government rebates in Queensland and Western Australia being used up over December.
On a month-to-month basis CPI was up 1% in original terms and up 0.2% in seasonally adjusted terms. Consensus expectations were for a 0.7% increase in original terms.
The context: Economists have been split in their expectations of whether the RBA will increase or hold interest rates steady following the monetary policy board’s next meeting on 3 February, although lower than expected unemployment figures for December flipped several into the hike camp.
The December CPI data is the last major release before the next RBA decision on the interest rate. The RBA has been focused on the timing or need for potential rate hikes in 2026 with interpretations about the persistence of inflationary pressures up for debate.
November CPI growth was slower than expected but the International Monetary Fund has previously flagged that Australia is “projected to see some drawn-out persistence in above-target inflation”.
The sources: ABS media release, ABS data
