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Two of Australia’s biggest banks are warning borrowers to brace for a rate hike in February, as persistently high inflation derails hopes of further relief.
The Commonwealth Bank of Australia and National Australia Bank (NAB) both expect the Reserve Bank of Australia (RBA) to lift the cash rate following its February meeting, citing inflation pressures that remain stubbornly above target.
In mid-December, the Commonwealth Bank flagged a 0.25 basis point increase to the cash rate in February, before holding rates steady through to the end of the year. NAB has gone further, tipping two rate rises in February and May.
Commonwealth Bank said inflation is forecast to hover around 3.3 per cent over the coming year, remaining above the RBA’s 2–3 per cent target band.
The bank pointed to ongoing strength in the Australian economy, with household spending rising, wages growing, and business investment increasing, creating capacity constraints where demand is outstripping supply.
Economists now expect that inflation will not return to the target range until 2027.
Despite this, Commonwealth Bank stressed that any February move would likely be a “fine-tuning” adjustment rather than the beginning of an aggressive tightening cycle, although further increases could follow if spending remains strong.
“The economy has picked up more momentum than expected, and that strength is keeping inflation from easing,” Commonwealth Bank head of Australian economics Belinda Allen said.
“A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3 per cent.”
Allen added that inflation was expected to gradually return towards the midpoint of the target band by late 2027, with a modest rate rise helping to support sustainable growth.
Commonwealth suggested that investment in housing is expected to remain relatively strong in the near term, supported by earlier rate cuts, before gradually easing through to the end of 2027.
However, NAB is forecasting a more aggressive path, predicting two cash rate increases that would take the cash rate to 4.1 per cent.
The bank said consecutive increases would reduce the risk of a sharper tightening cycle later on.
“Pre-emptive action should also minimise the amount of tightening needed and allow scope for a gradual return to more neutral policy settings in the mid-to-late 2027 – where we have pencilled in 50bps of cuts taking the cash rate back to 3.6 per cent by the end of the year,” the NAB report read.
“Expressed another way, this is the difference between tapping the brakes and executing a gentle slowing or trying one’s luck, losing and having to slam on the brakes with potentially undesirable consequences.”
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