Introduction to Interest Rate Forecasts
Two major banks have announced that they now expect the central bank to start tightening monetary policy settings next year, while one expects a cut, and another sees rates remaining on hold. This comes after the Reserve Bank of Australia (RBA) voted unanimously to hold the cash rate steady at 3.60 per cent for the final rate announcement of the year.
Commonwealth Bank of Australia’s Forecast
The Commonwealth Bank of Australia (CBA) has revised its forecast, stating that it believes the RBA will raise the current 3.6 per cent cash rate by 0.25 percentage points in February and then maintain a rate of 3.85 per cent until the end of 2026. This is a change from the bank’s previous call for a steady cash rate through 2026. However, a “large hiking cycle is unlikely to be needed”, the major bank’s economics team said.
Reasoning Behind the Forecast
The CBA’s head of Australian economics, Belinda Allen, said: “The economy has picked up more momentum than expected, and that strength is keeping inflation from easing. A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3 per cent.” The team also stated that inflation has proven more stubborn than forecast and that signs of inflation persisting are a key reason the RBA may need to act.
National Australia Bank’s Forecast
National Australia Bank (NAB) has also revised its cash rate forecasts, expecting a total rate increase of 50 basis points (bps) in 2026, with one 25-bp hike in February and another 25-bp hike likely to follow in May. NAB’s chief economist, Sally Auld, commented: “When viewed in the context of a central bank that has expressed concern about upside risks to inflation and uncertainty around the stance of policy at present, we think the RBA will need to make a modest recalibration of monetary policy in the first half of this year.”
Westpac’s Forecast
In contrast, Westpac’s current prediction is for two 25-bp rate cuts, but not until mid-2026. This would bring the cash rate down to 3.1 per cent. Westpac economists have said that although the probability of a rate hike has risen, “we see this to be dependent on data over the coming months, and a more likely scenario is a prolonged pause.” They are less convinced that capacity constraints would be an issue for inflation.
ANZ’s Forecast
Australia and New Zealand Banking Group (ANZ) economists expect the cash rate to remain at 3.6 per cent over its forecast horizon. ANZ’s head of Australian economics, Adam Boyton, said that the economy was in an unusual position as it entered 2026, with GDP growth around potential, the cash rate around neutral, and the labour market broadly in balance.
Conclusion
The differing forecasts from major banks reflect the uncertainty surrounding the future of interest rates in Australia. While some banks expect a rate hike, others predict a cut or no change. The RBA’s decision to hold the cash rate steady at 3.60 per cent for the final rate announcement of the year has added to the uncertainty. As the economy continues to grow and inflation remains a concern, the RBA will need to carefully consider its next move to ensure a stable and sustainable economic environment.
