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At their 8–9 December meeting, the Monetary Policy Board of the Reserve Bank of Australia (RBA) decided to keep the cash rate steady at 3.6 per cent, but left the door open to rate hikes in the new year.
The minutes from the December meeting have now been released, unpacking the decision-making process behind the decision, and - notably - what it would take for interest rates to start rising.
The board acknowledged that underlying inflation is already projected to remain above the midpoint of the 2–3 per cent target band until 2027, albeit assuming market pricing for future rate cuts.
Members also judged the economy to be operating with a degree of excess demand and questioned whether financial conditions were restrictive enough to bring demand and supply back into balance.
While the board stopped short of acting in December, stating it was too early to conclude trends, this combination is what could ultimately justify a rate increase in the next announcement on 3 February.
With November’s consumer price index (CPI) figures due today (7 January) and December’s due 28 January, clearer data could clear the fog around what’s in store for the future.
The 3 tests for a hike
According to National Australia Bank (NAB), the minutes clarified the framework the board is using and what would need to change for policy to tighten.
In response to the minutes, the bank's economics team noted that the RBA is focused on three key questions: whether excess demand is sustaining inflation, how labour demand and economic activity are evolving, and whether financial conditions remain restrictive.
NAB's chief economist Sally Auld said that the first two hurdles are close to being met. The board has grown more confident that the labour market remains “a little tight”, with private demand remaining strong and companies revising up capital expenditure expectations, she suggested.
Inflationary pressures also appear to be broadening, with goods prices, such as durables, running hotter than expected, Auld said. This places a great deal of pressure on the two upcoming CPI postings before the next cash rate announcement.
NAB’s latest forecast predicts trimmed mean inflation to rise 0.9 per cent quarter on quarter, only marginally below the 1.0 per cent pace seen in the September quarter.
If realised, NAB said “it will be hard for the board to stare down what looks to be a shift in the underlying pulse of inflation.”
The final and most uncertain test is financial conditions. Auld said that the minutes revealed differing views among board members on whether higher market interest rates have done enough of the tightening for them.
She therefore suggested ongoing strength in spending, credit growth, and asset prices would likely push the board towards concluding that conditions remain too loose.
Banks split on the outlook
NAB is currently forecasting that there will be a 25-basis-point rate hike in both February and May, taking the cash rate to 4.1 per cent. The bank called this a “recalibration, rather than the beginning of a significant tightening cycle”.
However, the broader banking sector is divided on the expected cash rate trajectory for this year.
The Commonwealth Bank of Australia (CBA) recently shifted to forecasting a February hike, saying the economy has regained more momentum than expected and that a small increase would help guide inflation back toward target.
By contrast, Westpac and ANZ have both predicted rates to remain on hold throughout 2026.
Both said that while inflation risks remain, hiking into a labour market that is gradually loosening would represent a policy shift for a central bank intent on preserving employment gains.
Even so, both conceded that if the RBA does move in the first half of the year, a hike is more likely than a cut.
[Related: What are brokers predicting for 2026?]