Consumers won't stop spending, whetting the RBA's appetite for rate rises

It might cost more than $17 for a pint at your local but Aussies continue to spend like drunken sailors – and it might come back to bite them in the ‘bankside’.

In the past two years prices have risen by almost 10 per cent across the board but despite wage increases falling comfortably short of that, Australians are heading into this Christmas on a spending blitz that will likely culminate in the Reserve Bank of Australia (RBA) lifting rates in early 2026.

Every Australian household is expected to spend $1,712 over the Christmas holiday period, with those under 45 driving the bulk of it, according to data released by MLC.

MLC senior economist Bob Cunneen told media that cost of living pressures were clearly not impeding spending.

“Consumer spending has been improving over recent months given the Reserve Bank’s three interest rate cuts (to 3.6 per cent) has boosted disposable income,” he said.

“Given this positive tone to recent consumer spending, there is a chance that the Reserve Bank may reverse course and even raise interest rates in 2026.”

Even as drinking out moves from being a cultural norm to a luxury, the RBA has issued a sobering statement on the persistent inflationary pressures that will likely see rates rise and many borrowers think about battening down the hatches.

As dry as the Minutes of the Monetary Policy Board Meeting might be, some of the points raised may moisten the eyes of borrowers in a country where a third of mortgage holders and renters are deemed to be in mortgage stress (spending more than 30 per cent of income on repayments or rent).

The RBA Minutes released Tuesday (23 December) point to interest rate hikes looming soon.

“Inflation for items such as new dwelling costs and market services had remained elevated, as expected by the staff at the time of the November projections, however, inflation of durable goods prices had exceeded expectations and inflation of domestic travel prices, which can be volatile, was elevated.

“Overall, the data suggested some upside risk to the outlook for underlying inflation in the near term, and it was likely that headline inflation would exceed the November forecasts in the near term.”

With inflation already above the RBA’s preferred 2 to 3 per cent range and surprising on the upside yet again, the Board members look sure to act, if not at its next meeting on 3 February then almost certainly at the following one on 1 April.

RBA members did note that year-ended GDP growth had picked up in the September quarter.

But that ray of positivity in the Australian economy is also masked by population growth.

Australia’s overall GDP growth is weak, but high population growth, largely driven by immigration, prevents technical recessions and props up demand.

Productivity remains flat, adding to the challenge of achieving sustainable economic growth despite increased consumer demand.

Banks lift rates early

The banks, never ones to shy away from a drink at the trough, are wasting no time waiting for the RBA.

ANZ has hiked fixed home loan rates for owner-occupier and investor loans, joining NAB and Westpac as the third big bank to do so in the past week or two.

ANZ, perhaps wanting to recoup some its epic fine for dodgy practices, increased owner-occupier rates by up to 0.30 percentage points.

As a result, its lowest fixed home loan rate is now 5.44 per cent. CBA now has the lowest fixed rate out of the majors at 5.34 per cent for 3-years, in what has been a game of leapfrog over the last eight days as banks move their fixed rates higher.

Canstar’s Data Insights Director, Sally Tindall, said ANZ’s hike to its fixed loans is yet another sign increases to the cash rate are on the horizon.

“Right now, CBA has the lowest fixed rate out of the majors, but that could turn on its head, yet again, if it joins the rate hike frenzy.

“With the number of fixed rates under 5 per cent starting to drop like flies, we could see more borrowers contemplate the possibility of fixing.

“In the last month, we’ve seen the number of lenders offering a fixed rate under 5 per cent almost halve. On 19 November, it was 42; today it's down to just 23.

“There’s still plenty of choice in this list for owner-occupiers, but the options are likely to shrink even further in the new year. 

“Fixing has been on the nose in 2025 as borrowers stuck to variable in the hope there’d be further cash rate cuts.

“Now the (RBA) Governor has poured cold water over this idea, fixed rates might stage a bit of a comeback.”

Not every industry expert was convinced the next move was upwards.

Steve Douglas, Executive Chairman, SMATS Group, said investors should consider fixed rates before they climb further.

“It is hard to say where rates will move, but regardless they are at a low historical level, and when combined with rising rents it means that it is a good time to be an investor in the Australian property market, either directly or indirectly.

“Fixed rates may also start to be worthwhile considering if the general consensus remains that the RBA won’t reduce further.”

The potential for a rate cut was still there, he added, but was dependent on government policy and spending.

“Inflation has long been the RBA’s indicator, but the current issue is more focused around government spending, which continues to escalate rapidly.

“This makes it difficult to know which direction rates may go, because if the Federal Government starts to rein in spending there is a chance of a future cut, whereas if they don’t then the upward pressure on inflation may cause the RBA to leave rates alone or lift them.

“Government spending causes other problems, as the competition for resources, especially labour, is causing grief in the private sector at the same time government is collecting record revenues from personal taxes.

“Given that, I personally feel we still have room for at least one more cut and think it will be necessary to help the private sector economy which is struggling in Australia at the moment,” Mr Douglas said.

Interest rates falling further? Borrowers would certainly raise a glass to that.