RBA holds but odds swing towards a hike before a cut in 2026

After three rate cuts in a year, 2025 ended with a monetary policy whimper as the Reserve Bank of Australia (RBA) surprised nobody by keeping interest rates on hold.

Tuesday’s (9 December) final RBA board meeting of the year kept the official cash rate at 3.60 per cent.

Speculation around another rate cut, however, has been clouded by higher inflation that could feasibly mean the next interest rate move is upwards.

Indeed, financial markets now see the next move as an increase, rather than a decrease, with a 25 basis-point hike largely priced in before the end of 2026.

Most major banks expect the cash rate to hold steady through 2026, but Westpac is bucking the trend by forecasting two cuts in May and August.

Domain’s Chief of Research and Economics, Dr Nicola Powell, said the RBA is still battling persistent inflation.

“With rents, energy and insurance costs remaining high, plus stronger-than-expected household spending, there was simply no room for a fourth cut this year.

“What’s more interesting is how expectations have shifted (towards expectations of a rate hike).

“For the housing market, the current stability cuts both ways; it gives buyers and sellers more certainty around borrowing costs and may help to take some heat out of the rapid price growth we’ve been seeing, especially at the more affordable end.

“It doesn’t, however, solve the deeper affordability issues.

“Mortgage holders are still managing repayments that are significantly higher than they were before the tightening cycle began in 2022 but as we’ve seen before, it could take just one weak data point to shift expectations all over again.”

Impact on property prices

Another to attribute the RBA’s holding pattern to inflationary pressures was PropTrack’s senior economist, Eleanor Creagh.

“The RBA will need clear evidence that inflation pressures are easing once more before cutting rates again,” she said.

“Interest rates have moved 0.75 basis points lower this year, increasing borrowing capacities and improving sentiment.

“Combined, these factors drove this year’s reacceleration in home price growth.

“National home prices rose 0.5 per cent in November and are now 8.7 per cent higher than a year ago, the fastest annual growth since mid-2022.

“Momentum has firmed throughout 2025, but stretched affordability means growth remains well below the 20-30 per cent annual gains seen in past booms.”

Ms Creagh added that earlier cuts and stronger confidence continue to support buyer demand, aided by population inflows and the expansion of the Home Guarantee Scheme.

“With new supply constrained, these factors will keep upward pressure on prices throughout summer, however, monthly growth eased in November across the capitals from October’s stronger pace.

“With interest rates now expected to remain on hold for an extended period, affordability constraints are likely to see price growth moderate throughout 2026.”

Are borrowers ready for rate hikes?

Rising interest rates, mortgage and rent affordability were among some of the top concerns for Australians heading into 2026, according to a nationally representative survey by Compare the Market.

Asked about their worst financial fear for the New Year, 12.3 per cent said losing a job or source of income was their biggest worry, 11.3 per cent worried about paying energy bills, while 10.9 per cent said a cash rate hike would be the worst scenario.

A similar number (10.8 per cent) feared being unable to pay their mortgage or rent, and 10.2 per cent said they worried about putting money aside for the future.

More than half of Australians (57.6 per cent) said that having higher interest rates for longer would negatively impact them in some way with 27.6 per cent saying it would affect their ability to save.

Compare the Market’s Economic Director David Koch said indications now are that interest rates will likely be on hold for the foreseeable future, maybe even all of next year.

“Don’t for a second think that the banks are going to do you a favour and reduce your rate without you asking,” Mr Koch said.

“Be the squeaky wheel and if your bank won’t budge it’s time to consider a switcheroo.

“Right now, there are advertised variable rates as low as 5.24 per cent for borrowers with a loan-to-value ratio below 60 per cent.

“That’s 0.27 per cent less than the average variable rate according to the RBA, meaning you may be able to effectively create a rate cut of your own.”

RBA ‘remains cautious’

Tuesday’s decision to keep interest rates on hold was a fairly straightforward one.

Inflation is up and consumer spending continues to grow. With Christmas spending now underway, the RBA was left with little option but to hold off any rate movements.

The RBA’s Monetary Policy Decision statement also cited a tight labour market and higher property prices as other factors weighing on their decision-making.

“Activity and prices in the housing market are also continuing to pick up.

“Financial conditions have eased since the beginning of the year, credit is readily available to both households and businesses and the effects of earlier interest rate reductions are yet to flow through fully to demand, prices and wages (but) on the other hand, money market interest rates and government bond yields have risen more recently.

“Various indicators suggest that labour market conditions remain a little tight.

“The unemployment rate has risen gradually over the past year and employment growth has slowed, however, measures of labour underutilisation remain at low rates, surveyed measures of capacity utilisation are above their long-run average and business surveys and liaison continue to suggest that a significant share of firms are experiencing difficulty sourcing labour,” the RBA noted.

The tighter labour market also equated to higher wages, which could exacerbate inflationary pressure and water down any rate cut expectations.

“Wages growth, as measured by the Wage Price Index, has eased from its peak but broader measures of wages continue to show strong growth and growth in unit labour costs remains high.”