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Australia’s economy is increasingly exhibiting conditions consistent with further monetary tightening, leading Commonwealth Bank economists to forecast a 25 basis point Reserve Bank of Australia rate hike in February, despite market scepticism around near-term action. I posted earlier on another two calls for a February rate hike:Citi forecasts 2 RBA rate hikes in 2026, February followed by May, as inflation risks riseNAB sees RBA hiking twice in 2026, clashing with market expectations for extended holdThe core of CBA’s argument is that economic momentum is proving stronger and more persistent than the RBA anticipated. Growth has rebounded faster than expected, with GDP accelerating through the second half of 2025 and activity now assessed as running around potential rather than below it. The pickup has been broad-based, led by household consumption as real disposable incomes recover and savings buffers are drawn down.Labour market conditions remain a key driver of the tightening call. Employment growth has stayed resilient, spare capacity indicators point to limited slack, and unemployment is forecast to remain low even as population growth eases. With wages growth still elevated relative to productivity, CBA argues that domestic cost pressures remain inconsistent with inflation returning smoothly to target without further policy restraint.Inflation dynamics are another critical factor. While headline inflation has moderated, underlying measures are proving sticky, with services inflation and trimmed-mean CPI easing only gradually. Inflation expectations have also edged higher across consumer and market-based measures, raising concerns that inflation persistence could become more entrenched if policy settings are not tightened further.CBA also points to evidence that financial conditions have loosened unintentionally. Equity markets have rallied, the Australian dollar has depreciated at times, and household spending has surprised to the upside, all of which risk undermining the disinflation process. Against this backdrop, holding rates steady for too long could allow demand to re-accelerate faster than supply, especially given ongoing capacity constraints.While acknowledging that timing is finely balanced, CBA believes the RBA will judge that acting earlier — rather than waiting for clearer inflation deterioration — is the lower-risk strategy. A February hike would reinforce the Bank’s inflation-fighting credibility and help ensure inflation returns sustainably to target, even if it means running policy more restrictive for longer.
This article was written by Eamonn Sheridan at investinglive.com.
💡 DMK Insight
Australia’s potential rate hike could shake up forex markets, especially AUD pairs. With Commonwealth Bank and Citi both predicting a 25 basis point increase in February, traders should be on alert. This forecast suggests that the RBA is responding to inflationary pressures, which could strengthen the AUD against currencies like the USD and NZD. If the RBA follows through, we might see a bullish trend in AUD/USD, especially if it breaks above key resistance levels. But here’s the catch: market skepticism could lead to volatility. If the hike doesn’t materialize, expect a sharp pullback in the AUD. Keep an eye on the economic indicators leading up to February, particularly inflation and employment data, as they could sway the RBA’s decision. Also, watch for how institutional players react; if they start positioning for a rate hike, it could amplify price movements. The real story is whether the market can shake off its skepticism and price in this potential hike effectively. Be prepared for both scenarios as we approach February.
📮 Takeaway
Monitor AUD/USD closely; a confirmed rate hike could push it above key resistance, while failure to hike might trigger a sharp sell-off.
