Economists warn sticky inflation may force RBA back into rate hikes in 2026

Summary:Economists see inflation remaining sticky through 2026Growing risk of RBA rate hikes, possibly from FebruaryLate-2025 inflation rebound shifted policy expectationsHousing, services and labour-market tightness key driversForecasts now split between hikes, holds and cutsInflation is expected to remain uncomfortably persistent over the year ahead, increasing the likelihood that the Reserve Bank of Australia will be forced back into rate hikes, according to a survey of leading economists conducted by the Australian Financial Review (gated). A growing minority of forecasters now expect the RBA to raise interest rates as early as its first policy meeting of the year in February. Seven of the 38 economists surveyed, including teams at major lenders such as Commonwealth Bank of Australia, Citi and National Australia Bank, see a near-term hike as increasingly likely, citing signs that inflation pressures have re-emerged rather than faded.While the RBA cut the cash rate three times last year, in February, May and August, taking it to 3.6%, economists now argue that those moves may have been premature. Inflation, which had appeared to be easing, unexpectedly picked up late in the year, with headline CPI rising to 3.8% in October and core inflation accelerating to 3.3%, well above the RBA’s 2–3% target band.RBA Governor Michele Bullock added to the shift in expectations in December, warning that further tightening could not be ruled out if price pressures proved difficult to contain. Since then, financial markets have swung sharply, moving from pricing rate cuts to partially pricing hikes. Traders are now assigning a meaningful probability to a February increase and are fully pricing a hike by mid-year.Economists point to a combination of structural and cyclical pressures keeping inflation elevated. Housing and services costs remain firm amid chronic undersupply, rapid population growth, rising wages and higher energy costs. At the same time, unemployment remains near historic lows, supported by strong public-sector hiring, particularly across healthcare and the NDIS, and widespread labour hoarding by firms reluctant to shed staff after years of skills shortages.While views remain divided, the balance of risks has clearly shifted. A growing number of economists now expect at least two rate hikes this year, with some warning that if inflation fails to moderate convincingly, even further tightening may be required into 2026.
This article was written by Eamonn Sheridan at investinglive.com.

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