RBA interest rates: Reserve Bank backflip leaves economists warning borrowers to brace for two 2026 increases

Borrowers are expected to be hit with two interest rate rises next year by the Reserve Bank of Australia, which admitted it may have cut rates too fast.

Among the economists caught out by the change in direction by Governor Michele Bullock was independent analyst Saul Eslake, who reversed position within an hour after Tuesday’s decision by the central bank to hold official rates at 3.6 per cent.

Mr Eslake switched from predicting a rate cut next year to stating rates may rise after Ms Bullock’s post-decision press conference.

“I kind of regretted putting it out early because when I watched her press conference, there was a very different tone,” he told The Nightly.

“If it turns out that the recent uptrend in inflation marks the beginning of a new up cycle, then the Reserve Bank will have to lift rates.”

The 30-day interbank futures market - a predictor of borrowing costs - changed yesterday from expecting an interest rate rise in November to hikes in May and November.

Two hikes would take the cash rate to 4.1 per cent, wiping out the relief from cuts in May and August.

A borrower with an average, new mortgage of $694,000 would pay $223 more a month, adding up to $2676 a year, if those predictions of 50 basis point hikes come true.

In NSW those with a typical home loan of $828,000, would be paying close to $5100 a month to their bank, following two expected hikes.

This would squeeze mortgage holders in outer south-west Sydney, where houses now cost more than $1 million.

The Reserve Bank’s statement on Tuesday noted inflation “may be persistent and will bear closing monitoring” but there was no hint about the prospect of rate rises next year.

In her press conference Ms Bullock said “we did consider and discuss quite a lot the circumstances and what might need to happen if we were to decide that interest rates had to rise again at some point next year”.

AMP deputy chief economist Diana Mousina said the format of a press conference led to a much more hawkish tone than the statement but she did not alter her prediction that rates will remain on hold next year.

“You get a wider range of meaning when she’s trying to answer all those questions so that’s why I think the press conference is not necessarily a better form of communication,” she told The Nightly. “It has led to some confusion sometimes.

“It moves very frenetically in that it usually tends to exaggerate whatever’s happening.”

Headline inflation rose 3.8 per cent in the year ended October 31, which was well above the RBA’s 2-3 per cent target.

Inflation data for November will be published on January 7, followed by December data on January 28.

Both releases will be ahead of the RBA’s first two-day meeting for 2026 on February 2 and 3, and will give its monetary policy board data on average price movements during the December quarter.

Despite the changed market pricing, Australia’s big four banks expect interest rates to remain on hold throughout 2026.

NAB has suggested a February hike is a possibility, but hasn’t amended its official forecast of rates staying on hold.

The Commonwealth Bank and ANZ share this position, with only Westpac still expecting relief next year.