TOM RICHARDSON: RBA fails to push back on talk, cash rates could hit 4 per cent in 2026

Reserve Bank Governor Michelle Bullock denied the central bank has its head in the sand about rising inflation at a media conference on Tuesday that was punctuated by laughter and seasonal bonhomie between the powerful policymaker and journalists.

At its monetary policy meeting the RBA kept cash rates on hold at 3.6 per cent, although Ms Bullock failed to push back on suggestions that bond market traders are correct in expecting interest rates to rise another 40 basis points to 4 per cent by this time time next year.

Repeatedly pestered by journalists for forward guidance about the direction of interest rates on Tuesday, Ms Bullock emphasised she’s not prepared to provide it, although admitted the market is likely correct in bracing for around 40 basis points of cash rate rises in 2026.

“You know I don’t do forward guidance (on interest rates),” Ms Bullock told the room. “But what the market is doing (in pricing interest rates to rise to 4 per cent) is reacting to the data and reflecting how they think we (the RBA) will be interpreting that data and what we might do.

“I think they’ve (the market has) got some interest rate increases in the second half of 2026, I have no particular view on the timing of the thing, and I think I sort of made this point today, they are right that the board is thinking about upside risks.”

Notably, a 4 per cent cash rate level is likely to reverse the 12-month bull run for house prices and scuttle the Labor government’s boasts that it’s achieved a soft economic landing characterised by low inflation, full employment, and a growing economy.

No head in the sand about inflatoin

The decision to hold rates ahead of Christmas is despite data that showed core inflation (stripping out volatile items) climbed to 3 per cent year-on-year over the three-month period from July to September 2025.

While the most recent data for the 12 months to October showed core inflation climbed to 3.3 per cent, with headline inflation, including the impact of soaring energy bills, jumping to 3.8 per cent.

Despite the data suggesting inflation has now been climbing since at least July, Ms Bullock didn’t want to accept that the central bank is kicking the inflation can down the road by failing to lift rates higher today.

“People don’t expect us to react to one number,” Ms Bullock said of the decision to look through October’s horror inflation data.

“I think there’s enough in the quarterly inflation print to suggest that there is some persistence (in inflation there). But there’s also a bit to say there were a whole lot of random things (price inputs) that just went up and maybe they’re not going to go up again at the same rate.”

However she did repeatedly infer it’s now, much more likely than not, that it’s next move in interest rates is higher, rather than lower.

She also pointed to upcoming monetary policy meetings on February 3 and March 16 as being live possibilities of an interest rate hike.

Between now and February 4 the central bank will have another lot of inflation data for the Christmas period to digest, before it decides on whether it needs to raise rates and prioritise an inflation fight even it means an economic slowdown.

“If inflation continues to be persistent and looks like it’s not coming back down towards the target, then that raises questions about how tight financial conditions are and whether it’s appropriate to keep interest rates where they are or at some point raise them,” she told the meeting.

The big downside risk now though is that the RBA is leaving it too late to move and Australia ends up mired in stagflation in 2026. That is an economic period characterised by relatively high inflation and low growth, which history shows often leads to public discontent and rising political pressure on the government of the day.