Citi has become the first major global bank to forecast interest rate hikes in Australia as early as February, after a run of stronger-than-expected data on inflation, housing and consumer spending prompted a rapid rethink of the monetary policy outlook. According to the report in the Australian Financial Review (AFR), the shift puts Citi among a small but growing group of forecasters calling for the Reserve Bank of Australia (RBA) to reverse course in 2026, after this year’s easing cycle.
According to the AFR, Citi – which was among the few to correctly predict the RBA would keep the cash rate on hold in July – had previously expected the cash rate to remain at 3.6% throughout 2026.
It is now forecasting two 25-basis-point increases next year, beginning at the RBA’s first policy meeting of 2026 on 3 February, followed by a second move in May. That call comes after bond markets sharply repriced the outlook for interest rates in recent weeks, swinging from rate-cut expectations to renewed concern about further tightening.
“We believe a tight labour market, new (higher) inflation forecasts, strong housing and household consumption all point to monetary policy being too accommodative,” said Faraz Syed, an economist at Citi, speaking to the AFR.
The reassessment follows stronger inflation prints that have challenged the RBA’s confidence that price pressures were on a sustained downward path. Headline inflation rose to 3.8% in October, while the trimmed mean measure – the central bank’s preferred gauge – accelerated to 3.3%, remaining above the RBA’s 2–3% target band.
The RBA left the cash rate unchanged at 3.6% at its meeting last week, after three cuts earlier this year. However, governor Michele Bullock unsettled markets by signalling that a rate increase was on the table if inflation remained stubbornly high.
Citi has argued that policymakers need to respond firmly to the upside surprises. “If you let inflation run for six months outside your target band, and you don’t react to that, then it does become more embedded into society as well,” Syed said.
Unlike some other advanced economies, Australia’s still-robust jobs market is complicating the task of bringing inflation back to target. A tight labour market is underpinning household spending and adding to the case, in Citi’s view, that current settings may be too loose.
“If everyone already has jobs, and then you get an interest rate cut, people have greater capacity to spend immediately,” said Lachlan Dynan, a macro strategist at Deutsche Bank.
Syed was cautious about criticising the RBA’s earlier rate cuts – a number of commentators have argued the board went too far – noting that, at the time, there were credible reasons to believe inflation was on a sustainable downward trajectory. However, an unexpectedly strong rebound in housing has pushed up construction costs and rents more quickly than anticipated.
This rapid acceleration in real estate-related costs, which has been at least partly driven by government policy, is now feeding Citi’s view that monetary policy has become overly stimulatory.
“It’s probably not of the RBA’s doing. I don’t think anyone foresaw the pick-up in house prices,” Syed said. “They’ve been caught off guard.”
Interest rate markets have been volatile, with traders whipsawing from pricing in a series of cuts to factoring in renewed tightening within a matter of weeks. Futures curves now imply around a 23% probability of higher borrowing costs by February and a fully priced-in hike by August, with a strong chance of further moves thereafter.
Independent economist Warren Hogan is also forecasting that the RBA will raise the cash rate at its 3 February meeting, followed by hikes in March and May. Under that scenario, the benchmark rate would return to 4.35%.
Other institutions, including Barrenjoey, UBS and HSBC, also expect higher borrowing costs, but not until later in 2026.
By contrast, many major banks continue to see the RBA on hold through next year. While Deutsche Bank’s baseline is for no change in 2026, Westpac has retained its long-held view that the next move will ultimately be down rather than up.
The bank argues that the economy could re-accelerate without reigniting inflation, helped by easing supply-side pressures. “Our current baseline is for two 25 basis points rate cuts, but not until mid-2026,” said chief economist Luci Ellis.
Commonwealth Bank, ANZ and National Australia Bank are also forecasting that the central bank will keep the cash rate steady for the foreseeable future.
For financial institutions and insurers, the widening range of views on the RBA’s next move underscores the policy uncertainty heading into 2026. Funding costs, asset pricing, mortgage affordability and claims trends will all be sensitive to whether the Citi-style hawkish scenario or the more dovish Westpac outlook ultimately plays out.
With the RBA signalling that it remains data-dependent and markets rapidly adjusting to each new release, insurers and intermediaries face a macro environment where inflation, interest rates and housing dynamics will continue to interact in complex and, at times, unexpected ways.
