There is endless speculation about which direction official interest rates are heading in Australia and how far and fast they will rise and fall.
Much of that speculation is formed by reading the tea-leaves—closely examining Reserve Bank board minutes and press statements from RBA Governor Michele Bullock, and working out which way the wind might be blowing.
A Clear View About to Arrive
Unusually, though, by the end of this month we should get a remarkably clear view of where official rates are headed.
As I covered ++here++, Australian interest rates have diverged from those in the US, with the next local change most likely to be a rise rather than a cut to the official cash rate.
The RBA has signalled strongly that inflation measures it keeps a close eye on will be vital in arriving at future rate decisions, with some economists saying there could be rate rises in the early months of 2026, while others are tipping a longer time frame in which rates might remain steady.
January 28 Inflation Data Vital
All of which makes the comprehensive quarterly inflation data, due to be released by the Australian Bureau of Statistics on January 28, vital reading.
If these figures confirm the RBA’s fears that upward price pressures are becoming entrenched in the economy, then rate rises could be coming sooner rather than later.
If, on the other hand, the figures show that the inflation spike near the end of 2025 was more of a temporary measure than a harbinger of things to come, then rate rises could come much later.
Temporary or Something More Sinister?
Minutes from the RBA’s final rates-setting board meeting for 2025 showed that the central bank was anxious that inflationary pressures were broadening into more permanent factors.
That December meeting saw governor Michele Bullock state that the board had discussed under what circumstances rates would need to rise in 2026.
Central to those discussions was inflation data, which will need to show that the recent pick-up in price growth is down to volatile or temporary factors, rather than stickier items such as market services and new dwellings.
Both measures have have grown faster than expected in recent months, although a fall in the November CPI gave some hope that price rises were slowing.
Are Current Settings Restrictive?
The RBA will also need to be convinced that financial conditions are still restrictive and therefore putting downward pressure on inflation.
Around the last board meeting in December, the jury remained undecided on whether official rates were restrictive or not.
Some members argued that the acceleration in home prices, low-risk premiums and aggressive banking competition showed that conditions were no longer restrictive.
Others said the gradual rise in unemployment in 2025 showed conditions were still restrictive.
Numbers Should Settle the Argument
The more detailed inflation numbers released on January 28 will play a key part in deciding who wins this argument.
At the moment, markets are pricing in about a quarter to one-third chance of an interest rate hike being announced in February.
The key figure to watch here is the RBA’s preferred measure of underlying inflation in the December quarter.
If it comes in around 0.8% then the most likely reaction will be to hold rates steady and wait for more data before making a decision.
However, a figure of 0.9% or higher would make a hike in official rates from the current 3.6% much more likely.
Rarely is the case for a rise or hold so cut and dried but the open communication from when the RBA Board turned more hawkish in December means that January 28 should definitely be circled in the calendar by all share market investors and traders.
