The composition of inflation deserves particular attention. Services inflation accelerated to 4.1% y/y, from 3.6%, typically signalling strong domestic demand and persistent wage pressures. Goods inflation, meanwhile, stood at 3.4% y/y, with electricity prices surging by 21.5%, further complicating efforts to rein in inflation.
Labour market strength strengthens the case for tighter policy
Elevated inflation is accompanied by a relatively tight labour market. Unemployment has fallen to around 4%, suggesting that demand-side pressures in the economy remain strong. This macroeconomic mix — high inflation and low unemployment — significantly narrows the central bank’s room for manoeuvre and increases the risk that price pressures become entrenched.
It is worth recalling that the RBA cut interest rates as recently as August, but already signalled in December that the next move could be a rate hike if inflation data proved concerning.
Financial markets price in a February rate hike
Market reaction has been swift. OIS contracts now price in around a 76% probability of a rate hike at the 2–3 February meeting. Such a move would represent a sharp pivot in monetary policy — less than six months after the last rate cut. At the same time, three-year government bond yields fell to 4.28%, possibly indicating that some investors view the recent rise in inflation as temporary or expect only a one-off tightening move by the RBA.
Among major financial institutions, consensus is building around the upcoming meeting. Westpac Banking Corp. and ANZ Bank both expect a 25-basis-point rate hike, taking the cash rate to 3.85%. Westpac, however, stresses that such a move does not necessarily mark the start of a sustained tightening cycle. A “wait-and-see” approach remains plausible, particularly if inflationary pressures prove short-lived and begin to ease in the months ahead.
