RBA Preview: Likely Hawkish Tilt

The RBA will keep the cash rate unchanged at 3.6% in the February meeting despite Q4 Inflation continues to run hot. The inflationary picture has turned hot after the Q3, partially from previous year's energy rebate base effect but also suggest stronger underlying inflation. Thus, the RBA should see little urgency to hike rates in the February meeting. It was forecasted to see inflation overshoot target range for most part of 2026 before gradually returning within in 2027. 

As both headline and trimmed mean CPI stays above 3%, market participants have increased their anticipation of the RBA hiking rates with around 70% of a hike being priced in and almost fully priced in for the two coming meeting. We believe such is too aggressive after being scared by the strong CPI in Q3/4 2025. The message was clear from the RBA that the easing cycle has ended but it does not mean we will be entering the tightening cycle again. Instead, we will likely be seeing choppy rate changes to end the previous easing cycle.

The RBA would likely first change their forward guidance to be more hawkish in the coming meeting beofre any rate change. If early monthly CPI is showing moderation for Q1 2026 as per our forecast, we could even see no rate changes in 2026.