The current economic forecast paints a much grimmer picture than before.

Here’s what we understand about potential interest rate changes heading into 2026.

Some financial institutions speculate that we might see a rate increase as early as February 3.

“The real question is whether we are looking at a prolonged pause or the potential for a rate hike,” an analyst noted.

“These are the two key considerations the board will be closely examining as we approach the new year.”

“They are the two things the board will be looking closely at coming into the new year.”

Those hawkish comments have led a range of economists to tip a rate hike in 2026.

Commonwealth Bank head of Australian economics Belinda Allen says the first meeting of the year will be a live one, and both CBA and NAB are predicting a 25-basis-point increase on the first meeting of the year.

NAB has forecast even more pain, pencilling in a further cut in May.

The market is more pessimistic. 

The market has been pricing in around a 27 per cent chance of a hike in February (that figure has been both slightly higher and lower throughout late December, but was at zero at the start of the month), and an end-year cash rate of about 4 per cent.

Not everyone agrees with that, though.

The other half of the big four banks, Westpac and ANZ, are predicting a year of holds, as are some economists.

“We expect to see the cash rate remain at 3.6 per cent in 2026, with the swing back to rate hikes more a story for 2027,” AMP chief economist Shane Oliver wrote. 

“But we concede that the risks look like they are now a bit more to the upside on rates in 2026. 

“However, our assessment is that the swing in the money market from expecting 2 or 3 more cuts after the August RBA meeting to now expecting nearly two hikes (in 2026) is premature and a bit too extreme.”

Why aren’t interest rates expected to come down?

Casual observers – particularly those with a mortgage – might be wondering why we’re suddenly talking about the prospect of rate hikes, not cuts.

After all, it was only a few months ago that economists were talking about the cash rate settling around 3.1 per cent.

The reason for the turnaround is an unexpected surge in inflation.

Having fallen back into the central bank’s target band of 2-3 per cent, the consumer price index (CPI) jumped to 3.2 per cent in the September quarter and again to 3.8 per cent in October, with underlying inflation not too far behind.

The data-driven RBA will get two new batches of inflation figures before its February decision – for November on January 7 and December on the 28th.

If inflation cools off, so too will the chance of a rate hike. 

But if it comes in hot once again, then mortgage holders will have every right to feel nervous about the first rates decision of the year.

“If trimmed mean inflation in the December quarter does not fall back as we expect (and comes in around 0.9 per cent quarter-on-quarter or more), then a hike as early as February is possible,” Oliver said.

“December quarter CPI inflation is the key to what happens early next year on rates.”

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