Australian Dollar: Inflation Greenlights RBA Rate Hike Next Month
- Written by: Gary Howes
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The Australian dollar extends its 2026 outperformance following release of hot inflation data.
The Aussie ratcheted up further gains midweek after Australian inflation raised the odds that the Reserve Bank of Australia would raise interest rates next month.
Quarterly trimmed mean CPI inflation, the core inflation gauge the RBA pays particular attention to, printed at 0.9%, putting it above the RBA's 0.8% forecast.
"The December quarter implies that the RBA is likely to raise rates at the February meeting," says Luci Ellis, Chief Group Economist at Westpac.
A 0.8% q/q forecast would deliver you an annual trimmed mean of 3.2%, but today's data puts the figure at 3.4%.
"The RBA continues to focus on the quarterly number for policy purposes," says a post-print reaction from TD Securities. "At face value, the trimmed mean outcomes imply the RBA hikes next month."
The CPI inflation number for the final quarter of 2025 stood at 0.6% q/q, double the rate the RBA forecast at 0.3%.
Image courtesy of Westpac.
"So the quarterly data suggests the RBA hikes next month as well," says TD Securities.
"The quarterly inflation print gets the casting vote. Today’s data voted for a rate hike," says Ellis.
A rate rise next month puts the RBA well ahead of its peers in the upcoming policy cycle that will be defined by a resumption of rate increases.
This means Australian interest rate-bearing products are offering global investors attractive returns, particularly relative to where rates are stuck at lower levels or where central banks are still cutting.
In fact, AUD now benefits from Australia commanding the highest relative return - known as carry - amongst G10 peers.
Australia's robust economy, underpinned by healthy employment levels and strong consumer demand, is generating inflation rates well above the RBA's target level.
By raising rates the RBA will take some heat out of the economy and stunt inflation's advance.
Indeed, at 3.8% y/y, the monthly inflation figure corroborates what the quarterly data are telling us: Australia's inflation is going the wrong way and the RBA can't sit back.
