RBA expected to raise interest rates in February: CBA economists

Why the RBA may raise interest rates

Australia’s economy finished 2025 with more strength than expected. Households are spending more, wages have been rising, and businesses are investing in areas like data centres and renewable energy.

But this stronger activity has arrived at a time when the economy is already close to its “capacity constraints” - meaning the economy is running close to its maximum sustainable speed. When demand grows faster than the economy’s ability to supply goods and services, prices tend to rise.

CBA economists now expect the Reserve Bank of Australia (RBA) to lift the cash rate by 0.25 percentage points in February to help bring inflation back under control. 

“The economy has picked up more momentum than expected, and that strength is keeping inflation from easing. A small rate increase in February would guide inflation back toward the RBA’s target range of 2-3 per cent,” said Commonwealth Bank Head of Australian Economics Belinda Allen.

What’s happening with inflation?

Inflation has been slower to fall than expected. The key trimmed mean inflation measure - which removes unusually large price changes to give a clearer picture of underlying inflation - rose to 3.0% in the September quarter and is expected to stay above that level until well into 2026.

The persistence of inflation suggests that price pressures are becoming more widespread, rather than being driven by only a few items. Economists believe it may take until late 2027 for inflation to return to the middle of the RBA’s target range.

“Inflation has proven more stubborn than forecast and we see signs of inflation persisting. That’s a key reason the RBA may need to act,” Allen said.

How strong is economic growth?

Economic growth is forecast to reach 2.4% in early 2026, a rate that’s slightly above the pace the economy can comfortably sustain, sometimes called its “speed limit.”

Households are a major driver of this strength, helped by earlier interest rate cuts, recent tax changes and steady job and income gains. Investment in data centres and renewable energy projects is also adding momentum as are improvement in housing investment and support from public demand.

What could this mean for borrowers?

The expected February rate rise would be a fine-tuning move, not the start of a large run-up in interest rates. The RBA is aiming to nudge inflation back toward target rather than cool the economy sharply.

However, if household spending or business investment turns out even stronger than expected, the RBA may need to raise rates more than once. In contrast, coolness in the labour market or a faster fall in inflation could deter the RBA.

The bottom line

Australia enters 2026 in solid shape, but its strength is keeping inflation higher than the RBA would like. A modest rate rise in February looks likely as the central bank works to keep price pressures in check while supporting a steady, sustainable pace of growth.

“We expect inflation to gradually return toward the midpoint of the target band by late 2027. A small rate rise next year would help set the foundation for a steady, sustainable period of growth,” said Allen.

Read Belinda Allen and the Australian Economic team’s full analysis: The Australian economy in 2026 – prepare for higher interest rates