Inflation hits 3.8%, rate hike odds rise in Australia
Synopsis
Australian inflation data surprised markets as consumer prices rose 3.8 per cent in the year to December, well above the Reserve Bank’s target range. The jump has made an interest rate hike at next week’s RBA meeting almost certain, with all four major banks forecasting a 0.25 percentage point increase. Housing costs drove inflation higher, rising 5.5 per cent annually. The ASX 200 fell, while gold and uranium miners surged. The Australian dollar retreated from three-year highs as economists debate whether one rate hike will be enough or if more will follow.
Australia’s Consumer Price Index rose 3.8% in the 12 months to December 2025, the Australian Bureau of Statistics reported. ABS head of prices statistics Michelle Marquardt said annual inflation accelerated from 3.4 per cent in November. The Reserve Bank of Australia’s preferred trimmed mean measure, which strips out volatile items, came in at 3.3 per cent, above the central bank’s 2 to 3 per cent target band.
Housing was the biggest contributor to inflation, rising 5.5 per cent over the year, driven largely by a 21.5 per cent surge in electricity prices as government energy rebates were wound back. Food and non-alcoholic beverages climbed 3.4 per cent, while recreation and culture rose 4.4 per cent due to strong seasonal demand from Christmas holidays and summer travel. Every quarter, CPI increased 0.6 per cent, with the trimmed mean at 0.9 per cent.
Major Banks Call Rate Hike Certain
All four major Australian banks now expect the RBA to lift interest rates next week. Westpac, previously forecasting rates would remain on hold through 2026, shifted its outlook after the inflation data. Chief economist Luci Ellis said the December quarter figures had the “casting vote” and voted “yes, hike,” describing the move as likely a “one-and-done” rather than the start of a tightening cycle.
ANZ’s head of Australian economics Adam Boyton also expects a single 25 basis point increase, calling it an “insurance” move. He said an increase would likely lead to softer activity indicators such as auction clearance rates, consumer sentiment and business conditions, suggesting one hike should be sufficient.
Capital Economics is more hawkish, forecasting two rate increases by May. Senior economist Abhijit Surya said the sharper-than-expected rise in underlying inflation makes a rate hike next week “all but certain.”
Market Reactions and Currency Movements
The ASX 200 slipped 0.2 per cent to 8,924 points following the data release, with about 120 stocks trading lower. Technology firms, furniture retailers and fast food chains saw the biggest declines, including Life360, Block, Temple & Webster and DroneShield.
Gold and uranium miners outperformed as gold prices surged above $5,200 an ounce. Northern Star Resources and Emerald Resources rose around 2.5 to 3 per cent, while uranium stocks such as Deep Yellow and Paladin Energy gained between 3.5 and 6.5 per cent.
The Australian dollar retreated below 70 US cents after earlier touching three-year highs, last trading at 69.92 cents. While the currency had benefited from broad US dollar weakness, the inflation surprise tempered some of that strength.
What Economists Are Saying
BDO chief economist Anders Magnusson said the RBA is now “primed” to raise rates after inflation overshot forecasts for a second consecutive quarter. He said a hike would indicate the bank sees longer-term inflation pressures, not just a temporary spike.
Betashares chief economist David Bassanese said the RBA appears to have little choice but to slow economic momentum with at least one, and possibly two, rate hikes in the first half of the year. He noted that most sources of demand-driven strength identified previously remained in place through December.
RSM Australia’s chief economist Devika Shivadekar described the outcome as showing “sticky” inflation rather than a re-acceleration, but said a February rate rise cannot be ruled out. She called the decision a close one, estimating the odds at about 55:45 in favour of a pre-emptive move.
What Happens Next
The RBA board meets on Tuesday, February 3, to decide whether to lift the cash rate from its current 3.6 per cent. Markets had already been pricing in a strong chance of tightening, and the latest data has reinforced those expectations. If rates are raised, it would mark the first increase since the RBA began easing policy and signal a significant shift in its monetary stance. The central bank will also release its quarterly Statement on Monetary Policy with updated forecasts.
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