Markets keep trying to price certainty into a world that keeps refusing to offer it. Bond yields climb across major economies, the United States Federal Reserve is openly divided, trade tensions continue to pulse beneath the surface, and the domestic labour market is showing the first soft edges after two years of remarkable strength. Into this mix, Bendigo Bank’s Chief Economist David Robertson has warned that the rush to declare a New Year rate hike may be misplaced.
“The market has quickly moved from pricing in one more rate cut in 2026 to now pricing in two hikes,” Robertson said. It is the kind of swing that illustrates how jittery investors have become, following a year in which inflation eased but did not retreat as far or as fast as hoped. Even so, he argues the sudden embrace of rate hikes is too reactive. “While the possibility that the easing cycle is over is clearly much more likely after recent inflation data, the proposition that the RBA may need to hike rates early next year does seem very premature.”
His central view for 2026 is a steady cash rate, shaped more by patience than panic. “If the RBA do need to adjust rates next year I’d suggest a cut is still as likely as a hike.”
“If the RBA do need to adjust rates next year I’d suggest a cut is still as likely as a hike”
The caution is understandable. Core inflation lifted to 3.3 per cent in the first complete monthly CPI series, with the pressures spread widely across housing, travel and accommodation. It was enough to dampen hopes of further relief for borrowers. This sits alongside fresh data from the ABS showing the unemployment rate steady at 4.3 per cent, with both employment and unemployment falling in November. Full-time jobs dropped by 57,000 while part-time roles increased by 35,000. Participation slipped to 66.7 per cent and hours worked were flat.
Sean Crick from the ABS said the unemployment rate “has remained at 4.3 per cent in five of the last six months”. Employment has grown 1.3 per cent over the year, even as population growth has been stronger. Underemployment and underutilisation rose again, painting a picture of a labour market that is no longer running as tight as it did through 2023 and early 2024.
Full-time jobs dropped by 57,000 while part-time roles increased by 35,000. Participation slipped to 66.7 per cent and hours worked were flat
Despite the softening, the broader economy has held its footing. Private demand has led growth this year, supported by the earlier rate cuts and a lift in household disposable income. Robertson said “there was a recovery in household disposable income and spending thanks to the cash rate cuts and lower inflation in 2025, and a resulting pick-up in private sector demand”. Business investment has risen strongly and is expected to continue, shaped by the huge wave of AI-related expenditure that defined 2025. He sees that shifting over time into productivity gains. “The current AI investment boom is likely to steadily transition to a productivity and output boom which over time will probably lead to higher interest rates.”
If 2027 and 2028 are shaping up as the next tightening cycle, the path to that point looks anything but straightforward. Global markets have been sending out warnings that are easy to ignore until they suddenly become impossible to miss. Bond yields across the United States, Europe and Australia have continued to climb, making everything more expensive to finance. Governments pay more. Companies pay more. Households pay more. These pressures stack layer upon layer. They rarely snap overnight. They grind.
The margin of comfort has narrowed. Inflation is down but not low. Wages have eased but remain elevated. Rates are stable but fragile. Growth is steady but not strong
The US Federal Reserve’s latest decision did little to calm nerves. A divided committee voted for a small rate cut, yet sent conflicting signals in the same breath. They promised an end to cuts while launching forty billion dollars a month in Treasury bill purchases. They eased and tightened at once. Some officials wanted a larger cut. Others opposed cutting at all. The political pull on the institution is now in plain sight, and with a government shutdown delaying data, the Fed itself admitted it was steering without full visibility. The contradiction has become the policy.
Australia cannot insulate itself from this backdrop, yet it remains better positioned than many peers. Trade partners weathered tariff disruptions. Export demand stayed firm. Domestic income recovered earlier in the year. Employment remains higher than before the pandemic shock. But the margin of comfort has narrowed. Inflation is down but not low. Wages have eased but remain elevated. Rates are stable but fragile. Growth is steady but not strong.
As the country moves into 2026, the message from both the data and the markets is to avoid sweeping predictions. Cash rates may well pause for the year, but that steadiness sits inside a wider global environment that refuses to stand still. The next phase will depend on whether inflation cools without triggering a sharper slowdown.
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