Australia’s latest interest rate rise has capped an abrupt shift in monetary policy, with Bendigo Bank warning that stronger jobs data, rising housing costs and stubborn inflation have reset the outlook for 2026.
In its February economic update, the bank’s Chief Economist David Robertson said the Reserve Bank’s decision to lift the cash rate to 3.85 per cent was expected by the time it landed, but still marked a decisive moment.
“Yesterday’s 3.85% was no surprise by the time it was announced, but caps off an extraordinary U-turn for monetary policy compared to where we were in mid-to-late 2025 and marks the shallowest RBA easing cycle in history, only three cuts ‘peak to trough’ totalling three quarters of a percent,” Mr Robertson said.
Bendigo Bank said the central bank’s tolerance shifted late last year as employment data began to undermine expectations that rates would remain on hold unless inflation rose further.
“Our view at the end of last year was the RBA board would not hike rates unless core inflation rose above 3.5%, however, the latest job numbers in particular changed the equation for the RBA,” Mr Robertson said.
“With unemployment unexpectedly falling in December to 4.1%, demand for labour and resulting inflationary pressures will be more persistent this year,” he said.
Mr Robertson said the decision reflected a convergence of pressures rather than a single trigger, with employment, prices, spending and housing all weighing on the policy outlook.
“These job numbers, combined with the latest CPI data, household spending, and housing trends, was all a bit too much for the RBA policy board’s risk tolerance,” he said.
Housing was identified as a key driver of renewed inflation pressure, particularly through rents and construction costs, which continue to rise despite higher borrowing costs
Housing was identified as a key driver of renewed inflation pressure, particularly through rents and construction costs, which continue to rise despite higher borrowing costs.
“The latest Home Value Index from Cotality for January showed another rise for dwelling values, up over 9% in the last 12 months on average for capital cities, and over 10% for regional values, proving the pressing need to add more supply hasn’t abated,” Mr Robertson said.
Beyond domestic factors, Bendigo Bank pointed to global volatility shaping the broader economic picture, with geopolitical tensions pushing investors toward the Australian dollar and commodities.
“As well as this unwelcome rebound in inflation and interest rates, global markets have endured a turbulent start to 2026 with geopolitical tensions around the world. One of the beneficiaries has been the Aussie Dollar, rising to almost 71 cents last week before a pullback, along with commodity prices,” Mr Robertson said.
He said the strength of the currency had arrived earlier than expected, mirroring the timing of the Reserve Bank’s shift.
“The higher exchange rate is something we have forecast for some months, but this rally has been slightly ahead of schedule, much like the timing of RBA rate hikes, which we had expected in 2027 rather than this year,” he said.
Looking ahead, Mr Robertson said a firmer dollar could help contain inflation and ease pressure on interest rates later in the year, setting the stage for stronger growth beyond 2026.
“More positively, the higher exchange rate will be helpful for inflation and is one of the reasons we still expect stable RBA rates for the balance of 2026, leading into a jump in growth and productivity for our economy in Financial Year 2027, assisted by the recent uplift in tech business investment,” he said.
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