Financial markets are now certain the RBA will hike interest rates in 2026, signaling a potential blow to mortgage holders and a cooling of the overheating property market. This shift in market sentiment comes as inflation data and national accounts indicate the economy is accelerating into the new year. The latest forecasts represent a significant turnaround from just two weeks ago, when traders were factoring in an even chance of rate cuts by the RBA's May meeting. The Australian Bureau of Statistics data revealed consumer price growth jumped to 3.8% in the year to October, far exceeding expectations and surpassing the central bank's 2-3% target range. This surge in inflation, coupled with rising household spending, has led to a market conclusion that the Reserve Bank won't be cutting rates further. Adam Donaldson, the head of interest rates strategy at the Commonwealth Bank, confirms that the market is now pricing in a high risk of rate hikes from February onwards. The pain of higher mortgage costs will be particularly severe for first-home buyers who have enjoyed rate cuts in 2025 but now face higher repayments. Sally Tindall, the director of data insights at Canstar, notes that fewer banks are offering loans at interest rates below 5%, and expects fixed rates to climb higher as banks adjust to the RBA's shifting cash rate expectations. While fixing mortgages at the lowest possible rate may benefit borrowers, Tindall advises shopping around to find the best deal. The rapid rise in home prices driven by three rate cuts this year has pushed affordability to its worst on record, attracting first-time buyers and property investors alike. Analysts at Westpac predict a 6% rise in national home values next year, down from the earlier projection of 9%, which is still a challenge for those struggling to enter the property market. As the RBA prepares to deliver its final rates decision for 2025, analysts anticipate the cash rate will remain at 3.6%, but are keen to see any pushback against the market's 'hawkish' outlook. While the market's swift switch from rate cuts to hikes may seem abrupt, economists believe the RBA is likely to maintain its current stance through 2026. AMP's chief economist, Shane Oliver, acknowledges the market's overestimation of the chance of higher rates, citing rising unemployment and a soft jobs market as factors of concern. The reliability of the new monthly consumer price index and the dependency on discounts for consumer spending also contribute to a degree of economic fragility.
