RBA Rate Hike Odds Shorten as Inflation Outlook Worsens 2026

The odds of a fifth interest rate hike this year have shortened after Reserve Bank deputy governor Andrew Hauser warned that the inflation outlook is worsening and could force the RBA to make “hard choices” at its next meeting.

Speaking at an investment bank conference in Sydney on Wednesday, Hauser said inflation “looks materially worse” than the central bank had expected two months ago. His comments have reignited talk of a hike to 4.85% on Melbourne Cup day, with financial markets already pricing in a nearly one-in-three chance before his speech.

Why the RBA Is Worried About Inflation Psychology

Hauser, who sits on the RBA’s monetary policy board, said the board is juggling a slowing economy with fears that Australians are starting to lose faith in the central bank’s ability to bring inflation back to its 2.5% target.

“The basic fact [is] that inflation has been high for a very long time now, and we are beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back into target at all, or certainly not for an extended period,” he said.

He added that businesses were starting to see 3.5% inflation as the “new normal”. Removing an entrenched inflation psychology can require higher interest rates, he warned.

What a Fifth Rate Hike Would Mean for Households

A hike to 4.85% would push the cash rate to its highest level since 2011, adding further pressure to household budgets already strained by rising petrol prices and the cost of living.

For a borrower with a $600,000 mortgage, a 25 basis point increase would add roughly $100 to monthly repayments, according to RateCity calculations. That comes on top of the cumulative impact of previous hikes.

Hauser acknowledged that while inflation was clearly too high, the picture for the economy was “more mixed”. “Clearly, we’re seeing the economy slowing, and that’s what we’ve been trying to achieve,” he said.

Market Reaction and the Path to Melbourne Cup Day

Financial markets had been pricing in a nearly one-in-three chance of a hike before Hauser’s comments. Those odds are likely to shorten further as traders digest the deputy governor’s warning.

The RBA board begins its next two-day meeting on 2 November, with the decision to be announced on Melbourne Cup day. Economists are divided on whether the RBA will pull the trigger, with some arguing the bank needs to see more data before acting.

However, Hauser’s explicit reference to “hard choices” suggests the board is seriously considering another hike. The RBA has repeatedly said it will do what is necessary to bring inflation back to target, even at the cost of slower growth.

Key Takeaways for Borrowers and Savers

• Rate hike odds have increased after the RBA deputy governor warned inflation is worsening.
• A hike to 4.85% is possible on Melbourne Cup day, which would be the fifth this year.
• Households should prepare for higher repayments if the RBA acts.
• Inflation psychology is a key concern for the RBA, which may require higher rates to break.
• Markets are watching the 2 November meeting closely for signals.

Comparison of Recent RBA Rate Hikes

What to Watch Next

The RBA’s next meeting on 2 November is the key event. Before then, markets will digest the quarterly inflation data due on 25 October, which could sway the board’s decision.

Hauser’s comments suggest the RBA is leaning towards another hike, but the final call will depend on the data. Borrowers should brace for the possibility of higher repayments, while savers may benefit from higher deposit rates.

As we noted in our analysis of Australia interest rate rise: wrong medicine for inflation, some economists argue that further hikes could do more harm than good. However, the RBA appears concerned that inaction could entrench inflation expectations.

The central bank’s dilemma is clear: raise rates too much and risk a recession, or raise too little and let inflation persist. Hauser’s warning indicates the RBA is prepared to take the harder path if needed.

For households already struggling, the prospect of another hike is unwelcome news. As we reported in Australian households face interest rate hike and rising costs, many families are already cutting back on spending.

The RBA’s decision will have wide-ranging implications. If it hikes, it will be the fifth increase this year, taking the cash rate to 4.85%. That would be a significant burden for mortgage holders, but the RBA believes it is necessary to bring inflation under control.

Investors are also watching closely. As we discussed in RBA interest rate rise odds drop after June inflation data, market expectations can shift quickly based on data. The upcoming inflation figures will be crucial.

For a broader perspective on how rate hikes affect the economy, see our article on RBA interest rate hikes: are they actually working. The evidence is mixed, but the RBA remains committed to its inflation target.

Meanwhile, global factors are also at play. Oil price jumps due to geopolitical tensions, as covered in oil price jumps as US-Iran clashes raise rate rise odds, could add to inflationary pressures and influence the RBA’s decision.

Finally, for a reminder of how high rates have already climbed, see RBA interest rates hit 15-year high as cash rate reaches 4.6%. A further hike would take rates even higher, with significant consequences for borrowers.