The Great Policy U-Turn: Citi Forecasts Surprise RBA Rate Hikes as Inflation Proves Stubborn
The expected policy path for the Reserve Bank of Australia (RBA) has dramatically reversed. Global financial giant Citi has made a decisive U-turn on its forecast, now predicting that the RBA will begin raising its cash rate as early as February 2026, followed by a second hike in May. This shift—from an expectation of no policy change throughout 2026 to anticipating 50 basis points of tightening—is driven by mounting concerns that Australian inflation is proving far more resilient than previously thought, and that the domestic economy is dangerously overheating.
This revised outlook marks a significant and sudden change in market expectations, suggesting that the RBA’s current monetary policy settings, which have the cash rate at 3.60% after recent holds, are deemed "too accommodative." The move reflects a sharp response to recent data showing stronger-than-anticipated domestic momentum, particularly in the housing market and household consumption, which directly threaten the RBA’s commitment to bringing the annual Consumer Price Index (CPI) back into its 2% to 3% target band.
Why the Pivot? Three Pillars of Australian Resilience
Citi economist Faraz Syed pinpointed the confluence of several key indicators that necessitated the firm’s policy shift. These factors collectively suggest that the Australian economy has not slowed down enough to tame persistent price pressures:
Tight Labour Market: The demand for workers remains robust, leading to persistent wage growth pressure. A tight job market fuels consumer spending, making inflation stickier. The unemployment rate, while recently holding steady at 4.3% in November, still signals a significant lack of slack in the job market.
New (Higher) Inflation Forecasts: Recent inflation data, including a headline CPI print of 3.8% in October 2025 (well above the RBA’s target midpoint), points to the need for higher interest rates to cool aggregate demand.
Strong Housing and Household Consumption: Resilient consumer spending and a buoyant housing market indicate that current borrowing costs are not restrictive enough to moderate economic activity, contrary to the RBA’s intentions.
The combination of these factors signals to Citi that the risks to the inflation outlook are now firmly "tilted to the upside," leaving the RBA with no choice but to adjust policy, starting at the central bank's next meeting in February 2026.
Forex Trading: The Bullish Shift for the Australian Dollar
For Forex Trading, particularly on the AUD/USD currency pair, this forecast shift by a major institution like Citi is a significant fundamental driver, signaling a move towards a bullish bias for the Australian Dollar (AUD).
Policy Divergence: The forecast creates a clear and widening policy divergence between the RBA and the US Federal Reserve (Fed), which is expected to cut rates in 2026. When one central bank is hiking (RBA) while another is cutting (Fed), the interest rate differential moves in favor of the hiking currency, providing strong support for AUD/USD.
Rate Hike Priced In: The market has quickly begun to incorporate this new hawkish outlook. Market pricing, as tracked by the ASX 30 Day Interbank Cash Rate Futures, has already moved from anticipating further cuts in 2025 to pricing in a significant probability of two hikes in 2026. This dynamic creates a favorable environment for the AUD against commodity-sensitive currency pairs like the AUD/NZD as well.
Risk Premium: This shift reduces the "risk premium" associated with the AUD, as the RBA is demonstrating a strong commitment to its inflation target, which enhances investor confidence—a key concept for practitioners of Global Markets Eruditio.
What Comes Next: The February 2026 Meeting
The Reserve Bank of Australia's next board meeting and Official Cash Rate announcement is scheduled for February 3, 2026. This meeting will be highly scrutinized, as RBA Governor Michele Bullock has stated that the board will assess policy on a "meeting-by-meeting" basis, with inflation and jobs data being the key inputs. Citi’s forecast puts the RBA’s credibility on the line, forcing the central bank to address the possibility of further tightening to maintain control over inflation and bring the economy back into balance.
Is Your AUD Trading Strategy Still Betting on an RBA Pause?
The market consensus is fracturing, and the momentum has shifted toward a hawkish RBA. Ignoring the possibility of early rate hikes could be a costly mistake in the volatility of Forex Trading.
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