Westpac, NAB and Commonwealth Bank expect inflation to accelerate, making life harder for the RBA

Australian home borrowers face a painful year of interest rate rises if inflation figures published tomorrow show a summer spending binge triggered a prices break-out.

Economists at Westpac Bank expect the inflation figures to show the consumer price index accelerated to 3.7 per cent at the end of last year, up from 3.4 per cent in the 12 months ended November 30.

This would put inflation further above the Reserve Bank of Australia’s 2-3 per cent target, following the phasing out of the Federal Government’s extended $75 quarterly electricity rebates, that finished at the end of last year.

“We expect another kick back up in electricity,” Westpac chief economist Luci Ellis told The Nightly.

“We’re in the phase where electricity prices are now rising very strongly because the rebates are dropping out.”

Reserve Bank Governor Michele Bullock and her monetary policy board are expected to look beyond one-off factors like the end of federal power rebates and more expensive summer accommodation.

While Westpac isn’t forecasting a rate hike in 2026, Dr Ellis said a surge in underlying inflation, without volatile items, could make her bank change their view.

Westpac, NAB and the Commonwealth Bank all agree that a 0.9 per cent increase in the trimmed mean measure of inflation, during the final three months of 2025, would be enough to spark a February 3 rate hike, when the RBA next meets.

This would put the annual pace of core inflation at 3.3 per cent, or a level above target.

“An ugly number tomorrow will be enough to convince the RBA,” Dr Ellis said.

The Commonwealth Bank, Australia’s biggest home lender, is forecasting a February rate hike based on bad underlying inflation numbers tomorrow and a heightened headline inflation rate of 3.8 per cent.

“A lot of spending on areas like hospitality and recreation over the year, so we have seen that stronger demand for particular areas of household consumption also then flow through to inflation,” CBA’s head of Australian economics Belinda Allen told The Nightly.

“Supply can’t keep pace with demand. We do feel there are some examples of businesses responding to stronger demand by passing on higher costs to really rebuild those margins that have been lost over recent years because of higher costs, higher wages growth, higher rents, higher insurance.”

NAB is also a bad set of underlying inflation figures which would lead to a February 3 rate hike followed by another increase in May, predicting a high headline inflation rate of 3.6 per cent.

“You’ve got a really solid fourth quarter. An economy that clearly picked up momentum into year end, then we’d be pretty comfortable with our view that the bank will hike in February,” chief economist Sally Auld told The Nightly.

A big underlying number tomorrow would show inflation running at levels above 3 per cent for five consecutive quarters when the RBA is focusing on returning core inflation to 2.5 per cent.

“That’s not behaving as they would wish,” Ms Auld said, adding underlying inflation would be unlikely to return to the mid-point of the RBA’s 2-3 per cent target until 2027.

The dollar rose above 69 US cents on Tuesday for the first time since October 2024 as currency traders focused on Australia’s low jobless rate of 4.1 per cent in December, which potentially adds to the case for another RBA rate rise.

A stronger dollar can potentially reduce goods inflation, which could make the Reserve Bank less inclined to hike.

“It will take some of the pressure off. Much of it depends on the underlying demand,” Ms Allen said.

The trade weighted index, based on a basket of 19 currencies, on Tuesday reached 63.7 points, the highest level since July 2024.

This is based on the most traded currencies with Australia including the US dollar, the Chinese renminbi and the Japanese yen.