Markets jumped from 56% to 73% odds of a February rate hike within hours of today’s CPI release. Matt Bell of Oliver Hume says the sugar hits expected months ago haven’t materialised for property.
What’s happening: Australia’s Consumer Price Index accelerated to 3.8% annually in December, up from 3.4% in November, whilst trimmed mean inflation rose to 3.3%. Markets immediately increased the probability of a February rate hike from 56% to 73%, effectively ending one of the shallowest easing cycles in more than three decades.
Why this matters: The reversal carries immediate implications for property markets and mortgage holders, with a 0.25% rate increase now expected next week.
The pivot in expectations from rate cuts to rate hikes happened fast last year, and accelerated again in January.
“Before today’s inflation data, the market had priced in a 56% chance of a rate hike at February’s meeting,” said Oliver Hume Chief Economist Matt Bell.
“With the trimmed mean measure coming in above market expectations, and no more significant data coming before next week’s RBA decision, that 0.25% rate hike is now pretty much locked in.”
According to the Australian Bureau of Statistics, headline inflation rose to 3.8% in December from 3.4% in November, exceeding market forecasts of 3.5%. The trimmed mean, which strips out volatile items, also edged higher to 3.3% from 3.2%.
Bell noted that underlying inflation now sits at 3.4% based on the quarterly series, ahead of RBA forecasts, and stands at 3.9% annualised for the most recent six months.
“Essentially, far too high for the RBA to be comfortable with holding rates at current levels,” he said.
Markets react swiftly
Major banks responded immediately to the data. All four major Australian banks: Commonwealth, Westpac, NAB and ANZ, now predict the Reserve Bank will raise the cash rate by 0.25 percentage points to 3.85% when its monetary policy board meets next Tuesday.
The shift marks a dramatic reversal for markets that, just months ago, were anticipating multiple rate cuts throughout 2026.
“So, the rate cut cycle was short and sweet and quickly (partially) reversed,” Bell said. “It was one of the shallowest easing cycles in more than 30 years.”
For mortgage holders, a 0.25 percentage point hike would add approximately $90 in monthly repayments for an owner-occupier with a $600,000 mortgage. Those with a $750,000 mortgage would see a $112 monthly increase, whilst a $1 million home loan would cost $150 more per month.
Property sentiment shifts
The implications for property markets are immediate and significant.
“For property markets, the impact on sentiment will be immediate,” Bell explained. “The sugar hits expected only four or five months ago haven’t materialised, and this reverse undoubtedly tempers the 2026 outlook.”
The announcement follows a period of mixed signals in Australia’s inflation trajectory, with earlier data suggesting price pressures were easing across most sectors.
Housing costs remain a major contributor to inflation, rising 5.5% annually in December, driven partly by a 21.5% surge in electricity prices as state rebates ended. Food and non-alcoholic beverages also contributed, up 3.4%.
Joel Gibson, Consumer Finance Expert at Zyft: “Today’s CPI increase confirms what many feared: the temporary relief of 2025 is over, and the national belt-tightening exercise is back on. While the headline inflation figure has risen somewhat marginally from 3.4% in November to 3.8% in December, the kitchen table reality is much harsher – a probable February rate rise and a colossal blow to household budgets.
“Unsurprisingly, for Aussies feeling squeezed by their weekly grocery spend and rental or mortgage outgoings, some of the largest contributors to annual inflation over the past 12 months were housing (+5.5%) and food and non-alcoholic beverages (+3.4%). Adding to the squeeze, electricity prices have soared 21.5% over the same time frame.
“What’s more, energy bills have already jumped $75 per quarter now that rebates have expired. Health insurance is set to rise around 5% in April, the biggest increase in years. According to Canstar Blue, Aussies were spending $178 per week on groceries in August 2025, but with today’s CPI figures in mind, inflation will add another $6 a week to the trolley, or $312 across the course of the coming year.
“This trolley hit is even more severe when you look at the essentials: coffee, tea and cocoa are up 15.3%, while proteins like lamb and goat have jumped 13.4%, and beef and veal have risen 10.8%. And if we get a rate rise, a 0.25% hike could add another $115 to the monthly repayment on an average $694,000 mortgage.
“All of these increases combined would mean an average Australian household should stand to shell out an additional $2192 over the course of this year. “We’re already seeing the impact at the checkout. Aussies, historically some of the most brand-loyal shoppers in the world, are abandoning those loyalties just to keep the pantry full. Home brands now account for 33.5% of Coles’ sales across 6000 products, with about 1100 added over the past year alone.
“Everyone’s got a power bill and rental or mortgage costs. These aren’t things you can avoid. The key is to focus on savings that actually move the needle. It’s not about skipping your morning $5 coffee. In reality, if you spend five minutes checking if your energy plan is any good or reviewing your insurance policies, you could save hundreds of dollars without even having to give up the caffeine.”
Positive fundamentals remain
Despite the near-term headwinds for property sentiment, Bell emphasised that underlying economic conditions remain relatively robust.
“On the positive side, the reason we’re here is because the economy is running hotter than expected, with rising consumer spending, a tight labour market and population growth that looks to have stabilised and possibly increasing again,” he said.
Bell also noted that the impacts of last year’s rate cuts will continue filtering through the economy. Mortgage holders and potential purchasers are dealing with rates 0.5% lower than they were at the same time last year.
“The economy generally is performing well,” he said. “The outlook for property markets in 2026 remains positive, for both land and established housing markets.”
The RBA has not increased the cash rate since November 2023, and previous economic modelling suggested rate cuts would continue through 2025 and into 2026. However, persistent inflation above the RBA’s 2-3% target range has forced a policy recalibration.
Services inflation remains elevated at 4.3%, whilst goods inflation sits at 3.4%. The tight labour market, with unemployment remaining low despite slowing job advertisement growth, gives the RBA confidence that the economy can withstand tightening monetary policy.
The February meeting will mark a critical juncture for both monetary policy and property markets, with stakeholders across the economy watching closely to see whether this represents a one-off adjustment or the beginning of a more sustained tightening cycle.
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