Financial markets 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 sentiment comes as inflation data and national accounts indicate the economy is accelerating into the new year. The Reserve Bank's decision to hike rates in 2026 is a significant turnaround from just two weeks ago, when traders expected a rate cut. The latest forecasts are based on data showing consumer price growth jumping to 3.8% in the year to October, far exceeding the central bank's target range of 2-3%. This increase in mortgage costs will particularly affect first-home buyers who have enjoyed rate cuts in 2025 but now face higher repayments. The market's conclusion, as stated by Adam Donaldson, is that the Reserve Bank won't cut rates further, with the possibility of rate hikes starting from February. Sally Tindall highlights the dwindling number of banks offering loans at below 5% interest rates and the expectation of higher fixed rates as banks adjust to the RBA's cash rate expectations. The rapid rise in home prices driven by rate cuts this year has made affordability the worst on record, attracting first-time buyers and property investors alike. Analysts now predict a more moderate 6% rise in national home values next year, instead of the previously expected 9%. The RBA's final rates decision for 2025, due on Tuesday, will be closely watched for any pushback against the financial market's 'hawkish' outlook. While traders have quickly shifted from rate cuts to hikes, economists believe the RBA is likely to hold rates through 2026. AMP's chief economist, Shane Oliver, acknowledges the market's overestimation of higher rates, citing unemployment trends and the fragility of consumer spending as factors of concern.
