Markets are pricing in a 56% chance of an interest rate rise next week when the Reserve Bank Board meets for the first time in 2026.
The ASX rate tracker shows the market was factoring in just a 25% likelihood of a 25-basis-point rise early last week.
That changed on Thursday after new data showed a fall in Australia's unemployment rate in December.
The ABS reported a 0.2% fall in the seasonally adjusted unemployment rate from 4.3% in November to 4.1% in December.
The market's prediction of a February interest rate rise lifted dramatically to 60% on this news, before easing to 56% on Friday.
Lower unemployment indicates people have more capacity to spend.
The RBA may consider this problematic after resurgent inflation began showing up in the data late last year.
The Consumer Price Index (CPI) rose 3.8% over the 12 months to October, which was the fourth month in a row of price gains.
Annual inflation dipped back to 3.4% in November, and tomorrow, we'll get the numbers for December.
Here's what CBA is forecasting for inflation, and the implications for interest rates.
CBA forecast for inflation
In an update released today, CBA senior economist Trent Saunders said:
The December 2025 CPI release will be closely watched, given its importance for the near‑term monetary policy outlook.
We expect headline inflation to rise 0.3%/mth in December on a seasonally adjusted basis, with the annual inflation rate increasing to 3.8%.
The more policy-relevant quarterly trimmed mean CPI is expected to have risen by a firm 0.9%/qtr.
While this represents a modest step down from the 1.0%/qtr increase in Q3 2025, it remains well above the pace consistent with the RBA achieving its inflation target.
On an annual basis, trimmed‑mean inflation is expected to lift to 3.3%, from 3.0% in Q3 2025.
Saunders said the RBA is focused on the medium‑term inflation outlook and is concerned about underlying inflationary pressures.
In our view, this release is likely to confirm that these pressures remain strong.
Saunders concludes that it is likely the RBA will raise interest rates this year, and most likely next week.
We continue to expect the RBA totighten monetary policy in 2026, with the most likely timing for the first cash rate hike being February 2026.
A hike in February will hinge on both the size and composition of the inflation print, as well as the RBA's assessment of the broader economic environment.
In 2025, the RBA cut interest rates three times in February, May, and August.
The RBA will announce its interest rate decision next Tuesday.
